The stroke of the pen is powerful indeed; it has led to wars, peace, and lots of other things in between, including changes in a country’s business environment. A large part of what defines the environment for doing business in a country is set in legislation. In many countries around the world, business regulations are more difficult than necessary, and some have taken great efforts to remove unneeded impediments with the aim of stimulating entrepreneurship and investment.
The World Bank’s Doing Business indicators, launched in 2004 with the aim to provide a comprehensive snapshot of each country’s business environment, have ignited to some extent the race towards becoming an “easier” place to do business. A few countries – Georgia, Macedonia, and Rwanda being the most prominent examples – took concentrated efforts to improve the aspects of the legal framework that are measured by the Doing Business project, and their efforts soon paid off. Georgia has positioned itself as one of the top 10 countries for “doing business” in the world, Macedonia is not too far behind at 25th place, and Rwanda has become the best ranked African country (and 32nd worldwide). However, the real question is: do such strokes of the pen lead to actual improvements in the business environment?
The answer is “not always.” In some cases, changes in regulations have immediate positive effects. For example, when countries amend regulations to lower or remove excessive fees on registering a company or a property, these actions have a direct benefit for entrepreneurs. However, moving from legislative changes to implementation is not always straightforward. For example, Doing Business says that, according to regulations, obtaining a construction permit should not take more than 105 days in Macedonia, yet surveys of businesses show that it takes on average 181 days (see Figure 1 below).
While these results cannot reveal whether the discrepancy lies in poor implementation or inaccurate measurement, the fact is that changes in regulations do not always yield the desired results. As the reality is far from what businesses demand (in order to be able to do business), it should not come as a surprise that the share of firms expected to give gifts to obtain a construction permit is higher than in many Eastern European countries. Getting from legislative changes to desired outcomes is even less straightforward. Georgia and Macedonia are ranked 3rd in the world, and Rwanda 13th, on the “Getting Credit” Doing Business indicator. Yet, the reality is that banks are more likely to require collateral in these countries than in most others, and the value of the collateral is much higher. Also, businesses in these countries are less likely to use a bank loan to finance investment than in most other countries that score lower on the Ease of Doing Business Index. This discrepancy can be partly explained by the fact that the Doing Business sub-components seem to promise more than the methodology actually captures. In the case of “Getting Credit,” the indicators refer only to the functioning of credit bureaus. Hence, governments should be aware that implementing Doing Business reforms will not capture all that is needed to make a difference in outcomes. The 2013 evaluation of Doing Business by an independent review panel also noted that the business environment is more than the laws and regulations, stating that the real business world is very different from the one “on paper.”
Another, more important, point is that the Doing Business indicators do not capture everything that businesses care about. This is particularly relevant for reformist governments, which may equate the determinants of the business environment with the Doing Business methodology and focus too narrowly on improving those issues.
One of the main advantages of the Doing Business indicators lies in their concentration on areas which governments can act upon; although market size, geography, and regional political stability are very important for investors, there is a limit to how much a government can influence. Each aspect of the Doing Business index falls in the domain of the government and can be changed most often with stroke of the pen (some reforms, such as online business registration or tax filing, require acquisition of IT equipment). Nevertheless, introducing “best practice” legislation, even if accompanied by perfect implementation, is not the only, or even the most important, determinant of the business environment that governments can influence. Take Macedonia again for an example; regulatory improvements moved the country from the 92nd position in 2007 to 25th in 2014, yet in the same time electricity production in the country declined, the length of railroads remained the same, and the road network expanded by less than 2 percent (of which only 10km are motorways). Taking up a pen to improve the regulatory environment, and ensuring that regulations are implemented, is no doubt important, but complementary investments are even more so for countries that aspire to move up the development ladder.