Doing Business Blog - The World Bank Group

G8 Urges Doing Business Reforms, Promotes FIAS

The G8 met finance ministers over the weekend to outline an action plan for growth in Africa. The resulting document is remarkable for its focus on making it easier for African businesses to operate. The text of the G8 communique is here.

The G8 ministers made reforms of the business environment a priority: "8. National regulatory frameworks should be strengthened to attract and retain private capital. Complicated regulatory barriers reduce incentives for African entrepreneurs to enter the formal economy. While a few African countries are making progress in simplifying business regulations, much is still to be done in most others. To this end, we encourage countries to use surveys, such as the World Bank's "Doing Business Reports", as indicators of possible barriers to business and of reform efforts."

The action plan goes on to say: "We renew our commitment to the existing technical assistance facilities focusing on the promotion of anti-corruption enforcement, and the reform of regulations, taxation and customs, such as the IFC (International Finance Corporation)'s PEP (Private Enterprise Partnership) Africa, the World Bank's FIAS (Foreign Investment Advisory Services) and the multi-donor ICF (Investment Climate Facility)."

Most encouraging in the G8 statement is the recognition that widespread informality - in business and in property rights - is the main drag on growth in Africa. "Expanding access to the formal economy" appears three times in the communique. Such access is achieved when barriers to entry are reduced, when it is easier to get credit, trade across borders, pay taxes, and get licenses.

Why are such reforms important? “When legality is a privilege available only to those with political and economic power, those excluded—the poor—have no alternative but illegality,” writes Mario Vargas Llosa in the foreword to de Soto’s The Other Path. It is estimated that 80% of workers in Africa are in the informal sector.

We have our work cut out.

Illegally poor

UNDP has just published a report on Making the Law Work for Everyone. It is the result of 3 years of work. And it seems to entail a lot of compromise among the 21 members of the commission tasked with charting new ways to fight informality, illegality, and judicial systems that cater to the elites only.

The commission members are a veritable "who is who" in development policy: Larry Summers, Hernando de Soto, Fernando Cardoso, Ashraf Ghani, and Ernesto Zedillo. The full list is found on page iv of the report. Interestingly, it does not include a single East Asian or East European--the two regions that have most drastically reduced informality and illegality. Maybe they were too busy reforming.

The Pendulum Swings

In a recent forum on Africa, Paul Collier advances a novel idea: Africa is growing faster than ever before because (you guessed it) it has made many mistakes in the past. The full argument goes as follows:

"But the growth we are seeing today is not just a result of commodity booms. There is a process at work that does not depend on democracy and is so simple that analysts generally miss it: learning from mistakes. Since 1970 African societies have accumulated a huge stock of experience in how not to manage an economy. For example, from the mid-1970s until the mid-1980s Tanzania adopted regulatory policies that proved to be ruinous. The knowledge they gained through failure is valuable. Tanzania is now one of the best-managed of all Africa’s economies. The European society with the best record of containing inflation over the past sixty years is Germany. It has the best record because it used to have the worst: the experience of hyperinflation immunized Germans from macroeconomic folly." Read the whole comment here.

Collier's argument makes sense, even outside of Africa. Eastern Europe rivaled Africa in economic mismanagement until the 1990s. Now, the majority of top reformers in Doing Business come from that region.The rationale is simple: people get fed up.

If so, let's predict the top reformers of the future: Zimbabwe, Venezuela, Turkmenistan, who else?

Easterly on the Growth Commission

Bill Easterly (picture) is at it again. This time his object of scorn is the World Bank's Growth Commission, which just published an extensive report. Easterly's summary: "After two years of work by the commission of 21 world leaders and experts, an 11- member working group, 300 academic experts, 12 workshops, 13 consultations, and a budget of $4m, the experts’ answer to the question of how to attain high growth was roughly: we do not know, but trust experts to figure it out."

Ever good with words, Easterly points out some memorable conclusions in the Growth Commission's report. For example: "It is hard to know how the economy will respond to a policy, and the right answer in the present moment may not apply in the future."

Easterly's conclusion: "My students at New York University would have been happy to supply statements like these to the World Bank for a lot less than $4m."

Read his complete comment in the Financial Times here.

Another World is Possible, If

This week I am debating Susan George, a political scientist and a fierce critic of the World Bank, the IMF and the WTO. George refers to those as the three stooges of global capitalism. Recently she has added the OECD, making the reference passe. An alternative name suggested: the four baddies.

In essence, George's argument is that the Bretton Woods institutions (plus selected others) are the servants of global corporations. And since corporations can't think beyond their noses, nothing good can come out of that. A notable Susan George quote: "Markets can't think about anything beyond about three months. This is very long-term for markets, which is why the important things in life have got to be taken outside of the marketplace. " Lesson one: market institutions are bad for development.

Kinks in Reform

A new paper by Daron Acemoglu (see picture) and co-authors finds what I have suspected all along: that policy reform works best in middle-income countries, and/or countries with some level of democracy. Or put differently, in MIT speak, "it is at intermediate values of constraints that policy may be both bad, but also reformable."

Whether or not groups and individuals with political power can thwart reforms depends on the constraints on politicians and on the process of policymaking. In societies such as many in Africa or the Middle East, where there are only few constraints and checks on politicians and on politically powerful groups, policy reform is unlikely to be very effective.

The Friedman Prize goes to...

Yon Goicoechea (see picture), leader of the pro-democracy student movement in Venezuela that prevented President Hugo Chávez from seizing broad powers in a December 2007 referendum, has been awarded the 2008 Milton Friedman Prize for Advancing Liberty.

Mr Goicoechea is a 23-years old law student, a third of the age of the average previous recipient. Peruvian writer Mario Vargas Llosa remarked, "Freedom and complacency are incompatible and this is what we are seeing now in countries like Venezuela where freedom is disappearing little by little, and this has produced a very healthy and idealistic reaction among young people. I think Yon Goicoechea is a symbol of this democratic reaction when freedom is threatened."

When I first heard the news (the actual ceremony is on May 15 in New York), I was puzzled. In an earlier blog, I had predicted that the prize would go to either an East European (Vaclav KLaus or Leszek Balcerowicz) or a New Zealander (Roger Douglas or Ruth Richardson). These candidates fit the previous pattern of recipients. I had also suggested in a later blog that the committee should be more flexible and look at people who have recently made tremendous steps in advancing liberty. The committee went that way, so much so that even I was surprised.

Economics of the Rule of Law

The Economist issue of March 15th 2008 includes an article on the relationship between economics and the rule of law. Among other things, the article addresses the issue of what the concept of the rule of law is really about and to what extent growth and development are directly related to it.

Despite ongoing debates, key actors in the “business” of development are increasingly including the rule of law under different forms and shapes in their agenda. Breaking down the concept of rule of law can be an interesting exercise.

Chinese Tales

Andres Oppenheimer's latest book, Chinese Tales, advances a basic proposition: Latin America is falling behind the rest of the world in competitiveness. He gives many examples, from the declining share in global trade to the rapid relocation of the headquarters of many Latin American businesses to Miami.

I am reading the book while on vacation in Fort Lauderdale, Florida. Oppenheimer's argument is especially obvious in this city. Here is how.

This is my first visit to Fort Lauderdale and I was surprised to see the big build-up in hotels and housing. Ever the economist, I have been asking around why. The answer: Miami is getting very expensive and vacationers and retirees are moving looking further north. Only a 20-minute drive from Miami, Fort Lauderdale is benefiting from this migration. There is a new Hilton (I am staying here and like it), new Sheraton, and a nearly-completed Trump Tower. Many new condo buildings too.

The Friedman Prize, Again

Yesterday's blog talked about the upcoming selection of the biennial Milton Friedman prize for advancing liberty. I gave the most obvious choices to win it this year. The write-up got me thinking on something else.

There should be an additional criterion on who gets the prize. Two criteria, in fact. The first one is that the nominees should still be active, in the sense that the prize can help them further pursue their work. On this criterion, the first and second winners (Peter Bauer and Hernando de Soto) have failed. Peter Bauer's untimely death only weeks after he received the Friedman prize made it impossible for him to raise its profile. Hernando de Soto has also done little to advance the cause of economic liberty since 2004. The only winner who fits this criterion to-date is Mart Laar, the 2006 winner.

The Friedman Prize

On May 15, Cato Institute will announce its biennial selection for the Milton Friedman prize for advancing liberty. Previous recipients include Hungarian-born Peter Bauer, Peruvian Hernando de Soto and Estonian Mart Laar.

The choice for the 2008 recipient is straightforward: select either a New Zealander or an East European. In the past 25 years, these are the only two places where economic liberty has been significantly advanced. The choices are: Vaclav Klaus, the Czech president; Leszek Balcerowicz, who just recently finished his term as president of the central bank in Poland; Roger Douglas and Ruth Richardson, both former finance ministers in New Zealand.

The Age of Milton Friedman

Andrei Shleifer (Harvard) has recently finished a short paper with this title, forthcoming in the Journal of Economic Literature. In it, he reviews two recent books: A collection of papers edited by Leszek Balcerowicz and Stanley Fischer; and a volume by Joseph Stiglitz, Jose Antonio Ocampo, Shari Spiegel, Richardo French-Davis, and Deepak Nayyar. Shleifer's article also pores over large amounts of recent data to come to the following conclusion: "In the Age of Milton Friedman, the world economy expanded greatly, the quality of life improved sharply for billions of people, and dire poverty was substantially scaled back. All this while the world embraced free market reforms."

What do the two books say about the age of Milton Friedman? Balcerowicz-Fischer conclude: "reliance on market forces within an open economy in a stable macroeconomic environment, with assured property rights, are the keys to rapid economic growth." Milton Friedman - as Professor Shleifer notes - would have put it better, but with the same idea.

Institutions and Development: The Second Wave

The last decade has spurred a lively (and well-published) literature on the importance of institutions and regulatory reform for economic growth. Some of the best-known articles include Acemoglu and co-authors' Unbundling Institutions, Djankov and co-authors' The New Comparative Economics, Rodrik's Getting Institutions Right, and Djankov and co-authors' The Regulation of Entry.

These studies have opened the field and put some specifics to the vague term institutions. Kuddos for this achievement. However, they are based on cross-country evidence. This raises a number of concerns, most of all that the associations they show may be due to some unobservable reasons (the favorite one of the detractors of this work is "culture").

Enter Rohini Pande (picture 1) and Christopher Udry (picture 2), with their paper Institutions and Development: A View From Below. Pande and Udry laud the success of the cross-country studies in re-vitalizing the moribund development literature and suggest two ways to enhance its robustness.

Pernicious Aid Dependence

Foreign aid can be the kiss of death for poor regions. This is what Amity Shlaes (picture), senior fellow at the Council on Foreign Relations in New York, argues in her article of February 27, 2008 on Bloomberg. This makes sense when you consider that aid obviates the need to tax, says Shlaes. "Governments that don't need to collect taxes don't need voter support either. They also don't need to produce an environment friendly to business. Those who benefit from a windfall turn to autocrats."

More importantly, aid tends to make politicians forget about growth. Bill Easterly, the most vocal opponent of aid dependence, describes an encounter with an HIV-positive woman in Soweto, where AIDS flourishes. When asked what the area's worst problem was, the woman replied "no jobs."

Shlaes' article concludes: "you should expand aid if you want to make Africa look more like the Middle East -- a bit healthier, but fundamentalist, non-entrepreneurial and bellicose. That's one flawed gift."

Easterly on Gates

Bill Easterly (picture), formerly of World Bank fame, always manages to ruffle the establishment. This time the establishment is Bill Gates, the philanthropist extraordinaire. Gates recently told the Wall Street Journal that he hated Easterly's latest book. Easterly was eager to respond.

The gist of Easterly's argument is that the profit motive of capitalism is stronger - and more effective in reducing poverty - than the philanthropy motive of donors. To quote Easterly: "Mr. Gates seems to believe that the solution is to persuade for-profit companies to meet the poor's needs by boosting the "recognition" of corporate philanthropy. But the dossier of historical evidence to suggest this would work is as thin as Kate Moss on a diet. ... Is it really the poor's only hope that the Gap will donate a few pennies per sexy T-shirt for AIDS treatment in Africa?"

Cashing In on Property Rights

Hernando De Soto argues that property rights are the pillars of developed economies. After a significant publication in 1989, “The Other Path - The Invisible Revolution in the Third World”, he was hired by governments around the world to advise on capital creation.

Informal (unregistered) property in Egypt, according to De Soto, is valued at $241 billion – an amount comparable to 55 times the foreign direct investment that the country received over the last 200 years (including Suez Canal and Aswan Dam), or 30 times the size of the Cairo stock exchange. This, of course, is according to De Soto.

Let the Public React

As fighting corruption is heralded as a main panacea of economic development, increased involvement of families in the politics of many countries may, at first blush, appear to increase chances of conflicts of interest. Kaczynski in Poland, Kirchner in Argentina, Abe and Fukuda in Japan. Also, the candidates: Clinton, Royal...

Corruption can be prevented through imposing restrictions, supports one approach. The World Bank, for example, prohibits employment of close relatives. It allows, however, employment of spouses/partners, as long as one of them does not report to the other.

The Doing Business approach to preventing corruption advocates disclosure of

Vietnam: A Property Market

Hoang is a successful manager of a foreign company who lives with his wife in a modest apartment in the capital of Vietnam, Hanoi. Five years ago, he bought a second apartment in an “expat” residential area for $100,000.

Loans from commercial banks were almost unavailable, so he used all his savings and borrowed from friends and relatives to pay the entire amount upfront in four installments. Hoang has been renting the apartment to a Japanese executive since then. At present, Hoang’s apartment is worth three times more. He is confident that he could easily sell it for more than $300,000 now, if he would.

Hundreds of construction sites are mushrooming in Hanoi. The real estate market is booming. Middle-class and new riches nationwide pour money in real estate, considering it the safest haven for their personal savings. New apartment complexes, hotels and storehouses are changing the city’s landscape. Last week, the Hanoi People’s Committee gave green light to three new five-star hotel projects. The construction delirium has brought hundreds of young people from the countryside to work on the scaffold. Their remittances are already a critical resource for their impoverished provinces of origin.

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.

Measuring the Ease of Enterprise

The field of measuring the ease of enterprise is maturing. In 2001, a dozen organizations put together indicators and ratings of the environment for doing business. Six years later, four have overtaken the rest and become the source of information for reformers in government, for investors and researchers. These come from the Fraser Institute’s Economic freedom of the world, the Heritage Foundation’s Index of economic freedom, and the World Bank’s Doing Business project and Enterprise surveys .

A new paper shows a clear trend: moving from indicators constructed by commercial entities—as a side business for their clients—to indicators constructed by organizations that provide a public good. This has brought in improved methodologies and better sources of information. It has also resulted in an innovation: aid flows or advisory services informed by measurement of the ease of enterprise. The United States’ Millennium Challenge Account is the pioneer in this market.

One Day in the Life of a Business

"One day in the life of Ivan Denisovich" got Solzhenitsyn a Nobel Prize in literature. The book is dull: it describes a single day of an ordinary prisoner in a Soviet labor camp in the 1950s. However, it described a reality that few had imagined.

It would be useful to have a similar account of the life of an ordinary business in, say, Africa. Many efforts have gone into improving the environment for doing business in Africa. The Doing Business team now works in over 20 African countries. The Investment Climate Facility for Africa has even more ambitious plans.

A parallel effort exists. Abhijit Banerjee and Esther Duflo at MIT Economics have a 2006 Journal of Economic Prespectives paper on the economic lives of the poor. The authors document how the poor (those who have less than $1 a day) earn their income and how they spend it in 13, mostly African, countries.

How Many Poor People Are There?

The Millennium Development Goals had a major setback this week. Turns out the number of Chinese living on one dollar a day may be about 300 million, not 100 million as previously calculated. This is according to a December 9 editorial in the New York Times. The reason: a large statistical glitch in how economists measure income.

How could such a blunder take place? Well, the poverty line is calculated in purchasing power parity dollars (see Millennium Development Goal #1). This is to avoid wide fluctuations in currency exchange rates caused by natural disasters, political cycles, or other events that affect domestic prices. So far, so good.

Binding Constraints to Growth

Dani Rodrik, these days probably the most original thinker in development, has recently advocated a new approach to growth: addressing the binding constraints. With co-authors Ricardo Hausmann and Andres Velasco, Dani wrote a nice paper on Growth Diagnostics . The main point: a large group of development experts recommend the "do as much reform as you can, as best as you can" approach. Another group proselytizes the "target the biggest distortions" approach to reform. Neither is right, in his opinion.

Viva La Millennium Challenge Corporation

The Millennium Challenge Corporation, a 4-year-old initiative by the Bush administration, "has taken longer than expected to help poor, well-governed countries." And Congress is considering cutting its budget for next year. So says a December 7 article in the New York Times by Celia Dugger, America's top journalist on development issues.

Well, what did politicians expect? That a new development organization will be created from scratch and be able to disburse large amounts of aid money (to the tune of $5 billion annually) in a couple of years? Unrealistic.

Sachs, Drugs, and Rock 'N' Roll

Only a couple of years ago, Jeffrey Sachs was riding high in development circles. Flying around with pop singer Bono, making films with Angelina Jolie, and advising UN Secretary-General Kofi Annan on reducing extreme poverty and disease. His website claims that "He is widely considered to be the leading international economic advisor of his generation." Or was.

Things have been quiet lately. For good reason: Sachs' claim to fame is his belief that the tripling of foreign aid to developing countries (to $195 billion a year) will eradicate poverty and finish off diseases like malaria by providing incentives to create new drugs. If you read his book The End of Poverty , you will become a believer.....unless you have worked in developing countries.