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. 

A Question for the President?

If you have a question for World Bank President Robert Zoellick, who will be attending the G20 meetings in London next week, March 31 is your chance to ask. Reuters is collecting questions online, and Zoellick will be responding in a speech while in London next Tuesday. Just follow this link and add your questions to the comments section. (You can also use the #askwb tag on Twitter.)

A Barro Classic

Robert Barro's 1997 classic Determinants of Economic Growth has a number of interesting analyses on what drives prosperity. Most pertinent for my current research (see an earlier blog) are his findings on growth and democracy. These are mixed.

On the one hand, democracies may retard growth as they institute rich-to-poor redistributions of income (think Ecuador under Correa and Venezuela under Chavez). A number of authoritarian regimes have expanded economic freedoms: Chile under Pinochet, Peru under Fujimori, the Shah's regime in Iran, China under Mao. On the other hand, dictators can use their power to steal the nation's wealth. Think Marcos in the Philippines, and Mobutu Sese Seko in Zaire (now the Democratic Republic of Congo). Democracies can provide a check on such powers. Also, some growth-enhancing policies - for example making it easier for new businesses to start operations - are also politically popular and embraced by the electorate.

Democracy, Growth and Doing Business

My previous blog talked about some research I am doing with Mohammad Amin on the link between democracy and Doing Business reforms. One reason to be excited about the project is that it may settle a big debate in the previous literature: does growth cause democracy or does democracy cause growth?

Various economists have weighed in on this. The discussion goes back to Montesquieu and Aristotle. The former thought that constraining the government through some sort of a democratic process is essential for prosperity (very un-French of him). Aristotle, in contrast, argued that growth in income and education will lead to better political institutions. These views are supported by voluminous work: the new institutional economists spurred by Douglas North have shown various evidence in favor of Montesquieu; Lipset and Barro have shown support for the Aristotle theory.

Democracies Pay Higher Wages

Mohammad Amin and I are soon finishing a new research project, linking democracy to Doing Business reforms. Or, stated more pompously, investigating the link between political and economic governance. Results will be featured here in a week. A preview: democracies reform more.

The result may be counter-intuitive at first. A casual look at the top-10 reformers in Doing Business 2009 lists Belarus, Azerbaijan and Egypt. (However, it also features Botswana - the highest rated democracy in Africa.) There is a good rationale why less democratic countries may reform more: it is easier. The top decision-maker says reforms will happen, and they happen. And there is certainly evidence of this in Doing Business. But it is not the rule. On average, democracies yield more reforms.

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:

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.

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.

Landlocked Economies at United Nations

In early October the World Bank, the UN – OHRLLS, and the UNCTAD came together at the United Nations in New York for the “High-level Investment Forum, Investing in landlocked developing countries: Trends, experiences and the way forward”. The objective of the forum was to bring together policy makers and private sector practitioners from landlocked developing countries, as well as current and prospective international investors to analyze current trends in FDI flows to LLDCs, exchange experiences and best practices and to explore future opportunities for FDI to these countries.

At the conference Doing Business launched the report Doing Business in Landlocked Economies 2009, which analyses the ease of doing business in 38 landlocked economies. When compared to coastal economies, landlocked countries tend to rank lower in starting a business, dealing with construction permits, getting credit, protecting investors, paying taxes, trading across borders, and closing a business.

Krugman Gets 2008 Nobel in Economics

In a surprise twist, Paul Krugman (Princeton) was announced the winner of the 2008 Nobel Prize in economics. Surprise not because he does not deserve it - Krugman's work on trade theory is widely acknowledged - but because the Nobel committee passed over Jagdish Bhagwati (Colombia), who has lobbied for it for years. As Professor Bhagwati's main work is also on trade theory, it makes it unlikely he will get the Nobel any time soon. (Bhagwati was also Krugman's teacher at MIT.) This announcement also dents the hopes of Anne Krueger, another top trade theorist.

What is perhaps most interesting about Krugman's choice is that he stopped doing economics almost 10 years ago and has instead been a columnist for the New York Times. This is good news: shows that you can have a second life and still get dividends on the first.