Doing Business In 2005: African Nations Struggle To Reduce Red Tape For Business, Missing Large Growth Opportunities
There is so much money, so many ideas, so much labour begging
to be given a
legal structure that is friendly, so that it can be put to use
solutions to the many challenges we face. Removing
obstacles to entry into
business, quick and cheap licencing, low taxes,
secure property rights and no
interference by government, security and
functioning courts to enforce
contracts... are afew of the things that would
encourage athe small and big
aspiring business person alike, the success of
these businesses are the jobs,
development and economic growth that so far
Botswana and South Africa have developed the strongest investment climates in Sub-Saharan Africa in recent years, but too few other African nations are following suit and most continue to rank among the world's least friendly for business, according to a new report from the World Bank Group.
Doing Business in 2005: Removing Obstacles to Growth, a report cosponsored by the World Bank and International Finance Corporation, the private sector lending arm of the World Bank Group, finds that investment climate reforms, while often simple, can help create job opportunities for women and young people, encourage businesses to move into the formal economy, and promote growth.
Between 2003 and 2004, for example, Ethiopia witnessed a jump of 48 percent business registrations after simplifying its entry procedures.
However, the report, which benchmarks regulatory performance and reforms in 145 nations, finds that poor nations, through administrative procedures, still make it two times harder than rich nations for entrepreneurs to start, operate, or close a business, and businesses in poor nations have less than half the property rights protections available to businesses in rich countries.
African countries reformed the least of all regions over the past year and still have the most regulatory obstacles to doing business. Sixteen of the 20 countries with the most cumbersome business regulations and weakest protection of property rights are in Africa. The Democratic Republic of Congo, Angola, Burkina Faso, and Chad rank among the bottom five. Chad, for example, still requires 19 procedures to register a new business, as compared with two procedures in a country such as Australia. In Congo, it takes 155 days to register a business. In Angola, it takes more than three years to enforce a contract.
Worldwide, rich countries undertook three times as many investment climate reforms as poor countries last year. European nations were especially active in enacting reforms. The top 10 reformers for the most recent survey year were Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal, and Spain.
Other findings related to Sub-Saharan African nations:
Botswana and South Africa ranked in the top quartile of the nations surveyed, according to indicators on the ease of doing business.
However, of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, only eight were in Africa.
Among the African nations enacting reforms, Ethiopia improved the process for starting a new business the most, by cutting the number of procedures from eight to seven, the number of days from 44 to 32, and the administrative cost of business startup by 80 percent. Still, it has the second-highest minimum capital requirement in the world, trailing only Syria.
Madagascar was the second-most effective reformer in Africa, slashing the time required to start a business by a third, to 44 days. Benin, Democratic Republic of Congo, Cote d'Ivoire, and Kenya also reformed entry regulation.
Two other reformers were Mozambique, where the public credit registry went online and strengthened the quality of data, and Namibia, which introduced more flexible work hours, making it easier for businesses to expand production.
Several countries enacted changes that worsened their investment climate. Malawi, Mauritania, and Rwanda made it more expensive to start a business. Zimbabwe hiked its capital duty from 1 percent to 20 percent and increased the license application fee fourfold."Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climates more business friendly," said Michael Klein, World Bank/IFC Vice President for Private Sector Development and IFC Chief Economist.
Doing Business in 2005 updates the work of last year's report on five sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business; expands the research to 145 countries, and adds two new indicators, registering property and protecting investors. "This year, Doing Business gives policymakers an even more powerful tool for measuring their regulatory performance in comparison to other countries, learning from best practices globally, and prioritizing reforms. Since last year, 13 countries, including Cape Verde, Gambia, and Mauritius, have asked to be included in the Doing Business analysis," said Simeon Djankov, an author of the report.
The main research findings of Doing Business in 2005:
Businesses in poor countries face larger regulatory burdens than those in rich countries. Poor countries impose higher costs on businesses to fire a worker, enforce contracts, or file for registration; they impose more delays in going through insolvency procedures, registering property, and starting a business; and they afford fewer protections in terms of legal rights for borrowers and lenders, contract enforcement, and disclosure requirements. In administrative costs alone, there is a threefold difference between poor and rich nations. The number of administrative procedures and the delays associated with them are twice as high in poor countries.
The payoffs from reform appear to be large. The report estimates that an improvement from the bottom to the top quartile of countries in the ease of doing business is associated with an additional 2.2 percentage points in annual economic growth. An indication of the payoff comes from Turkey and France, each of which saw new business registration increase by 18 percent after the governments reduced the time and cost of starting a business last year. Slovakia's reform of collateral regulation helped increase the flow of bank loans to the private sector by 10 percent. The payoff comes because businesses waste less time and money on unnecessary regulation and devote more resources to producing and marketing their goods and because governments spend less on ineffective regulation and more on social services.
Heavy regulation and weak property rights exclude the poor - especially women and younger people - from doing business. The report finds that weak property rights and heavy business regulation conspire to exclude the poor from joining the formal economy. "Heavy regulation not only fails to protect women, young people, and the poor - those it was intended to serve - but often harms them," said Caralee McLiesh, an author of the report. Doing Business shows that countries with simpler regulations can provide better social protections and a better economic climate for business people, investors, and the general public. The report builds on noted economist Hernando de Soto's work, showing that while it is critical to encourage registration of assets, it is as important - and harder - to stop them from slipping back into the informal sector.The top 20 economies in terms of ease of doing business are New Zealand, United States, Singapore, Hong Kong/China, Australia, Norway, United Kingdom, Canada, Sweden, Japan, Switzerland, Denmark, Netherlands, Finland, Ireland, Belgium, Lithuania, Slovakia, Botswana, and Thailand.
The Doing Business project is the product of more than 3,000 local experts - business consultants, lawyers, accountants, and government officials - and leading academics, who provide methodological support and review. The data, methodology, and names of contributors are publicly available online.
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