A concerted effort is being made by institutions like the World Bank to quantify various types of transaction costs incurred by businesses (Doing Business, Enterprise Surveys). The rationale for focusing on transaction costs (and reducing them) is usually couched in mainstream economic concerns. That is, in an attempt to increase growth rate of GDP per capita, create jobs, reduce poverty, and so on.
In the immediate aftermath of the global financial crisis, one obvious truth is that locus of growth has shifted east. While the world frets over the stuttering recoveries in the USA and EU, most Asian economies have rebounded well, including a pick-up of FDI into and from these markets. The latest IMF World Economic Outlook expects growth in developing Asia to be 9.4% in 2010 and 8.4% in 2011. Contrast this with estimates for the USA of 2.6% in 2010 and 2.3% in 2011, and for the EU 1.7% in 2010 and 1.5% in 2011. A similar story will be found in the Global Economic Prospectsreport from the World Bank Development Economics Group to be launched on January 12.
A central question remains, however: Are these high growth rates and the high returns to investment, risk-neutral vis-à-vis investing in developed markets? Or other emerging-market regions? This question is pertinent for both commercial and political risk – but it is the latter to which I now turn.
For all of us working towards providing a better business and regulatory environment, it is important to know whether economic analysis has improved the quality of regulatory decisions. A proper analysis of the costs and benefits associated with regulations (government rules that govern private activity) is critical in determining which regulations to administer and in what capacity.
The conventional wisdom is that the exchanging of information on an individual or firm will go a long way in determining credit worthiness, thereby improving credit availability. When a bank evaluates a request for credit, it can either collect information on the applicant first-hand, or it can source this information from other lenders that have already transacted with the applicant. Information exchange between lenders can occur voluntarily via “private credit bureaus” or it can be enforced by regulation via “public credit registries.”
To promote the registration of new firms, many countries have been undertaking reforms to reduce the costs, days or procedures required to register a business. For example, the World Bank Doing Business report each year identifies the 10 most improved countries on the overall Doing Business index (comprised of 9 subindicators). One of these subindicators measures reforms related to starting a business, with 30-65 countries reforming in this area each year. A still unanswered question is whether some reforms are more important than others. A priori, it is not clear what magnitude of reduction in costs (or days or procedures) is necessary to create a significant impact on firm registration. In other words, what exactly constitutes a reform? Is a 20% reduction in the costs of registration sufficient, or is a 50% reduction necessary to get a substantial number of firms to register?
In a recent paper Leora Klapper and I empirically investigate the magnitude of reform required for a significant impact on the number of new registrations. We use a new dataset that is uniquely suited for this purpose: the World Bank Group Entrepreneurship Snapshots (WBGES), a cross-country, time-series panel dataset on the number of newly registered companies. We supplement it with data from Doing Business reports that contain the cost, time and procedures required for registration of new companies. Importantly, both datasets focus on limited liability companies. In an earlier paper, we used the same dataset to investigate the impact of the global financial crisis on new firm registrations.
The new Doing Business 2011: Making a Difference for Entrepreneurs report has just been published, the 8th in th
2. Bringing mobile phones to mobile (food cart) microentrepreneurs -- but will it make the food any tastier?
Editor's Note: Yara Salem is a Private Sector Development Specialist with the Doing Business project and manages the Starting a Business indicator.