Doing Business Blog - The World Bank Group

Tajikistan Reduces Capital Requirements for Small Business

Earlier this month Tajik President Emomali Rahmon issued a law reducing the minimum capital requirement for new businesses from approximately $2,000 to $73 (500 Tajik som). To put it differently, a new business previously had to pay more than twice the average income per capita (219%, to be exact), while now the requirement is equivalent to only 16%. Quite a jump.

A recent survey on reforms in entry regulation, written by Simeon Djankov, finds that Tajikistan joins a large number of countries who have recently made this jump. For good reason, it is hard to argue about what benefits such minimum capital requirements bring except that they make it difficult or impossible for poorer entrepreneurs to start a business. This is the type of regulation no sensible government wants to have on its conscience.

How to Use the Enterprise Surveys

Over the last decade the World Bank has invested heavily in developing the Enterprise Surveys. In the last 30 months, after the management of the database moved fully to the private sector and finance vice-presidency, all surveys have been put on the web and the methodology is now uniform across all regions. Previously, regions and even country teams could add whatever questions they thought were appropriate, without regard for the cross-country comparability of data. In short, the data are better and more accessible.

Now comes the hard part: making use of them. Traditionally, the enterprise surveys have fed into country-specific Investment Climate Assessments (in World Bank speak - ICAs). These are part analysis, part story-telling. They typically take a year to produce and often have suspect methodology. Some of the policy recommendations that come out of such work are, not surprisingly, naive. Last year, for example, I witnessed a meeting of the ICA team on Mauritius with a government delegation. An author of the report stated that the big issue in Mauritius was lack of reliable electricity, citing as proof the high percentage of businesses that have back-up generators. "These are needed during storms. No electricity grid can withstand the type of storms that sometime come through the island," answered a senior official. Somehow that had escaped the ICA team.

Be that as it may, how can the Enterprise Surveys be put to good uses? Here are 4 ideas:

A second time in Second Life

For the second time in a row, the Doing Business team is venturing into Second Life - an online virtual world - to release its annual report. I'll be assisting Dahlia Khalifa with the presentation on October 30th, 2pm EST. If you want to join in, you can watch streaming video of the event. The more adventurous among you can get an avatar - registration on Second Life is free - and teleport to our 'build' on this island.      

To get a feel for Second Life, check out Dahlia's interview yesterday on the upcoming virtual release of Doing Business 2009 on the Real Biz in SL show. (Dahlia handled the interview like a pro, this being her second year in Second Life.)

Cross-posted on the PSD blog.

Doing Business in FYR Macedonia

One little-noticed reform that will have a big effect: FYR Macedonia announced that effective October 1 most foreigners can enter the country without a visa. Georgia did the same thing 3 years ago, and it is always fun to go through immigration at Tbilisi Airport. After a couple of long flights the last thing someone needs is to sit around at the visa desk. Sounds like a small thing but it can be a memorable annoyance if you travel often. Here is a list of countries that require me (a citizen of Bulgaria, of European Union pedigree) to get a visa and where I get annoyed each time this comes up: Azerbaijan, Colombia, Egypt, Kazakhstan.

What is the rationale that, say, the Kazakh government wants me to get a visa? It's not like there is a rush of Bulgarians going to Kazakhstan. If I were to ask the minister of the interior, and I intend to, my guess the answer will be that this has always been the case. Not really. We are comrades. Built socialism together for quite some time and I am still struck by how many Kazakhs have been to Bulgaria pre-socialist-collapse.

So bravo to FYR Macedonia to not sticking to non-existent rationale and doing away with unnecessary bureaucracy. More foreigners will come, and those who would have come anyway would have an easier time. These things are remembered.

Crisis Snobs

"I am struck by how little interest is shown in the lessons learned from the numerous financial system crashes that have occurred in developing countries over the past two decades," says Bill Easterly of NYU fame. "I guess American policy makers and analysts are 'crisis snobs' that don't think they can learn from Argentina (even Japan and Sweden seem to be a stretch.)"

Think of these who have encyclopaedic knowledge of these crises, like Ross Levine at Brown and Jerry Caprio at Williams. It's all in their book (joint with James Barth) - Rethinking Bank Regulation: Till Angels Govern. Treasury people across OECD countries have a lot to learn from them. (Jerry was my director for a couple of years and I can tell you he knows this stuff inside and out.)

This knowledge matters not just for central bankers and Treasury officials. Coffee bean growers in Indonesia reported this week that their prices have fallen by 40 percent since August. Why? If anything, there must be more coffee-drinking at financial institutions and their supervisors around the world. No. It's because shippers cannot get trade credit. And without shipping, coffee beans don't get to your Starbucks.

Crisis Talk (3)

Who holds the risk in securitization? A nice paper by Markus Brunnermeier (Princeton University) talks about how financial innovation precipitated the current crisis. A good read for anyone who is trying to understand why things unravelled as fast as they have.

The main thesis of the paper is that the financial innovation in the last decade or so, clouded the view of who holds the risks. The author says (page 9): "The main disadvantage of securitization is that the transfer of credit risk distances the borrowers from the lenders. First, it makes it unclear who holds what risk. In the end, it might very well be that the risk comes back to the issuing bank, even though it thought it had transferred the risk on to, say, a hedge fund. Second, the banks' incentive to carefully approve loan applications, and their incentive to monitor (and even to collect) these loans, is drastically reduced. Since a big part of the risk is now borne by other financial institutions, banks essentially hold the full risk only for some months before it is passed on to others. Put differently, nowadays a bank faces only a "pipeline risk." That is, only risks that are not yet passed on and are still in the bank's pipeline are the bank's concern."

The article is forthcoming in the Journal of Economic Perspectives.

Belarus: A Top Reformer

Earlier this year, the government of Belarus publicly announced its goal to enter the top quintile of the Doing Business ranking. The government was determined to overhaul its business regulatory framework from the get-go.

In January, it held a series of extensive consultations with experts from the Doing Business team. The team explained its methodology in great detail and offered a set of recommendations on what to reform and how. The government of Belarus took its homework seriously and pledged to pass 63 regulations aiming to ease business regulations in the country in the first half of the year.

Crisis Talk (2)

Yesterday we started a new series of blog postings on the unfolding financial crisis. Today's topic: how bad can things become?

Bad. Germany's forecasters just updated their views for 2009, now suggesting growth of 0.2%, and possibly as low as -0.8%. "A number of negative shocks from outside Germany had already clouded the economic climate. But the dramatic developments on the financial have led to an even sharper deterioration in prospects," the forecast added.

The Irish economy has already gone into a recession, with production declining by 0.5% in the last quarter. Capital investment was also 18.8% lower in the quarter compared with 2007, with significant declines in house building as well as in the acquisition of transport equipment and machinery. During the same period, France and Italy shrank 0.3%, while the Netherlands saw zero growth.

Hungary also cut its 2009 forecast last Friday, to 1.2%. Ukraine is facing troubles too. The Baltics and the Balkans have bigger external deficits than Hungary, and may come into trouble too.

Meanwhile, the Korean won has lost more than 30% of its value relative to the dollar this year. This makes it difficult for businesses to access credit. In a statement yesterday, the government said it would guarantee for three years all external debt taken on by South Korean banks before 30 June 2009 in order "to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market."

What does all this mean for the world economy? The latest IMF forecast is, for once, overly-optimistic: 0.5% growth in the rich world and 6% in developing countries. Or around 2% globally. This is likely to be revised downward fast. Can it go negative? It could. The unfolding crisis is affecting a larger number of countries and, coupled with slowing economies, may have amplifying effects. If the world goes negative growth in 2009, it would be the first time in a long while. Hold on to your seats.

Crisis Talk (1)

This entry starts a series of blogs on the unfolding financial crisis. Seen as primarily a US phenomenon only a month ago, the crisis has now reached countries as diverse as Hungary, Ukraine, Indonesia and Brazil. The stock exchanges in several countries, including Russia, Romania and Indonesia, were closed for days to avoid further loss of value. Banks in quite a number of emerging markets have experienced runs. Where is all this coming from, what are the remedies, and what are the implications for reforms in financial systems?

This blog has a modest aim: to talk about the likely impact on regulatory reform work. This has been increasing fast in the last few years, fueled by expanding economies and a desire to improve international competitiveness. On the latter, macroeconomic issues had subsided and so governments had turned their attention to regulatory reform. This was in part due to some new research work, notably around Hernando de Soto and our own Doing Business project. Mostly, however, it was due to an economic boom that made competition for capital and even qualified labor global. So you had to be more competitive than your neighbor to attract resources. This time may now be over.

Three things will change. First, the attention of governments will turn away from micro reforms and into financial and fiscal reforms. This is especially true in Eastern Europe and Central Asia, which are likely to be significantly affected by the crisis. The second region already affected is South Asia. Others will follow. Second, the nature of reforms will shift: from mostly administrative reforms like business entry, business licenses and customs reforms, to mostly legal - bankruptcy, investor protections and tax. The latter because governments will try to adjust fiscal policy in the face of falling revenues and bigger demands on the budget. Third, the reforms will be done in a rush: a declining economy pushes many businesses into insolvency, and hence the need for faster bankruptcy procedures. Capital flows will start to dry up and governments will be hard-pressed to come up with ways to keep foreign capital. Improving laws on investor protection will be one answer.

What does this imply? Unpopular reforms - no one cares about bankruptcy in a booming economy - become urgent. The demands on finding good examples of bankruptcy and investor protection regimes will increase. Lawyers will become hip.

Is Improving Access to Credit Bad?

One may think so having in mind the current stock market situation. In fact, giving credit to people that cannot repay their loans is normally not a good idea. However, providing information to lenders about the credit worthiness of potential borrowers can be a step in the right direction. That way, lenders can: 1. identify the borrowers that are more likely to repay their loans and 2. avoid bad borrowers, keeping default rates low.

Credit information is one dimension of enabling access to credit included in Doing Business. The Doing Business credit information index measures the existence of a credit bureau or registry and the types of information collected and distributed by those agencies. For instance, Doing Business assesses whether credit information on individuals and firms is distributed, what is minimum loan amount that gets recorded in the database, and whether positive and negative information about the borrowers is made available to lender.

Providing more information to lenders does not necessarily lead to more lending. That is what Hertzberg, Liberti and Paravisini (2008) found. The authors analyze the reform in the Argentine public credit registry of 1998. The registry expanded the database to include borrowers with less than $200,000 in total debt. The authors found that the firms affected by the expansion, that is those with less than $200,000 total debt, obtain fewer lending than before. As consequence of this reform banks became aware of the other loans those borrowers had and were less likely to lend.

Improving access to credit through credit information may prevent lenders from issuing bad loans, after all.