Wolfensohn: Prune red tape to spur growth in poor countries

Prune red tape to spur growth in poor countries
By JAMES WOLFENSOHN
Business Times - 10 Sep 2004

A YEAR ago, the World Bank Group published the Doing Business report, measuring for the first time the burdensome regulations and weak property rights in many poor countries that stifle the growth of a vibrant business sector.

With the publication this week of the second Doing Business report, we can see that significant changes have been occurring in the developing world over the past 12 months in this critical area.

For example, the number of new businesses founded in Ethiopia last year leapt by almost 50 per cent. It may seem a miracle, but the reason is no mystery: the Ethiopian government cut the cost of setting up a new business by nearly 80 per cent, or about four years' salary. Turkey and Morocco also simplified their procedures and saw the number of start-ups grow by around 20 per cent.

Obviously, making it easier for entrepreneurs to start new businesses is good for growth. The same seems to be true for the other activities the report tracks, which include trading property, ease of hand allowing the use of collateral to get credit. It should come as no surprise that countries with streamlined, efficient regulation of these areas enjoy higher growth.

What is less obvious, but just as important, is that inefficient regulations hurt vulnerable people. In too many of the 145 countries covered by our research, restrictive laws exclude women and young workers from the labour market.

Unrealistically high minimum wages mean that unskilled workers can only work in the informal sector - the black market - without paying taxes or enjoying any protection. Attempts to enforce jobs for life make employers very reluctant to take a chance on new workers, especially women.

In contrast, countries with more flexible rules have many more women in the private sector workforce and much lower youth unemployment.

Stronger property rights also benefit the poor. For example, when creditors have stronger legal rights, they provide more loans. Everybody benefits, but the effect is larger and more significant for the smallest firms.

Similarly, when countries provide efficient property registration, all types of firms report that their rights are better protected, but small firms enjoy the greatest benefits.

Many countries aspire to protecting the poor, but it is a myth that heavy, bureaucratic regulations achieve this goal. Norway, Sweden, Denmark or Finland are all on our list of the twenty countries with the simplest business regulation. They regulate where it counts: protecting property rights and providing social services.

They have found that workers, investors and even the tax authorities can all be looked after without reams of red tape.

Nor are efficient regulations the exclusive preserve of rich countries. Lithuania, Slovakia, Botswana and Thailand are also on our top 20 list.

This year's Doing Business report shows that countries like India, Poland, Slovakia and Colombia found ways to simplify business regulations, strengthen property rights, or make it easier for businesses to raise capital.

We have also discovered and documented dozens of proven reforms which have worked for rich and poor countries alike. Ethiopia's dramatic success was achieved by abolishing an unnecessary requirement to publish notices of incorporation in the newspapers.

Tanzania's bankruptcy courts work much better now they are staffed with specialist judges. Thailand now allows entrepreneurs to start business without paying in minimum capital. Most of these reforms quickly pay for themselves - and for lower taxes or better public services.

Since the solutions are sometimes so simple, it is frustrating to see that businesses in the poorest developing countries face three times the administrative costs and nearly twice as many bureaucratic procedures and delays than their counterparts in the industrialised countries.

In effect, the countries that most need entrepreneurs to create jobs and boost growth - the poorest countries - put the most obstacles in their way.

For people striving to start or grow a business, last year was a good year in the 58 countries which measurably improved some aspect of their business environment. It is just a shame that not more of the 58 were poor countries, rather than rich countries fine-tuning systems which already work well. We hope that the poor countries which have demonstrated simple, successful reforms become a lesson and an inspiration to many others.

Strong property rights - and effective, simpler regulation - do not arise from miracles, of course.

They occur when countries measure their red tape, sharpen their reform scissors, and clear the way for average citizens to participate in the economic life of the nation.

The writer is president of the World Bank.
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