Doing Business Blog - The World Bank Group

Azerbaijan Top Global Reformer

The sixth in the World Bank Group's annual series on business regulations, Doing Business 2009, launched on September 10th. There are two ways a country can make headlines with its ranking in this report. One way is to make it to the top quintile of the ranking and be dubbed a top performer. This year Singapore remained at the top of the list, followed by New Zealand, the United States and Hong Kong (China).

Another way a country can steal the headlines is by becoming a top reformer. Each year the Doing Business determines top reformers by looking at 10 countries that have reformed in at least 3 of the areas of business regulation measured by the report and that have moved most in the overall rankings.

This year the list of these countries is led by Azerbaijan. This country reformed in 7 out of 10 areas measured by the Doing Business project with reforms including introduction of a one-stop shop for business start-up, introduction of a unified property registry, greater protection for minority shareholders, creation of a new economic court, amendments to the labor code and the opportunity to file and pay taxes electronically.

All these reforms helped Azerbaijan jump an unprecedented 64 places in the overall ranking. In a year where 113 economies implemented 239 reforms to make business easier – the most reforms recorded in a year since Doing Business project started – Azerbaijan’s performance is dazzling.

Three Ways to Fight Tax Evasion

The Chinese have given the world such wonders as paper, the compass, gunpowder, fireworks, and eyeglasses, to name but a few. A few years ago, they also came up with an ingenious way to fight tax evasion: the receipt lottery. If you buy a service in certain types of establishments, such as restaurants, your receipt contains a scratch lottery in which you can win up to a few hundred dollars (true to form, I have yet to win more than the princely sum of 5 RMB ($0.74)). This gives consumers an incentive to request receipts for their purchases—in effect co-opting them in the fight against tax evasion.

According to this paper by Junmin Wan, the experiment has been quite successful—in areas where the lottery was introduced, business taxes were 17.1% higher and the growth in business tax revenue 21.5% higher than in other areas of the country over a six-year period.

Bailing Out Rich Guys

The recently tabled scheme to put another $700 billion in bailing out financial firms isn't making economists happy. Ron Paul is upset too: the scheme sounds like bailing out rich guys (investment banker types) at the expense of tax payers.

Professor Raghu Rajan (University of Chicago) has an alternative solution: ask the shareholders of financial firms to recapitalize. Financial firms have been reluctant to raise capital thus far. One difficulty is that an equity issuance may send a negative signal, suggesting to the market that there are more losses to come. It may also be difficult for them to cut dividends to stem the outflow of capital, for such cuts may signal management's lack of confidence in the firm's future. Another difficulty comes from what is known as the debt overhang problem: when a highly indebted entity issues equity, much of the value raised effectively bolsters the value of the risky debt. Because of this value transfer, essentially at the expense of existing equity, equity holders are unlikely to look upon a recapitalization favorably.

Bankruptcy Reading

Time to dust off the old bankruptcy books. With the financial crisis starting to affect some large companies in the US and Europe, ripple effects are going to be seen throughout emerging markets.

Enter a recent study on bankruptcy by Oliver Hart, Caralee McLiesh and myself, which was just accepted at the Journal of Political Economy. We present insolvency practitioners from 88 countries with an identical case of a hotel about to default on its debt, and ask them to describe in detail how debt enforcement against this hotel will proceed in their countries. We use the data on time, cost, and the likely disposition of the assets (preservation as a going concern versus piecemeal sale) to construct a measure of the efficiency of debt enforcement in each country. In Japan and Singapore, secured creditors collect 96 cents on the dollar; in the United States, 86 cents; in Germany, 57 cents; in France, 54 cents. In contrast, Brazilian creditors fear bankruptcy: they would collect 13 cents on the dollar if their debtors entered insolvency. Turkish banks are even more fearful: they would collect 6 cents on the dollar.

The paper also identifies several characteristics of debt enforcement procedures, such as the structure of appeals and availability of floating charge finance, that influence efficiency. It turns out that the measure of efficiency of debt enforcement is strongly correlated with per capita income (rich countries do better) and predicts debt market development across countries.

Some other patterns are noteworthy too. Many poor countries try to reorganize firms in insolvency, even though they are not so great at it. The result: long-drawn processes and low pay-offs to creditors - 11 cents on the dollar in Romania and only one cent in Angola.

Doing Business 2009 - Five years of reforms

Doing Business 2009 is here! The sixth in the World Bank Group's annual series on business regulations, DB 2009 allows us to take a look at five years of reforms since DB 2004. But before I get to that, let me hit the highlights of DB 2009:

• This year's top reformer is...drum roll please...Azerbaijan! Azerbaijan improved on 7 out of 10 of the indicators tracked by DB and moved up 64 slots in the overall rankings.
• Two regions - Eastern Europe and Central Asia and Sub-Saharan Africa - accounted for 7 of the top 10 reformers: Azerbaijan, Albania, Kyrgyz Republic, Belarus, Senegal, Burkina Faso, and Botswana. The other top 10 were Columbia, Egypt, and Dominican Republic.
• Once again, Singapore tops the rankings, followed by New Zealand, the United States, and Hong Kong, China. 

Why Courts Matter

A recent article by Pablo Casas-Arce and Albert Saiz (Wharton) collects data on the size of the rental market in 102 cities in 47 countries and relates these data to measures of judicial efficiency, in particular, the time to repossession and the judicial formalism index in Djankov and others (2003). The former variable is an estimate of how many days it takes, on average, for a landlord to regain access to his housing unit in case of rent non-payment.

The authors find that urban areas in countries with less efficient legal contract enforcement (measured by its high formalism and long times to repossession in the rental market) tend to have a lower percentage of households living in rental units. Instead, people either buy their homes, or, if they are not rich enough to do so, they do not move to new locations even if offered good jobs.

In other words, bad courts hurt mobility, which in turn hurts the labor market. In sum, one reason for high unemployment is... you guessed it, the long delays in courts.

Slow courts have been around for some time. One example is described in the autobiography of Goethe, Germany's poet. On taking his law degree in 1771, the young Goethe began practicing law in Wetzlar. At the courthouse, he found "a monstrous chaos of paper that swelled up and increased every year. Twenty thousand cases had been heaped up, and double that number was brought forward." One case, filed in 1459, was still awaiting decision. Judiciously, Geothe decided to pursue poetry instead.

Doing Business now on Facebook

 

This is just a quick note to let DB blog readers know that Doing Business now has its own place in the world of Web 2.0. You can check out the Doing Business Facebook page here, complete with photos, videos, updates on new publications, and a number of other features. And if you want to get updates on Doing Business publications and events or just show your support for the publication, you can become a fan when you visit the page.

NB: You've got to have a profile to become a fan - if you don't, you can set one up here. Also, your personal information is NOT viewable by other fans of Doing Business unless they are already in your network as specified in your Facebook privacy settings. More on privacy issues here.   

Cross-posted on the Private Sector Development blog.

São Tomé's Possible New Revenues

On a recent trip to Africa, I had the chance to visit one of the continent’s smallest countries. São Tomé and Príncipe – comprised of two volcanic islands in the Gulf of Guinea – is also the smallest African economy covered by Doing Business. A veritable tropical paradise, the islands abound in natural beauty. Although poor and no Gini coefficient seems to have been calculated for São Tomé, I would expect it to turn out relatively low.

But all that might be about to change – or not. The pristine waters surrounding the islands are believed to contain vast quantities of hydrocarbons, which, if discovered in commercially viable quantities, would transform the country’s economy. Fortunately, there has been a significant effort, aided by a team from Columbia University, to create a legal framework conducive to the transparent and sustainable use of the expected oil revenues. The new Oil Revenue Management Law stipulates, inter alia, that all oil contracts shall be public and that any bribe paid in connection with a contract award shall constitute sufficient cause for annulment on the part of the State.

Transparency provisions such as those adopted by São Tomé are important. Whether the measures already taken turn out to be enough if and when production starts remains to be seen. The stakes are high – the small population and the estimated size of the oil reserves mean that every São Tomean citizen is potentially poor no longer.