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Trust, courts, and starting a business: The case of Serbia

Jose Daniel Reyes's picture
Company registration is one of the cornerstones of a functioning economy. A business register maintains the repository of data on companies authorized to operate in a given jurisdiction. With many businesses appearing every day, company registries play a key role in formalizing the economy, promoting access to finance for small enterprises, and ensuring legal protection for investors. The breadth of the information stored in the registers also help policy makers follow business dynamics and study the impact of business environment reforms. Registers are usually managed by government offices, courts or the chamber of commerce.

One of the most popular types of reforms to increase the efficiency of business registers and encourage firm formalization is to set up "one-stop shop" service points by integrating different registration steps into a single streamlined process. Over 100 economies globally have launched some form of one-stop shop for starting a business. However, reforms in this area often focus on quick-wins such as reducing the time and cost required to start a business rather than implementing more substantive reforms such as creating a sustainable, up-to-date, and reliable companies’ registry.
 
Photo Credit: Colorful umbrellas of Belgrade, by DayZoom on Flickr

Serbia is one of the countries that underwent major structural reforms during the mid-2000s. A key reform in 2005 was a radical change in the company registration regime. The World Bank Group supported this reform through a structural adjustment credit operation that required transferring business registration from regional courts to a newly established centralized government agency. Even when handled in the same court, this process was discretionary and decentralized, with each individual judge applying different requirements to registry a company. The unpredictability of this system contributed to a general distrust of the court system in Serbia.
 
The Serbian Business Register Agency, created in 2005, sought to increase the efficiency and transparency of the registration process. The effects of the reform were felt almost immediately. The time necessary for starting a business was reduced from 51 days in 2004 to 15 in 2005. The World Bank’s 2006 Doing Business Report ranked Serbia as the top reformer in the world. But, more importantly, for the first time, Serbia had a complete, accurate, up to date, electronic and accessible database of companies operating in the country.
 
A recently released World Bank Working Paper examines the effects of transferring business registration from regional courts to a centralized agency in Serbia, thereby transforming registration from a highly adjudicative practice to a simpler administrative process. We found that the reform increased the number of new firms by up to 34%. The effect of the reform is larger in regions with high distrust in courts than in regions with low distrust in courts. This effect is larger compared to those of other types of registration reforms, suggesting that courts can pose significant barriers to new firm creation. We also found that the reform increased the one- and two-year survival rates of new firms.
 
The paper provides an important lesson for policy makers considering putting in place a one-stop shop for government to business services. In Serbia, the reforms implemented did not stop at just reducing the time and cost to start a business. They were in-depth reforms that also transformed a highly discretionary business registration regime managed by courts to a purely administrative procedure that is simple, transparent, and electronic. In addition to lowering entry costs, Serbia’s reforms helped reduce discretionary powers, such as the ones exercised by judges, to decide whether to allow firms to register or not and to put up potential roadblocks. This goes a long way toward not only making it easier to start a business, but also to fostering trust in a country’s adjudication processes.