Doing Business Blog - The World Bank Group

Doing Business and the Commodity Boom

Open a newspaper these days and chances are you'll read about the price of one commodity or other just having set a new record. Most analysts will point to growing demand from large emerging markets such as China and India. An aspect less commented on in this commodity crunch is the supply side of the equation.

Trade efficiency may matter, as large commodity exporter rankings on the Doing Business Trading Across Borders indicator suggest. Kazakhstan, a commodity superpower, comes in at 178 out of 178; the Democratic Republic of the Congo lingers at 154; and Brazil, a mining giant, is at 93. Even Australia, a top 10 country in the overall ease of doing business, only manages 34th place when it comes to trade.

Bureaucracy and inadequate transportation infrastructure mean supply may not always be as responsive to increases in demand as it could be. Poor roads, delays at borders and port congestion all constitute serious obstacles to export growth. Add to that the power shortages in countries such as South Africa (see a recent blog post) - through which a sizable part of commodity exports from southern Africa passes - and you could argue we are also going through something of a supply crunch.

Nigeria Aims For 48-hour Customs Clearance

The Kirikiri Lighter Terminal in Lagos was recently the scene of a curious incident. The chairman of the local chapter of the Association of Nigerian Licensed Customs Agents (ANCLA) came in to discuss a complaint by one of the association's members that a certain customs official had refused to clear his container because he had failed to pay a bribe. Discussions became heated and ended with the chairman being thrown out of the official's office by force. This led to a small riot as association members - fed up with corruption at the terminal - invaded the premises and inflicted considerable damage. See the full story here.

The Nigerian government has set itself the objective of clearing all imports within 48 hours - an ambitious target indeed given that it currently takes 12 days to clear import goods into Nigeria. By creating delays and increasing the costs of trading, corruption makes consumers and entrepreneurs worse off, limits export competitiveness and reduces overall trade volumes.

Mozambique: On Reform Path

Recently, the Doing Business team visited Mozambique, and saw first-hand its path of reform and new policies to ease doing business. Last year Mozambique climbed 6 spots on the global Doing Business ranking, from 140 to 134. In 2006 a new commercial code was implemented. The new code increased minority shareholders protection and made it easier to hold directors and controlling shareholders liable for misconduct. In SADC, only South Africa has better regulations for protecting minority shareholders.

Mozambique also recently passed a new labor code. This is likely to have a positive change to its ranking on the Doing Business employing workers indicator.  The maximum duration of term contracts was extended to 72 months (that is a term contract of up to 2 years renewable twice), allowing workers and employers increased employment options. Mozambique is slowly making its labor market more flexible.

The Credit Crunch in Zambia

Commercial banks - mostly subsidiaries of foreign banks - are the most dominant financial institutions in Zambia. The banking system is comprised of 14 commercial banks, holding 90 percent of financial assets. Foreign equity participation is significant, accounting for three quarters of the banking system capitalization with regional leaders such as Standard Chartered, Barclays or Stanbic controlling a sizable part.

However, a financial sector diagnostic carried out by the World Bank Group noted that by the end of 2005, credit to the private sector by banks represented only 8% of GDP in 2005. Furthermore, only 5,000 people hold 90% of loans, and just 8% of Zambia's adult population had a bank account as of 2005.

What Eskom Can Learn

South Africa’s power crisis is in the news these days. With demand levels high compared with the supply capacity, and a reserve margin of 4% well below the internationally recommended minimum of 15%, the state-owned utility Eskom has resorted to adopting a rationing policy: Eskom’s customers have to accept that they currently get 10 to 20% less electricity than before the crisis. Hotels, large offices, and commercial customers will carry the biggest burden.

As the power crisis deepens, the country is looking for lessons to learn from other countries that have been in similar situations. Doing Business is currently developing a new indicator on the importance of electricity for businesses in countries across the world. Once the new indicator is out, countries like South Africa will be able to learn from more than 100 other countries’ practices. In the meantime, lessons have to be drawn from selected cases. Let us have a closer look at the short-term strategies that can be adopted.

Metro and Doing Business Commonalities

Picture this: you are standing on a platform full of people looking up at a screen which usually shows the train schedule. Alas, instead of the train destination and time, it only tells you that a train will be coming – not where to or when. If you happen to live in Washington D.C. and took the red line on the metro this weekend, this pretty much sums up the experience – followed by a 30 to 40 minute wait. Forget planning.

So what does this have to do with regulation or the investment climate? Well, every entrepreneur has to interact with government officials to comply with regulations in operating a company. Doing Business tracks some of these transactions through its indicators on, for example, starting a business, transferring a property title or enforcing a contract through the courts.

With Power Comes Accountability

Bugattis paid for in cash at more than 1million Euro a piece. Mansions in Paris. Villas in Nice…

This is not the latest James Bond movie, but the beginning of a long list of properties and bank accounts in the name of five African heads of state and their close relatives. The list of assets was published by Le Monde last week on an investigative expose about an ongoing inquiry by the French Office on Grand Financial Crimes. The presidents of Angola, Burkina Faso, Gabon, Congo, and Guinea are the target of the investigation. The article describes at length how they own a large number of real state properties in some of the nicest and most expensive neighborhoods in Paris and other French cities.

Taxes in Benin - Then and Now

It might not seem unusual to hear an entrepreneur complain about taxes. Indeed, it would be most unusual if you would meet one that does not. However, do modern-day entrepreneurs in Benin have more reason to complain than their ancestors in the pre-colonial kingdom of Dahomey?

The pre-colonial kingdom of Dahomey (in the south of modern-day Benin) had a tax system in place that rivaled that of any modern-day western country (whether this is something to be proud of is another matter, of course). Let’s have a look at how their tax system compares to what Doing Business measures today: number of taxes, tax rates and time required to pay the taxes.

First, today there are 15 different taxes in Benin ranging from the corporate income tax to the tax on the collection of dirt. In Dahomey, traders would have sympathized. They had to endure separate taxes on the sales in markets, on entries into the kingdom, on the crossings of rivers, on agricultural production and on cash incomes (in addition to the inheritance tax and the flat tax on all adult males). (Edna Bay, Wives of the Leopard: Gender, Politics, and Culture in the Kingdom of Dahomey, p.122)

Can Electricity Be Weighed in Gold?

There are very few businesses that do not depend on electricity. Shoe-shiners and rickshaw drivers are such rare exceptions. Pretty much every other business needs electricity. Some businesses, however, need enormous amounts of electricity: aluminum smelters, for example, or mines.   

In South Africa, the gold and platinum mining industry alone accounts for 15% of the national electricity consumption. On January 25th the sector experienced a huge shock when the state-owned electric utility Eskom informed the big mining companies that it could only provide for 50% of the mines’ usual needs for the months to come. The consequence? Mines had to be shut down. You don’t want your miners stuck hundreds of meters deep below the surface and see the light suddenly go off.

Repercussions could also be felt outside the country. South Africa being the largest producer of platinum in the world and the second largest gold producer, prices for those two metals went through the roof at the Bullion Market in London.

One Strike and You're Out of Business

On October 17, 1993, 16 West African states signed a treaty known as the "Organisation pour l'Harmonisation du Droit des Affaires en Afrique" or "OHADA" (Organization for the Harmonization of Commercial Law in Africa). The objective of the organization is to promote African economic integration and attract investment to the region. In an effort to harmonize laws, the member states have adopted "Uniform Acts" in areas such as corporate law, bankruptcy, accounting and debt recovery.

In 1998, the 16 OHADA countries -- soon 17 when DRC Congo joins the club -- adopted a "Uniform Act on General Commercial Law" which governs business registration. Article 10 of the Act states that "people who have been convicted of a crime as well as people who have been imprisoned for at least 3 months for committing economic or financial offenses are excluded from becoming an entrepreneur." This provision was meant to protect society by excluding criminals from doing business.

The Doing Business project counts 24 countries (out of 178) that still require company founders to submit a criminal record when they want to register their business. Out of the 24, 16 are the OHADA member countries. The remaining 8 are Algeria, Kuwait, Burundi, Djibouti, Macedonia FYR, Slovakia, St Kitts, and the Czech Republic. In Kuwait, for example, you cannot even hold shares in a company without a clean criminal record. These laws sharply contrast with countries like the United States and the United Kingdom where some cities have training programs and give financial support to convicts -- while still in prison --to help them start a business when they get out.

Top Reformers and Inverse Relationships

The author is a member of the Doing Business team and a Kenyan national.

A main finding of Doing Business 2008 is that return on investment is directly proportional to the pace of reforms. Ironically, this will not be the case for Kenya, at least not in the short term.

A top Doing Business reformer, and long billed as one of Africa’s beacons of peace and prosperity, Kenya is currently reeling from the effects of a violent reaction to a disputed presidential poll result in which widespread civil unrest, loss of life and property and paralyzed transport have become commonplace. Imports are stuck in Mombasa, while shops are empty.

In the Lion's Mouth

“When your hand is in the lion’s mouth, be careful how you pull it out,” goes one proverb.

Three years after a brokered peace, one would think that Liberia is safely out of the lion’s mouth. UN troops continue to patrol Monrovia, aid agencies are rushing in with their checkbooks, and Liberians are starting to rebuild their businesses and their country. But looks may be deceiving.

The Liberian government recently requested advisory work to improve the country’s performance on the Doing Business indicators. The request makes sound political sense. Reform may put the Liberian government in good standing with the donors holding the purse strings. Also, investment promotion campaigns are lent much more credibility when the World Bank classifies a country as a top reformer. One only needs to flip through the Financial Times or The Economist to see the incredible marketing job that Saudi Arabia and Georgia have done with their status as top reformers.