Published on World Bank Voices

Amid slowing growth, the world needs a fresh impetus for business reforms

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Two Zimbabwean women working in a textile factory on the sewing line using sewing machines, measuring tapes and scissors to stitch lining in African styled patterned fabric garment Two Zimbabwean women working in a textile factory on the sewing line using sewing machines, measuring tapes and scissors to stitch lining in African styled patterned fabric garment

Years ago, in Lima, I stumbled across a former classmate from medical school exchanging US dollars for Peruvian soles on the streets. It wasn’t that he’d dropped out of medical school—he was qualified to practice as a doctor. But he made more money exchanging currency than working as a doctor.

A poorly managed economy causes all types of distortions, curtailing lives and livelihoods with enormous human consequences.   Today, these distortions are all around us. Why do young African women and men risk their lives crossing the Mediterranean to sell knockoffs in the streets of Madrid, Paris, or Rome? They might be fleeing political persecution, but more often they just need a job. Why do businesses—from clothing manufacturers to electronics retailers, remain so small, congregating in a maze of shops in Jakarta, Lagos, or La Paz? They might reflect an abundance of entrepreneurial spirit, but most likely they face obstacles and lack incentives to expand. Why are conversations on political and social affairs with taxi drivers in Buenos Aires, Manila, or Nairobi so insightful? It’s true that many of them might know things from experience, but a large number of taxi drivers also have a university degree and yet haven’t found a job that suits their skills.

Unemployment, underutilized skills, informality, and crime are symptoms of a stagnant economy, where job opportunities are scarce and poverty and vulnerability run rampant.  These problems are typically studied and treated in isolation. Governments tend to deal with symptoms rather than root causes. Too much migration? Build a physical or bureaucratic wall between countries. Too few skilled jobs? Subsidize foreign direct investment and high-tech industry. Too many informal businesses? Send more tax and labor inspectors. Too much crime? Hire more police, install more security cameras, and jail more people. These targeted policy interventions may achieve some degree of success. But they will not eliminate deeply rooted socioeconomic problems.

In the long run, a dynamic economy is necessary to eliminate poverty, promote shared prosperity, and address all the problems associated with the lack of development. That means an economy that supports private businesses as the engine of growth. The private sector already generates most jobs and production around the world. It provides an increasing share of essential services. It drives innovation in key sectors: banking, telecommunication, health, and education. Don’t get me wrong—private sector dynamism is not a panacea. Without it, however, all development solutions will fall short.

Governments can and must play a positive role. Well-targeted micro and macro policy interventions can make an important difference.  But governments can also achieve lasting national benefits by creating a business environment that allows entrepreneurs and workers to thrive. By making the economy business- ready, governments can create incentives for investment in physical and human capital, efficient reallocation of resources, technological and managerial innovation, and formalization of businesses and workers. All of which will help drive long-term growth.

Making an economy business-ready, of course, is easier said than done. It takes strong political will and government capacity for reform. But the first step is understanding how ready the business environment really is. This requires a hard look in the mirror. When governments confront reality, they often find it difficult to accept. It’s uncomfortable to see that your economy lags best practices elsewhere around the world. Your neighbor may have adopted digital services for business registration, making it half as costly and twice as quick for firms to start up there. Your trade competitor on the other side of the world may have streamlined its regulatory practices for cross-border financial transactions or provided a stable supply of electricity and internet services—meaning it can not only export more but also attract more foreign direct investment.

Yet, without this international benchmarking with respect to best practices, you wouldn’t know how business ready your economy is and, most importantly, what exactly must be improved.

That is why the World Bank Group this month launched a new benchmarking exercise to measure the business environment in about 180 economies worldwide each year.  The new flagship Business Ready (B-READY) project replaces and improves upon the former Doing Business project. We have strong safeguards, more rigorous analytical methods, and high expectations for the new project.

Over the past two decades, World Bank indicators of the business environment helped spur about 4,000 regulatory reforms in 186 out of 190 economies worldwide. We intend to improve on these results, not only by promoting more reforms but also better-quality reforms—better in three ways. First, instead of outright deregulation, we advocate for a regulatory framework that eliminates red tape and balances firm flexibility with improvements in welfare for consumers, workers, and the environment. Second, instead of merely measuring regulations, we also consider the quality of public services that businesses need to work within a sensible regulatory framework. Third, along with information collected from business environment experts, we also take into account the perspective and information from businesses themselves, through surveys.  

Over the past three decades, consistent business reforms coincided with a remarkable era of growth and shared prosperity across the world—a time when poverty fell to record lows and countries chalked up rapid progress on all key indicators of development. Today, nearly all of the forces that drove that progress are in retreat: without better economic management, average global growth over the remainder of this decade could be the slowest in a generation.

We must not permit the economic distortions that prompted my medical-school classmate to toil in trading currency on the streets rather than serve as a doctor. An economy that is business-ready does not imply an economy that favors powerful corporations or the rich.  Quite the contrary. It means an economy ready for entrepreneurship, for innovation, for good jobs for all—in short, an economy that is development-ready.


Authors

Norman Loayza

Director, Global Indicators Group, World Bank

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