Doing Business Blog - The World Bank Group

Tajikistan, in Reform Mode

In the six-year history of Doing Business, it has become evident that indeed what gets measured gets done. Often, the Doing Business data stimulates debate among policymakers prompting them to address challenges in the regulatory environment in their countries. And policy-makers are often inspired by other reformers. Last year, Kyrgyzstan was the first Central Asian country to make it into the top 10 reformers’ list. This year, two of its neighbors – Kazakhstan and Tajikistan – are also in reform mode.

Earlier in March, a Doing Business reform advisory team visited Tajikistan to support the Government’s business climate reform efforts. Ranked 159th out of 181 economies on the ease of doing business – and last in the Eastern European and Central Asian (ECA) region – Tajikistan seems determined to improve its business climate this year, led by the State Committee on Investments and the President’s Office.

Doing Business - How Useful Are These Indicators Anyway?

This was the big question during a sometimes heated panel discussion I recently attended in Miami. With a lawyer, an investor, and a government official present, one can imagine that the views varied. Juan Pablo Capello from Greenberg Traurig, who has advised many international investors, saw the indicators as quite limited as they focus mostly on local, small and medium size enterprises. In his view, sovereign ratings and legal certainly matter much more for foreign investors. Luis Manuel Kolster from GM countered that actually investors do look at tax rates and regulatory burden, but the decision to invest is also foremost driven by market size and cost. What I found most interesting was the government perspective, or should I say reformer perspective, by Liliana Rojas from the Colombian Ministry of Commerce. At the end of the day, it is governments that create and shape the regulatory environment for businesses. So, are they doing this in the sole hope of attracting sudden large foreign investment? She saw the indicators and rankings as a rather useful tool for benchmarking, informing reform agendas and tracking progress. The goal of these reforms? Promote and support local businesses and, in this way, aid job creation and growth. In the end, all participants agreed that, particularly nowadays, this is an important objective to have.

Reforming Outdated Commercial Laws

Three weeks ago I visited El Salvador and Honduras to discuss different aspects of their reform program inspired by the Doing Business (DB) indicators. In San Salvador, representatives from Central American governments met in a two-day workshop to share successful experiences of regulatory reform and learn from each other.

Panama and the Dominican Republic sent participants as did Honduras, Guatemala and Nicaragua. Some of the participating countries – such as the host nation, Guatemala and Honduras – have been reforming for a while and are planning their next steps. The Dominican Republic was a top-10 reformer last year. Others – such as Nicaragua and Panama – are relative newcomers to the reform field. We will see how much they can and will get done.

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.

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.”

Naturally Madagascar

Such is the slogan adopted by the government of Madagascar for its development vision. Conceived in 2002, it's meant to allude to the abundant natural beauty with which the island is endowed. It could also refer to the island's aspiration to become a natural choice for foreign investors. The far-reaching reform program that's supposed to make this a reality places a heavy emphasis on improving the regulatory framework to enable the private sector to act as the main source of growth. On a short visit to the capital this week, I've been impressed by the flurry of reform activity in seemingly every quarter.

Trade facilitation is a case in point. This year, Madagascar was one of the top reformers on the Trading Across Borders indicator, introducing an electronic data interchange that links all the main entities involved in the import and export process from customs and the ports to the commercial banks, the Central Bank and the Treasury. Based on the Singaporean model and inspired by Ghana's experience, the system is run by Gasynet, a public-private partnership between the government and SGS, a private company. In conjunction with improvements at the island's main port at Toamasina, the reforms introduced by Gasynet have so far led to an impressive three-week drop in the time required to clear import goods.

Belarus: A Top Reformer

Earlier this year, the government of Belarus publicly announced its goal to enter the top quintile of the Doing Business ranking. The government was determined to overhaul its business regulatory framework from the get-go.

In January, it held a series of extensive consultations with experts from the Doing Business team. The team explained its methodology in great detail and offered a set of recommendations on what to reform and how. The government of Belarus took its homework seriously and pledged to pass 63 regulations aiming to ease business regulations in the country in the first half of the year.

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.

Three Ways to Fight Tax Evasion

The Chinese have given the world such wonders as paper, the compass, gunpowder, fireworks, and eyeglasses, to name but a few. A few years ago, they also came up with an ingenious way to fight tax evasion: the receipt lottery. If you buy a service in certain types of establishments, such as restaurants, your receipt contains a scratch lottery in which you can win up to a few hundred dollars (true to form, I have yet to win more than the princely sum of 5 RMB ($0.74)). This gives consumers an incentive to request receipts for their purchases—in effect co-opting them in the fight against tax evasion.

According to this paper by Junmin Wan, the experiment has been quite successful—in areas where the lottery was introduced, business taxes were 17.1% higher and the growth in business tax revenue 21.5% higher than in other areas of the country over a six-year period.

São Tomé's Possible New Revenues

On a recent trip to Africa, I had the chance to visit one of the continent’s smallest countries. São Tomé and Príncipe – comprised of two volcanic islands in the Gulf of Guinea – is also the smallest African economy covered by Doing Business. A veritable tropical paradise, the islands abound in natural beauty. Although poor and no Gini coefficient seems to have been calculated for São Tomé, I would expect it to turn out relatively low.

But all that might be about to change – or not. The pristine waters surrounding the islands are believed to contain vast quantities of hydrocarbons, which, if discovered in commercially viable quantities, would transform the country’s economy. Fortunately, there has been a significant effort, aided by a team from Columbia University, to create a legal framework conducive to the transparent and sustainable use of the expected oil revenues. The new Oil Revenue Management Law stipulates, inter alia, that all oil contracts shall be public and that any bribe paid in connection with a contract award shall constitute sufficient cause for annulment on the part of the State.

Transparency provisions such as those adopted by São Tomé are important. Whether the measures already taken turn out to be enough if and when production starts remains to be seen. The stakes are high – the small population and the estimated size of the oil reserves mean that every São Tomean citizen is potentially poor no longer.