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From Paper to Practice: How Easy Is It to Ease Doing Business

Borko Handjiski's picture

A storefront that specializes in nuts 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). 
 

Source: Data from www.doingbusiness.org and www.enterprisesurveys.org                                                     

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.

 

Comments

Submitted by Sebastian on

Interesting blog, Borko. The idea of an implementation gap resonates. What is striking though is the fact that the graph seems to contradict that idea. In the majority of countries business perceptions (or reality?) as measured by enterprise surveys seem to be more positive than DB indicators (most countries are placed above the 45 degree line and Macedonia is the exception rather than the rule). Why do you think that is? Measurement problems in one or both of the indicators? Or is there another story?

Submitted by Borko on

Dear Sebastian, thank you for your comment! The variations, in general, between de jure regulations (measured by Doing Business) and de facto practice (measure through enterprise surveys) is another important story indeed. Lant Pritchett and Mary Hallward did a very interesting study on this: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1759154.

Submitted by Justin Mahwikizi on

Very interesting post Borko.

What is also an interesting question is if the local population also understands that these benefits are in place in order to generate more economic activity in-country. So it could be more of an information/education exercise to assure legislation is understood by both the folks in charge of implementation and the beneficiaries of such reforms.

Nevertheless, great analysis on the post.

Submitted by Borko on

Thank you Justin, you are absolutely right that sometimes regulatory improvements do not yield expected results because they are not communicated adequately to the business community; there are numerous examples when businesses or individuals are not aware of the changes in the business environment.

Submitted by erwan fouéré on

This is an excellent, clear and timely commentary. Those countries who boast about their high 'doing business' rating should take heed.
Perhaps it is time for the WB to revise its method of rating, precisely to avoid possible misrepresentation of the ratings by the countries concerned.

Submitted by Borko on

Dear Erwan, thank you for your comment; the Doing Business methodology is not perfect and there is little prospect that an ideal indicator could be designed (a fellow blogger wrote recently on the DB methodology http://blogs.worldbank.org/futuredevelopment/beauty-numbers), hence governments should take it as only one of many measures of the business environment.

Submitted by Thomas O'Brien on

Borko, nice blog. You make a good point, and your examples including from Rwanda do resonate.
More broadly has there been a comprehensive (econometric) study which relates investment performance to key explanatory variables, say including the DB score or rank?

Submitted by Borko on

Thank you Tom, you raised a very important question, that is whether the changes in inputs (regulations) lead not only to changes in outputs (business environment) but also in outcomes (economic growth). The Bank did a study on two years ago, http://elibrary.worldbank.org/doi/book/10.1596/1813-9450-6176. Interestingly, the results showed that the DB indicators that have largest impact on economic growth are those related to costs, that is those indicators which are closest to measuring 'reality' rather than only 'legislation.

Submitted by Rafael G. on

Very interesting approach to measuring a "doing business" environment in countries. In my experience the intangible practical issues on the ground are the ones that sometimes define how easy or hard it is to expand into a new market rather than gross economic measurement numbers. When starting up companies in new countries practical matters such as time, costs and requirements in each country for startup activities like setting up bank accounts, registering new legal entities, leasing property and vehicles, setting up cell phones and internet connections, hiring permits, ease of currency exchange in local banking, legal permits, import/export requirements, etc. All these practical matters are the ones that really start differentiating between countries on where your business is more likely to take off faster and which ones will cause lots of problems you did not account for in your business plan. Higher rated "business friendly" countries will sometimes be a bigger headache due to practical matters on the ground than less rated ones. Developing these alternative indicators can give new perspectives on practical aspects of doing business in other countries rather than just the regular economic indicators.

Submitted by Borko on

Thank you Rafael, as you mention, there are too many practicalities that matter for entrepreneurs, and it is probably a mission impossible to capture all those things in one indicator or publication. Hence, global rankings and indicators should be seen only one of many tools that guide policies that influence the business environment.

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