Doing Business Blog - The World Bank Group

Where to Invest in 2009?

With stock markets and real estate prices falling down in both OECD countries and large emerging markets, it is time to look for more lucrative investments.

If you have a high-risk/high-return taste, look no further: Cuba and Zimbabwe fit the bill. Prices in both markets are low, thanks to the poor economic institutions in both countries. Yet both countries boast decent infrastructure, well-educated population (by regional standards), and, in the case of Zimbabwe, functioning judiciary. Both leaders are old: Robert Mugabe is 84; Raul Castro is 77. New leaders may be more interested in welcoming foreign investment.

The two countries came up on top of the list in a recent survey. If you have less taste for high risk, other selections include Azerbaijan, Colombia, Costa Rica, Ghana, Mozambique, and Vietnam. These economies already have taken significant steps to improve their investor attractiveness. Prices are rising, but many opportunities remain.

Debtor-friendly Insolvency Laws

When trying to encourage businesses, law-makers rarely focus their attention on bankruptcy laws, as can be seen from the low number of reforms recorded by Doing Business in this area.

However, during periods of crisis, countries are more likely to pay attention to them. And some countries–when going through hard times may enact temporary insolvency laws or amendments to the existing insolvency law to protect debtors that otherwise would become bankrupt. The main purpose of enacting these regulations is to prevent a “domino effect” where one bankruptcy would lead to another, and so on. This has been the case, for example, in some Latin American countries such as Colombia (1999) and Argentina (2002).

Which basic characteristics distinguish these laws from others? First, they are normally temporary. Second, they are remarkably “debtor friendly”. Scholars usually classify insolvency laws in two types, as far as the level of protection is concerned: debtor friendly laws vs. creditor friendly laws. The United States chapter 11 is perhaps the most known example of “debtor in possession” law, while some European laws that allow creditors to appoint a trustee and liquidate the debtor’s assets are considered creditor friendly. Of course, in the middle, there are many hybrids.

Exposing Corrupt Mayors in Brazil

A recent paper by Claudio Ferraz (IPEA, Brazil) and Federico Finan (UCLA) finds that the disclosure of corrupt practices at the municipal level in Brazil reduced the mayor's likelihood of re-election by 20%, and by nearly 40% in municipalities with local radio stations. The latter effect also helps honest mayors: when disclosures did not identify corrupt practices and local radio reported on this, mayor's chance of re-election shot up.

The program of random auditing of municipal government's expenditure started in May 2003. The findings from each audit are posted on the internet and presented to the media. President Lula, in opening the audit program, remarked: "I think the Brazilian society needs to understand once and for all, that we are only going to be able to truly fight corruption once the civil society, with the instruments made available, can act as a watch dog."

The municipalities to be audited are selected randomly through a lottery, that takes place alongside the national lottery drawings. The press and civil society are all invited at the drawings. The audit last a week, with approximately 15 auditors going through the documentation of the use of government funds.

Corrupt practices vary. In one case, a bid was constructed in a way that only one firm could plausibly qualify - the one that was later discovered to have bribed the mayor. In another case, a $300,000 contract was awarded to a phantom company. In a third case, federal money received for rural road construction was used to build a first-class road ... to the farm of the mayor.

Given the success of the program, the federal government has expanded the draw to 60 municipalities a month. Other countries may want to learn from this experience.

Singapore's Success in Construction Regulation

No one can ever accuse the Singaporean Building and Construction Authority (BCA) - the main regulator of the construction process for under-regulating, nor for not ensuring the safety of its people. The country has no record of a building collapse. “Authorities in building control in Singapore do not need to catch us,” says Mr. Lee – CEO of a construction management company. Singapore is the world’s best practice in the Doing Business Dealing with licenses indicator.

There are three reasons to the success of Singaporean model. First reason, building control run by the BCA is based on delegating most of the control to private sector. Singaporean architects and engineers –referred as qualified professionals - are in charge of designing and oversight of construction projects. “It did not happen overnight and it took a crisis to build this trust,” says Mr Lee. The recession of 1985 in Singapore made the government turn to the private sector. Government opened various channels of consultation with all the players in the sector.

Regulation Optimism in Poland

“Poland is to become the easiest country in Europe to run a business,” said Mr Waldemar Pawlak, the Minister for the Economy in Poland, during a meeting with the American Chamber of Commerce in April, 2008. The Deputy Premier said that his Ministry’s priority is to put in place laws that encourage “better regulation,” i.e. regulations easing the running of businesses.

The Minister’s priority is part of the new government’s goal to better integrate Poland in the market economy. Internally, it created the Parliamentary Commission to promote deregulation- a process that has been tried many times by consecutive governments but with no success. This time, the government decided on a new approach- not to nominate a special Ministry with change-resistant civil service to handle this process, but rather to put lawmakers in charge.

What Do Corruption Indices Measure?

Apparently, not the level of corruption. This is the finding of a new paper (What_do_corruption_indices_measure?) by Dilyan Donchev (Harvard) and Gergely Ujhelyi (University of Houston).

The authors use data on actual corruption experiences and correlate it to reported corruption perceptions in surveys by Transparency International and the International Country Risk Guide. There is no correlation. Some of the factors commonly found to "reduce" corruption, such as economic development, democratic institutions or Protestant traditions, systematically bias corruption perception downward from corruption experience. In other words, people assume that there would be less corruption in rich countries or democratic countries, regardless of the actual experience.

In addition, perception indices are influenced by absolute (as opposed to relative) levels of corruption, which penalizes large countries. Why is that the case? Because in large countries the media reports more stories of corruption (in terms of absolute numbers) and so people who answer the surveys in, say, Brazil, think the country is more corrupt than, say, Argentina, even if in terms of the number of corruption instances per adult population Argentina may have more.

In sum, perceptions indices are like the king's new clothes: they are only in the eyes of the beholder.

Doha-ha-ha

Now that the latest Doha-round negotiations went up in flames, there has been a lot of finger-pointing about who derailed it--and concern about the detrimental effects of this failure.

Not to worry. As Dani Rodrik explains in a recent blog, the loss is not that big.

Instead, trade negotiators can turn their attention to reducing bureaucracy and delays in trade. Each additional day that a product is delayed prior to being shipped reduces trade by more than one percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by about 70 km on average. These are the findings of a recent study on trade logistics, based on evidence from 98 countries [Djankov, Freund and Pham "Trading on Time," Review of Economics and Statistics (forthcoming)]. Delays have an even greater impact on exports of time-sensitive goods, such as perishable agricultural products. For these, an extra day of delay reduces trade volumes by 3.5 percent.

Why is Colombia Reforming Fast

I am just back from a trip to Bogota. One always learns a lot from meeting with reformist governments. This time around one finding struck me the most: President Alvaro Uribe spends every Saturday traveling to towns and cities around the country, and listening to people's comments on what needs to be improved. These townhalls last from 9am to late evenings. Every Saturday.

At first, I was incredulous. Really? Every Saturday? Yes. Most ministers go with him as well and on the spot commit to the needed work.

No wonder then that a lot of improvements are seen in the ease of doing business. Colombia was a top-10 reformer in Doing Business 2008. Colombians call these trips participatory democracy. They also sound like just-in time reform solutions.

Red Tape Relics

Just when we thought that museums have covered ground on just about any theme or period, a museum for redundant policies and contemporary art was juxtaposed. And it couldn’t have been more timely.This innovative idea exposes superfluous, contradictory, and nonsensical laws and regulations.

Country of exhibition: the Netherlands

Venue: city halls and other government buildings

The venue couldn’t have been better. And, as Simeon Djankov states in a recent blog, “It is not all that surprising that businesses consider the government to be a drag on their activity…. After all, the governments make businesses pay taxes and go through all kinds of administrative hoops.”

Exactly the museum’s point! It recognized that a variety of regulations were not efficient to anyone, and decided to publicly demonstrate its flaws. Buro Inaxis, and Program Administrative Burden Reduction for Citizens, both created by the Ministry of Internal Affairs, initiated this refreshing project and since 2006 this exhibit has displayed burdensome, non-existing, or just hilariously funny regulations.

The World's Most Expensive City

It isn't London, New York or Tokyo but... Luanda! Yes, Angola's capital - recently named most expensive city for expatriates by ECA International - is indeed an expensive place to be as the Doing Business team discovered on a recent visit. Three-bedroom houses rent for up to $30,000 a month. Hotel rooms are almost impossible to come by, while the average restaurant charges $30-$40 for an entree. In case that makes you feel like just making do with something simple for your next meal, a pack of cereal at the local supermarket will set you back $8.

Part of the reason may have to do with the petrodollars flooding sub-Saharan Africa's second-biggest oil exporter. But part of it may also very well be due to inadequate infrastructure. Emerging from decades of civil war and experiencing growth estimated at over 20% in 2007, the country's infrastructure simply can't keep up. Take the roads. They are so congested that a truck that leaves at 5 am to pick up a container at the port will be lucky to get it to the warehouse by midnight. Congestion at the port is another problem. Storing containers at the port is so cheap that importers prefer to keep them there rather than move them to other storage facilities. It is often impossible to locate the container the first time around so the truck has to come back the day after.