Doing Business: Icebreaker – not Gospel

By Michael Klein

15 years of Doing Business

It takes less than a day in New Zealand to register a small business. It takes 230 days to do the same in Venezuela – that is, if one follows the law. There is a purpose to registration – notably identification for the tax and social security system.  Doing Business advocates sound rules, not their abolition.  Make the purpose simpler to achieve and people will comply more readily.  Business and job creation become easier. People can do business without paying bribes and without special connections. The informal sector shrinks. Safety nets can improve.  The Scandinavian countries are prime examples of how rules that are easy to use underpin both wealth creation and social safety nets. This illustrates what “Doing Business” is about.

By now the World Bank’s annual Doing Business report has been published for 15 years. It currently covers 190 countries.  Over the years it recorded 3,180 reforms worldwide.  Some 920 of these reforms have in part been triggered by the report.

The very fact that it is politically salient gives rise to periodic disputes, most recently in Chile.  The dispute has triggered broader debate. This note lays out my overall perspective on the report, which I helped launch in 2003 and oversaw until 2009.

To start with, a reminder of what Doing Business does.  In 11 indicator sets, the report records and codes formal rules that govern the life of business from entry to exit – how easy it is to register a firm, how complex to enforce a contract, and so on.  The data are based on the laws and regulations made by governments – not on expert assessments.  Details are available online for anyone who wishes to delve into the nitty-gritty.  The basic methodology of coding rules is state of the art and similar to the other main effort to capture official rules for businesses – the OECD’s Product Market Regulation indicators.

Doing Business Matters

Why does it matter?  Doing Business helps analyze basic institutions that underpin wealth creation and poverty reduction: first, rules that facilitate competition – the entry of new firms and the exit of underperforming firms – and, second, rules that allow businesses to invest and contract.

The Doing Business data are informative.  Peer-reviewed research underpinning the indicators shows their importance for matters like growth, employment creation, and the size of the informal economy.  The data characterize basic processes, for example, those used to enforce a contract.  It is not a priori clear that simpler enforcement leads to greater justice.  Research confronting the Doing Business indicators with perceptions of firms on fairness of outcomes suggests, however, that in fact “justice delayed, is justice denied”.   The data thus help understand how regulations relate to desired outcomes.

The official rules matter.  Lant Pritchett of Harvard and Mary Hallward-Driemeier of the World Bank confronted the Doing Business data with data from the World Bank’s enterprise surveys, which I also sponsored as a complement to Doing Business.  They found, unsurprisingly, that in real life firms do not always follow the law to the letter.  Yet, the key finding was that simpler rules for a given purpose make it more likely that the law guides firms.

At the same time it is obvious that the world is more complex than captured by the report.   The data do not constitute an investor attractiveness measure. They do not capture politics.  In fact, the report comes with its own “health warning”.  Those who think that fixing a few indicators will automatically lead to higher growth may be in for a disappointment.

Many data we use are imperfect.  GDP is a case in point.  Enrolment rates for education are rather imperfectly related to educational quality, and so on.  But the data help and are used in all sorts of ranking – witness the UNDP’s human Development Index.

The Doing Business Report is a diagnostic tool.  Like Cholesterol measurement in medicine it captures risk factors that matter.  Some people still do fine regardless, whereas others suffer even when their measure looks good.  So it is with economies.

Icebreaker

Informing debate.  Some 30 years ago I started working on analysis of markets and underlying institutions.  It was clear that good institutions matter.  When discussing with a government whether its rules for businesses were overly complex, it was hard to prove that things could be done more easily.  Who says that contract enforcement is taking too long?  Unsurprisingly, the defenders of the status quo argue in great detail that prevailing rules are the best they could possibly be.  Doing Business helps challenge such arguments by benchmarking performance.  It shows how other countries solve the same problem. It often reveals problems countries were not aware of.  It shows that things can be better.  It provides detailed ideas on what could be done.  It even provides contact persons in other countries with whom reform ideas can be discussed.

Providing perspective.  In 2006 I visited Ghana.  At the time a meeting of aid donors suggested that Ghana did not reform its business environment – pots of aid money were sitting around unused.  Ghanaian officials, however, claimed they were doing a lot.  Who to believe then?  As it happened, the Doing Business report of the year showed that Ghana was the third most active reformer of business environment rules worldwide.  The government “just did it” – without donor funded consultants.

Creating momentum. Without benchmarking and summarizing, the regulation agenda easily drowns in complexity.  Some 10 years ago, in Mexico private firms opposed a government reform of corporate governance.  They claimed it would make business harder.  The government argued its proposed law would improve markets.  Parliamentarians were confused.  Who is right – the bureaucrats or the people operating in the market?  A person in the government had the idea of using the Doing Business method to benchmark the draft law against other countries.  It turned out that the government proposal would bring corporate governance more in line with good practice. The objection by the private incumbents seemed based on preserving power, not enhancing transparency.  Doing business thus helped government win the parliamentary vote against vested business interests.

Benchmarking shines a light on matters that vested interests rather keep hidden.  Who cares if someone claims, that business registration processes are cumbersome in country A?  Interest rises when it is shown that other countries have simpler rules.  Political interest is really piqued when global rankings show country A looks worse than country B – particularly, if the latter is looked upon a bit askance in country A.  Political momentum is created without a penny of donor funding on the table.

There are those who argue that the global rankings of Doing Business should be dropped.   Indeed, the world is more complex than expressed in the rankings.  Yet, the aggregation of all the data is informative and it stimulates debate.  The challenge is to have a reasoned debate.  The disputes that I experienced typically led to eventual reform.

We also launched a companion project to Doing Business – “Women, Business and the Law.”  Most people debating Doing Business don’t even know about it.  It has escaped major disputes.  In retrospect, I wish we had devised a global ranking so that important issues of discrimination had a brighter spotlight too.

The way ahead

The agenda highlighted by Doing Business matters.  The data help diagnose issues.  The rankings create political momentum.  That leads to improvements.  In a nutshell, that is the case for the chosen approach.

What is to be done?  Implement well.  Make sure data mistakes are corrected and acknowledged when they happen.  Keep methodology changes to a minimum.  Explain the rankings well.  Help a sensible debate about reform unfold.  Use the report as a tool, not a gospel.

Emerging from the Darkness: Albania’s Informal Economy

Bruna Blog ImagePhoto of New Bazaar in Tirana, Albania by Flickr user Tokil under an Attribution-ShareAlike 2.0 Generic license.

By Brunilda Kosta

Last year, Albania took the third step in the government’s plan to reduce economic informality, an issue which has long restricted development and prosperity for the country. For this article, the informal economy is defined as activities which are legal but do not fully comply with state regulations. They include tax evasion, lack of business registration, and labor regulation avoidance. Such forms of informal economic activity are detrimental to a country’s economic growth, and seem to occur more frequently in countries that are undergoing structural reforms and transitional economic adjustments, such as Albania.

Numerous studies have showcased the high level of informality in Albania. Friedrich Schneider, Professor of Economics at the Johannes Kepler University (2010), estimated that in 2007 the Albanian informal economy was equivalent to 32.9 percent of GDP. A 2013 study conducted by the European Bank for Reconstruction and Development (EBRD) surveyed business leaders in Albania,  40 percent of whom admitted that they are forced to compete with the informal sector. Finally, in 2015 the Albanian government disclosed that the informal economy makes up 50 percent of GDP. These startling figures encouraged the government to institute reforms. In 2015, the Albanian government elevated its focus on informality and undertook diverse actions to mitigate the associated issues. This article analyzes the Albanian government’s approach to reducing informality and aims to come up with actionable and pragmatic policy recommendations for implementing effective reforms.

The Albanian government has struggled to integrate the informal sector into the economy for many years. The informal economy moved into the spotlight in August 2015 when Albania’s Prime Minister publicly announced that the government would make it a priority, but failed to provide a timeline or specific details on how to do so. Following this announcement, Albania’s Minister of Finance vaguely explained their ideas for addressing informality but did not lay out a public strategy. In April 2016, the Minister of Finance announced the next action, a strategy designed in collaboration with the International Monetary Fund (IMF); however, the strategy remained vague. The business community and economic experts argued that these actions were taken haphazardly and with the purpose of increasing government revenues. The third phase was launched in September 2017 and went into effect at the beginning of October the same year. The government announced that it will spare no efforts to “eradicate” informality. These recurrent actions produced encouraging outcomes such as additional revenues and an increased number of registered businesses and employees. Simultaneously, these actions have had economic and psychological consequences for business operations.

One of the key actors in the informal sector is employees. In Albania, informal employment is manifested in various patterns as displayed in the chart below: 39.75 percent of employees declared not to have a written contract with their employer, while 30.29 percent of employees declared that they do not pay for social and health security benefits (Figure 1). When compared to the averages for Southeastern Europe (SEE), the biggest difference was between the number of employees with no written contract. One reason behind this high level of informal employment could be the short-term benefits to employees such as earning extra income that would otherwise have been taxed. Nevertheless, aside from some rudimentary benefits, the drawbacks of staying informal outweigh the informal benefits. For example, operating in the informal economy prevents employees from reaping the benefits of the formal sector like earning a pension and having a higher salary. A recent study estimates that Albanian workers earn 29.3 percent more in the formal sector than in the informal, despite widespread belief of the opposite.

Figure 1: Informal employment patterns

Bruna Blog Chart

Source: Albanian Center for Economic Research (ACER) & Southeast Europe Leadership for Development and Integrity (SELDI), 2016

Another pattern of informality is underreporting income. This often occurs among firms that utilize only cash transactions, which is a widespread practice in Albania. A study of the National Business Forum in Albania found that businesses underreport around 30 percent of annual turnover.

Many of these statistics support, to some extent, the government’s efforts to address informality in the last several years. The Albanian government’s intentions were positive, but its approach to combating informality has been flawed. The purpose is to incentivize informal firms to transition into the formal market; however, coercing firms out of the shadows carries significant risks. In Albania, formalized firms struggle to survive because regulations are burdensome, which is a contributing factor to informality. Some challenges for Albanian business owners, according to the recently released Global Competitiveness Index include tax rates, corruption, and access to financing. This report is corroborated by the most recent Doing Business report 2018 for Albania, which shows that ‘paying taxes’ is a major obstacle to the ability for businesses to grow and succeed. The Albanian government should decrease the regulations placed on businesses, which could naturally facilitate the formalization process.

Fortunately, sustainable change is starting to occur. For example, it is worth applauding the government’s recent withdraw from its initial plan to include small businesses in the value-added tax scheme. This shows that the government’s genuine efforts to diminish the informal economy, coupled with effective dialogue with the business community, could yield positive results and generate a win-win scenario. Moreover, the government has stimulated notable positive results despite its lack of transparency and collaboration with the business community. For example, in 2016, Albania had an average of 56 registered firms per 1,000 people, while in 2014 it had 40 registered firms per 1,000 people. This shows that there was an increase in the number of businesses registered over the span of two years. On the other hand, more than 100,000 businesses deactivated their status or initiated their forms for closing procedure. The tough actions of putting people in jail raised psychological pressure and fear among businesses which disrupted normal business operations.

The fundamental question remains: how can the government encourage informal businesses to move into the formal sector, while minimizing the negative consequences of doing so? The following policy recommendations should be considered:

  1. The government should stop prematurely talking about actions without the knowledge base to support those actions. Working in the hidden economy in SEE is often socially embedded and not simply a matter of rational choice to maximize personal benefit. Hence, a comprehensive understanding of social norms, cultural customs, and historical facts should be understood first.
  2. The government should include interrelated issues that incentivize formalization. For instance, small businesses often fear that coming out of the shadows will mean more shakedowns by corrupt officials or entanglement in bureaucratic red tape. Corruption is a clear concern and burden for the business community and should be addressed by the government.
  3. Using structural reforms and technology to curb informality could also benefit government finances, growth, and poverty reduction.
  4. Tackling informality should be a joint effort strategy; the government should improve their dialogue with the business community and effectively engage with and accept their reasonable proposals.
  5. Finally, the government should design a clear strategy for informal economy mitigation, drawn on sectoral basis, and associated with a rational action plan.

It is difficult for any economy to eradicate informality entirely. However, bringing informal activity out of the shadow economy has the potential to boost tax revenues, increase productivity, spur economic growth, and improve the quality of life for Albania’s citizens.

Power Sharing for Post-Conflict Development: The Case of Rwanda and Burundi

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Photo of Kigali, Rwanda by Flickr user oledoe under an Attribution-ShareAlike 2.0 Generic license.

By Francis Jung

Introduction

According to the World Bank, the IMF and the US Agency for International Development (USAID), Rwanda is doing exceptionally well at attaining the development goals outlined in its Vision 2020, despite the Rwandan Genocide of 1994.  Burundi, on the other hand, is not doing so well; especially since President Pierre Nkurunziza’s announcement to run for a third term in April of 2015.  Why is Rwanda doing so well, while Burundi is doing so poorly when it comes to achieving human development goals?

At face value, the question seems broad and mundane to which any number of people in the development community could provide a separate answer, half of which would start out with, “that depends;” but a deeper analysis of their similarities suggest that it would be reasonable to draw from the two something specific that explains why one country has driven down poverty and infant mortality while maintaining stable growth rates and the other is all but re-immersed back into conflict.

This article establishes that the reason Rwanda is doing so well is mainly due to two factors:  first, the consolidation of power, the exclusion of opposing parties and the establishment of a single-party state early on its post-conflict development and second, Rwanda’s focus on implementing the Sustainable Development Goals; and Burundi is doing so poorly because the government is vulnerable to power seeking, would-be political entrepreneurs.

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International Documentaries in Global Development: Outreach, Measuring Impact and Engagement

By Julie Tumasz

Public and private organizations can use documentaries to widen the public’s awareness of development issues, motivate public involvement, and have a beneficial impact on non-profits’ social change goals. Non-government organizations (NGO), federal governments, and the private sector use a variety of different strategies to reach, impact, and engage documentary audiences – both while watching the film and afterwards, through activism and advocacy. Measurable outcomes of documentary films can be seen in several steps of the documentary process: the story, outreach, impact and finally, engagement.  The best strategies for organizations to effectively complete these steps are to engage the viewer before, during, and after the viewing.

This article will examine two widely distributed feature-length documentaries from two different American filmmakers that focus on promoting the same social goal of education. World Vision Documentaries describes the importance to tell a development story from the perspective of an outsider because that is the same perspective as the audience the filmmakers are targeting; these films were primarily aimed at American audiences. These feature films, making use of long-form storytelling, appropriately match the complexity of development work unlike short-form advertising, spots or social media.

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A filmmaker captures a rural school in Kabwe, Zambia. Documentaries inform and motivate the global public to participate in international development issues. Photo courtesy of Flickr User Francesco Volpi, under a Creative Commons Attribution-Share Alike 2.0 Generic License.

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Remittances: A Complement to International Aid

By Rohit Sudarshan

The future of traditional foreign assistance is in a precarious situation. Over the past five years, Organization for Economic Co-operation and Development (OECD) countries that contribute the largest share of international aid—namely Australia, France, and the U.S.—have seen a downward trend in official development assistance (ODA) as a percentage of gross national income (GNI). Additionally, the United Kingdom’s development agency, DFID, is currently handling a surge of fraud investigations regarding their foreign aid. Countries that are global leaders must promote other financial means for international development. Few options are as important and efficient as remittances.

Remittances are payments made by immigrants to families and friends in their country of origin and represent an effective method for those in developing countries to continue to improve their standard of living. While ODA requires the coordination of government agencies as well as policymakers from many countries, remittances do not face that same constraint. The difficulty in ensuring accountability has meant that governments have misused and absorbed aid money. For these reasons, remittances can be an appealing alternative; they can move expediently and directly to a recipient that needs it.

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