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This is an archived USAID document retained on this web site as a matter of public record.
BUSINESS UPDATE
In this section:
Report Identifies Benefits of Business Reform
Q & A: The Doing Business Project
Report Identifies Benefits of Business Reform
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A business training program in 2003 provided Victoria
Nikitina with the skills and support she needed to launch
her successful mini-bakery, Doctor Bread, which has
since expanded to four locations in Donetsk. More than
1,000 entrepreneurs have begun or expanded their businesses
with help from the USAID/Ukraine-supported Women’s
Economic Empowerment Project, which has trained 13,000
participants on business management and marketing principles,
offered access to credit, and disbursed small grants
to increase economic opportunities and effect policy
changes at the local and national level. “The training
at the business center gave me a powerful incentive
to move forward. Thanks to the center, I understood
that I can make my dream come true,” Nikitina said.
Larissa Piskunova, USAID/Kiev |
Despite political turmoil, more new companies were registered
in the first three months of this year in Serbia than in the
same time period last year, helped along by business reforms
supported by USAID and the World Bank.
The number of new businesses jumped 42 percent, making Serbia
the top performer in this year’s Doing Business
report, an annual World Bank document that focuses on five
basic indicators of the regulatory environment affecting small
and medium-sized businesses.
Among the factors it looks at is the number of days it takes
to start a business, difficulty in contract enforcement, and
labor restrictions. The report measures these factors in a
standardized way that allows comparisons across countries.
The World Bank is involved in 42 reform projects around
the world. USAID, in collaboration with the World Bank, is
the main supporter of reforms in five of the 10 top countries:
Serbia, Egypt, Georgia, Romania, and Kazakhstan.
Eight countries have completed reforms, while reform is
ongoing in 13 others, said Simeon Djankov, a senior World
Bank economist who heads the Doing Business project.
The payoff from easing business entry is substantial, as seen
in Serbia.
Vietnam this year also moved ahead, with a 28 percent gain
in the number of new business. Romania jumped by 22 percent.
Reform intensity was lowest in Africa this year, as it was
last year. Breakthroughs have occurred in the Middle East,
notably in Egypt and Jordan.
Reformers in the bottom quartile attained 1 percent growth
between 1994 and 2004. Had reforms been undertaken in these
countries to reach the same level of reform in top quartile
countries, an additional 2.2 percent annual growth would have
been achieved, the report estimates.
The focus of Djankov’s research and the World Bank’s
reform efforts is that a macro approach must be complemented
by “micro policy” reform—policies that create
an enabling environment for business and ease the way for
business formation, development, and investment.
Businesses in poor countries face significantly larger regulatory
burdens than those in rich countries. In administrative costs
alone, there can be as much as 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.
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Clothing retailer Gezim Neziri and his wife, Sofia,
credit a USAID/Albania microloan program for their transition
from poverty to prosperity. Over 220 Gypsy clients in
Albania have grown their businesses by borrowing capital
from Albanian Partners in Microcredit (PSHM), a local
institution funded by USAID. “Without the loan
from PSHM, I would still be in the streets,” says
Gezim. “Now I have enough money to buy a department
store, hire more people, and provide for my children
until I am an old man.”
Karla Christenson, USAID/Albania |
A hostile business environment forces individuals and firms
into the informal sector. This inhibits countries from collecting
substantial revenues that could be put to good development
use supporting health, education, and other public services.
It also keeps some of the more enterprising individuals in
developing countries marginalized, Djankov said. The benefits
in legitimizing these workers and businesses are incalculable,
he added.
The Doing Business report builds on noted economist
Hernando de Soto’s work, which shows that while it is
critical to encourage registration of assets, it is equally
important to stop people from slipping back into the informal
sector.
A year ago, the 80 missions around the world where USAID
operates were asked to inventory all the commitments they
were making to microeconomic reform. More than 600 activities
were reported, and Administrator Andrew S. Natsios has indicated
his commitment to expand and accelerate this work.
Djankov gave a preview of the 2006 report, which now tracks
11 indicators and charts the pace of micro reform around the
world. This report, subtitled “Creating Jobs,” is
designed to demonstrate the benefits of reform in the most
concrete terms. It is scheduled to officially appear September
14.
Q & A: The Doing Business Project
Simeon Djankov, a senior economist at the World Bank, is
the team leader of the Doing Business project. He has
been involved in privatization and enterprise restructuring
projects in Belarus, Bulgaria, the Czech Republic, Georgia,
Kazakhstan, the Kyrgyz Republic, Moldova, Romania, Russia,
and Slovakia.
Here are some frequently asked questions about the project
and Djankov’s work in international business development.
Could you summarize the significance of your paper?
Starting new businesses has been identified by many governments
as a top policy priority. However, the focus has been on easier
access to finance through special microfinance schemes. We
instead study the regulatory barriers to entry and show that
they are insurmountable in many countries around the world.
The result: people either don’t try or they start businesses
in the informal economy.
Is the answer to rewrite the existing regulations?
There is little reason why business entry should be heavily
regulated. Yet many countries in the world impose burdensome
regulations in the name of improving consumer welfare. We
find the only effects of such regulation are higher costs
on business and increases in the informal economy. The only
beneficiaries are incumbent businesses and the bureaucrats
themselves.
How are economies selected for the Doing Business
project?
The Doing Business project covers 145 countries. These
include all economies with populations over 1.5 million, except
for the International Development Association’s inactive
borrowers (Cuba, Korea, Democratic People’s Republic
of Korea, Liberia, Myanmar, Somalia, and Sudan) or countries
or territories that are or recently have been in a military
conflict or where data are unavailable (Afghanistan, Eritrea,
Iraq, Libya, Tajikistan, Turkmenistan, and the West Bank and
Gaza).
What differentiates Doing Business from other business
environment surveys or polls?
Existing surveys and analyst polls are usually perception-based
and target large institutional investors, executives of multinational
corporations, and global lenders. The indicators presented
and analyzed in Doing Business take a new approach.
They are based on factual information concerning laws and
regulations in force. The focus is on domestic, small and
medium-sized companies. The methodology builds on extensive
and detailed information on regulations, which helps governments
identify specific problems and design reforms. The data collection
process is transparent and easily replicable, allowing broad
country coverage, annual updates, and ready extension to new
locations.
How does the Doing Business data help in designing
reforms?
The analysis in Doing Business has direct relevance
for policy reform. It reveals the relationship between business
regulation indicators and economic and social outcomes, allowing
policymakers to see how particular laws and regulations are
associated with poverty, corruption, employment, access to
credit, the size of the informal economy, and the entry of
new firms. Also, the analysis provides guidance on the design
of reforms.
The data offer a wealth of detail on the specific regulations
and institutions that enhance or hinder business activity,
the biggest bottlenecks causing bureaucratic delay, and the
cost of complying with regulations. Governments can identify,
after reviewing their country’s Doing Business
indicators, where they lag behind and what to reform.
Could you describe your relationship to USAID?
Our cooperation with USAID started last year by including
several postconflict or small countries in this year’s
analysis—Afghanistan, Iraq, East Timor, Eritrea, Guyana,
São Tomé, and West Bank and Gaza. The inclusion
of these countries will inform reform efforts. In fact, some
of the early work in Afghanistan with the USAID field office
there has resulted in changed priorities—for example,
in a new emphasis on establishing a credit registry.
Another part of the cooperation is joint dissemination events.
We did one in Croatia last November, Mexico in December, Afghanistan
in January, Paraguay in March, and Zambia in June. Indonesia
is in August. These events generate a lot of media attention
on improving the business environment; in Paraguay we had
28 media pieces. Overall, the second Doing Business
report has had over 1,250 media articles, which helps push
for reforms.
In what ways might this collaboration be strengthened
in the future?
One way is to focus further on postconflict countries. A number
of them—for example, Sudan—have requested our advice.
We now have sufficient experience and analysis to start prioritizing
reforms based on what other countries have done successfully
and our assessment of the country’s needs.
Here, working with USAID is crucial, as its staff frequently
has the most experience in many types of reform. One example
is business registration. Another is in improving the enforcement
of contracts. No other development agency comes close. And
success depends on having good analysis (Doing Business)
and experienced implementers (USAID).
Are there best practices in business regulation?
What works in developed countries often works well in developing
countries too, defying the idea that “one size doesn’t
fit all.” But reform options are not always the same
across rich and poor countries. In such instances, developing
countries could simplify the models used in rich countries
to make them workable with less capacity and fewer resources.
Moreover, the good-practice examples presented in the Doing
Business report are not limited to rich countries or countries
where comprehensive regulatory reform has taken place. The
report provides many examples of successful reforms in developing
countries in some areas of business regulation.
USAID recently rolled out an anticorruption strategy.
Talk about the relevance of your research to corruption.
There are two types of corruption: the grand corruption that
goes to the top of the government and the petty corruption
of government officials who extract bribes for rendering public
services. Making regulation simple, which is the focus of
Doing Business, can significantly reduce the latter.
If, for example, you make business or property registration
electronic, there is no need to meet a public official in
person, and hence no opportunity to extract a bribe. You can
think of various procedural requirements as tollbooths: at
each a public official may ask for a bribe. The fewer tollbooths,
the less corruption. A number of surveys report this connection,
for example, in streamlining company registration in Vietnam.
For reducing grand corruption, you need a freer media and
more transparency in government.
Who uses the Doing Business findings?
Policymakers, the aid community, investors, and researchers
use Doing Business indicators and analysis to benchmark
countries on their regulatory environment for business, assess
the impact of laws and regulations on business activity, make
informed decisions regarding policy reform and private investment,
identify best practices in regulatory reform, and support
research on institutions and regulation.
You started your report with five indices of the business
environment. You now have 11. Are you working on others?
This year we are including “paying taxes” and “trading
across borders.” In June, we presented the project to
the World Bank board and asked for guidance on future expansion.
The topic that came high on most lists is corruption in business
transactions. We will likely include it within the next two
years. Another topic is infrastructure for business—electricity,
water, and telecommunications.
The main priority for Doing Business now is to work
with partners, not only on disseminating reforms but also
seeing them through—helping to implement them. This is
where the cooperation with USAID is strategic. We won’t
succeed without it.
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