Doing Business Blog - The World Bank Group

Singapore focuses on doing business in APEC

Singapore, ranked 1 out of 181 economies on the ease of Doing Business, is hosting the upcoming Asia Pacific Economic Cooperation (APEC) Conference this spring.  APEC covers 21 countries, and senior APEC officials are making resisting protectionism and accelerating economic integration key priorities for this year’s meeting.

One new feature of the conference is an initiative by Singapore to identify the top areas of regulatory barrier when doing business in economies of APEC. To achieve this, it is introducing an "Ease of Doing Business" survey, based on that of the Doing Business project. It aims to provide suggestions on the areas and types of reforms to regulations that businesses would like to see APEC governments embark on.

Singapore wants to highlight the results from the survey to the APEC governments to help improve the ease of doing business in the 21 member economies. Any business located in one of the 21 APEC countries can complete the survey through this link. 

Why Entrepreneurship Matters

Whoever is interested in entrepreneurship should check out this week’s Economist to find an interesting report on the matter. The author demystifies some common misconceptions (e.g.everyone is young, it depends on Venture Capital, it has to change the world, among others) and assesses how the enthusiasm for entrepreneurship is holding up in times of crisis.  Not so bad, apparently.

Some resources such as talent and office space are easier to find. That together with less competition in the long run allows newcomers to get their foot in the door. 85% of entrepreneurs in eight emerging markets surveyed for Endeavor indicated that they have been hit by the crisis; 88% thought that it would still get worse.  But, they also foresaw that, on average, their businesses would grow by 31%, and the number of employees by 12%. 

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.”

Taxes and the Crisis

No one likes paying taxes, and yet the government needs tax revenues to finance itself, and the various infrastructure and social projects it develops. Businesses benefit from these projects (unless the money is wasted in corruption). The real question is how much tax to pay to make both the government and businesses happy.

The Doing Business background study of the effect of taxes on investment, growth and entrepreneurship deals with exactly this question. It investigates all taxes that businesses need to pay in 85 countries.

Take Bulgaria as an example. The average Bulgarian business pays the following taxes: corporate income tax (10% of profit), social security contributions (24% of gross salaries), municipal fee (1% of the value of land and buildings), vehicle tax (950 leva per vehicle), property tax (0.15% of the value of land and buildings), and value added tax (20% on the value the business created using the various inputs and labor). If the average business paid all its taxes, about 35% of its profits will go to the tax collector.

Is 35% the right level of business taxes for Bulgaria? Let's compare to some other countries. Austrian businesses pay 55% of profits in taxes. German businesses pay 48%. Latvian businesses pay 33%. Irish businesses – 29%. Former Yugoslav Republic of Macedonian businesses pay 18%.

There is a good rule in setting taxes: the poorer the country, the lower the tax burden. This is for two reasons. First, poorer countries waste more tax money through corruption. Second, lower tax burdens for businesses lead to more economic activity.

Entrepreneurship - the key to prosperity?

Following the G20 summit this weekend, the leaders of the world's largest economies issued a statement explaining how they intend to remake the world's economic architecture. On the very first page of the statement you'll run across the following:

Our work will be guided by a shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets foster the dynamism, innovation, and entrepreneurship that are essential for economic growth, employment, and poverty reduction.

It might be tempting to treat this merely as empty rhetoric, but I think it's worthwhile to look at what the data actually shows about these relationships. The most recent data from the World Bank Group Entrepreneurship Survey - which covers 100 countries - indicates a very strong (and statistically significant) relationship between entrepreneurship and economic well-being. (Entrepreneurship is measured by the entry density rate of limited liability companies and economic well-being is measured by GDP per capita.)

 

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:

Kicking In An Open Door

“You never know what to expect,” a Surinamese entrepreneur said to me, describing the unpredictable situation at the port of Paramaribo (see picture). “Before we know it, we’re not allowed to enter the port area because someone woke up that morning and had the idea that we need some additional device, or piece of clothing. Everyone will be sent away off to the store to buy that piece of clothing or equipment. It is never announced in advance, it is so random that no one could see it coming. It is frustrating because we never know what to expect. When requirements change that unexpectedly, we cannot prepare for it and thus, besides the frustration of another, useless change, we lose time in getting our goods from the port, which costs us money. We’re in the port area every day, so why is it that they could not tell us before?”

This is only one example where authorities fail to communicate and the entrepreneur is directly disadvantaged. The information is nowhere to be found until an officer decides to communicate the details at a time that is convenient to him. The rule is implemented immediately without advance notice and the entrepreneur all of a sudden finds himself barred from entering the port area unless he fulfills the unforeseen requirements on the spot.

Going Portable in Phnom Penh

Up until last year, entrepreneurs in Cambodia who sought to obtain loans to expand their businesses might have found themselves coming up against a brick wall. As the country had no secured transactions law, an entrepreneur—particularly a small or medium-sized one—would likely have found himself with little to offer potential lenders in the way of collateral.

Land was acceptable as collateral—that is, if the entrepreneur was fortunate enough to own any.

Tangible movable property (such as the sewing machines of a clothing maker) was also acceptable—if the entrepreneur handed the property over to the lender. Of course, this would effectively deprive her of her business and negate the whole reason for getting a loan in the first place.

All this changed with the enactment of the country’s new Law on Secured Transactions in 2007. While Doing Business is still evaluating the impact that the new law will have on Cambodia’s score in the Legal Rights index of the Getting Credit indicator, the law looks to be a giant step forward. It creates a Filing Office within the Ministry of Commerce in which lenders can register their security interests in movable property.

What’s the Best Minimum?

It depends. However, when it comes to paid-in capital requirement the best minimum is zero. 75 economies in the Doing Business sample of 178 agree with this statement. Nevertheless, the rest do not and impose minimum paid-in capital requirement of up to 36 times the income per capita of the country. However, at least one of those 75 economies is now considering imposing a minimum paid-in capital requirement – Antigua and Barbuda.

Antigua and Barbuda currently has no minimum capital requirement. That is, the shareholders decide on how much to invest initially in the business, depending on the industry and banking financing requirements. However, the Company Registrar feels this solution is not optimal because it promotes the creation of fake companies and it does not provide enough protection to creditors. Consequently, there is a request from the registrar to raise the paid-in minimum capital requirement to EC$ 100,000 (over USD37,000 and over 3 times Antigua and Barbuda’s income per capita). Will this be a step forward?