Doing Business Blog - The World Bank Group

Should competition agencies care about the informal sector?

Actually, yes. Informal firms can operate in the same product or geographic markets as formal firms and therefore affect the competition level. So what can competition agencies do to address the informal sector?

The OECD recently held a forum on competition that gathered delegates from over 100 competition agencies. One of the sessions had the purpose of increasing the knowledge about the role of the informal sector for competition.

First, can informality be good for competition? On one hand unregistered firms may be unfair competitors to the formally registered companies because informal firms can gain price advantage by not paying taxes and not complying with regulations. Here the competition agencies have very limited power, since the enforcement of these regulations is often outside their jurisdiction. Addressing these non-compliances are normally the job of tax authorities and other regulation agencies. On the other hand, informal firms can increase the degree of competition in a market by reducing the market share of formal firms. Competition agencies are in fact taking informal firms when computing market shares. The challenge in this case is to measure the market share of informal firms. Competition agencies are being creative about it. For instance, in Bulgaria the competition agency use the purchases of cement (i.e., the main input of the industry being analyzed) to assess the market share of informal firms in the ready-mix concrete market.

Want Higher Productivity? Reduce Entry Costs

Want higher productivity? Reduce entry costs. This is the main finding in a new paper by Levon Barseghyan (Cornell) and Ricardo DeCecio (the Fedreal Reserve). Using the regulation of entry data from Djankov et al (2002), they find that the productivity of countries with entry costs in the lowest decile is 3.43 times higher than that in countries in the highest decile.

What is the mechanism for this difference? The authors find that, "The mechanism through which entry costs influence productivity is that countries with high entry barriers have lower business density and higher variance of employment distribution across firms."

This is an exciting result as the link between regulation and productivity is under-researched. So is the link between regulation and economic growth. But as growth is affected by so many things, studying the possible channels through which the ease of doing business results in higher growth is the way to go. Barseghyan and DeCecio provide evidence for one such channel: from entry costs to entrepreneurship to lower productivity and hence retarded growth.

This result is always of interest, but particularly now when politicians around the world are looking for ways to stop the decline in income caused by the unfolding crisis.

Looking for Inspiration

The Doing Business project of the World Bank Group, which measures the ease of administrative procedures that matter to businesses such as starting a business, registering a property, enforcing a contract or carrying international trade can be a strong means of holding governments accountable for their work.

Chambers of Commerce, Architects' associations or Law societies may be interested in what a Doing Business-based methodology has to offer. For example, Doing Business data raise simple questions:

- Why does it take 4 days in Armenia but it takes 40 days in Germany and 334 days in Angola to transfer a land title?

Trade finance, the crisis is hurting!

Le commerce international n’a pas été épargné pendant cette période de crise financière. D’après les statistiques de l’Organisation Mondiale du Commerce (OMC), entre 2007 et 2008 le commerce international a baissé de 6%. Avec environ 90% du commerce financé par des crédits, des assurances ou des garanties -- en d’autres termes, par les banques -- l’année 2009 s’annonce difficile. Parmi les moyens mis à la disposition des commerçants, il y a la lettre de crédit.

Doing Business Contributor “Going Green”

Simutaneously, and perhaps jointly, the financial crisis and global warming tend to be on everyone’s mind. As the financial crisis wears on, it is becoming even more important to find innovative ways for cutting costs and reducing CO2 emissions. Architecture et Construction (A.C.), a Doing Business local partner in Burundi is doing just that.

Prosper Ringuyeneza, a civil engineer working for A.C., invited me to visit a construction site on the outskirts of Bujumbura, where a secondary technical institution financed by an entity in Belgium (Direction Générale de la Coopération au Développement). The project is called Appui à l’Enseignement Technique et Professionnel.

The construction project is of special interest because it is the first time earth compressed bricks instead of the traditional baked red bricks will be used in Burundi. And when asked why the use of earth compressed cricks, Prosper answers “my country has been at war for so long, the forests are depleted. It is now time to save the remaining forests for future generations, cut down the CO2 emission and reduce construction costs.”

Trade finance

IFC will double its guarantee program for global trade finance to $3 billion. Find out more about the program and see if banks in your country are part of it. http://www.ifc.org/GTFP

 

Democracy and Reforms

There has been a sneaking suspicion that regulatory reforms (a la Doing Business) are easier in less democratic countries as the rulers can decide what to reform without the pain of a lengthy parliamentary or civil society debate. As it turns out, this is incorrect. Democracies are bigger reformers.

This is the main finding in a recent paper by Simeon Djankov and Mohammad Amin, Democracy and Reforms.

The abstract: "We use a sample of 147 countries to investigate the link between democracy and reforms. Democracy may be conducive to reform, because politicians have the incentive to embrace growth-enhancing reforms to win elections. On the other hand, authoritarian regimes do not have to worry as much about public opinion and may undertake reforms that are painful in the short run but bring future prosperity. We test these hypotheses, using data on microeconomic reforms from the World Bank's Doing Business database. These data do not suffer the endogeneity issues associated with other datasets on changes in economic institutions. The results provide a robust support for the claim that democracy is good for growth-enhancing reforms."

This is surprising at first, but on second thought it becomes obvious: democracies bring political competition, and political competition brings the desire to do better economically....hence reforms.

The next question is what other important variables correlate with reforms. Mohammad and I are now working on a paper linking natural resources and the propensity to reform. This is particularly relevant in the past few years, with commodity prices shooting up. Perhaps their recent collapse (not cocoa though) will bring about more reforms. A case of positive externality.

Closing a Business

For years, this topic has been the least active in Doing Business. No more. The recent crisis has brought many businesses to bankruptcy, with countless more to come. It is a good time to be a bankruptcy lawyer.

How timely then that the background paper to Closing a Business has just been published in the Journal of Political Economy. The paper, Debt Enforcement Around the World, is written by Simeon Djankov, Oliver Hart, Caralee McLiesh, andAndrei Shleifer.

The main point of the paper? That rich and common law countries have more efficient bankruptcy procedures; and that the availability of floating charge finance and the absence of appeals during the procedure (as opposed to before the procedure has started) make for more expedient bankruptcy. That rich countries have better bankruptcy is especially heart-warming: they will need it badly in the coming year or two. According to the latest forecast, OECD economies are going to shrink by 1 to 2 percentage points in 2009 alone. This means lots of exit.

The analysis in the paper is already used by other researchers. For example, in a recent paper, Levon Barseghyan (Cornell) shows that inefficient bankruptcy regimes cause more macro volatility as factors of production do not move freely across firms and sectors. Debt Enforcement Around the World is the sixth background paper to Doing Business published in a top economics journal. Another one - Trading on Time  - is forthcoming in the Review of Economics and Statistics. The tax paper is hopefully soon to appear in the American Economic Journal: Macro. That leaves two to go.