According to the report, the results of an examination of the regulatory performance of 145 countries and compiled by more than 3000 local experts, it is twice as hard to run a business in poorer countries because of onerous administrative hurdles. The study found that rich countries undertook three times as many investment climate reforms as poor countries last year.
The report, Doing business in 2005: removing obstacles to growth, encourages governments to consider simple reforms that its sponsors, the World Bank and International Finance Corporation, think will create job opportunities, encourage businesses to move into the formal economy and promote economic growth.
The top 10 reformers singled out for praise are: Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal and Spain.
Michael Klein, the IFC’s chief economist and World Bank/IFC vice-president for private sector development, said: “Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones that are simplifying regulation and making their investment climates more business-friendly.”
Mr Klein’s warning comes on the back of the report’s headline conclusions that it takes, on average, a business in a poor or lower-to-middle income economy 11 procedures, 122% of income per capita and 59 days to get started. In a rich country, it takes six procedures, 8% of income per capita and 27 days.
The most shocking aspect of the report is the magnitude of difference in the regulatory burden between rich and poor countries. In administrative costs alone, there is a threefold difference between rich and poor countries. And the number of administrative procedures and delays experienced in poorer countries are twice as high.
Higher costs include contract enforcement, registration, delays in insolvency proceedings, property registration and the cost of firing workers. Despite the higher costs of regulation in poorer countries, they also offer fewer protections in terms of legal rights of borrowers and lenders, contract enforcement and disclosure requirements.
However, the report also highlights the positive economic effects of simple reform measures. The authors estimate that lower regulatory burdens in the top quartile of countries examined account for an additional 2.2 percentage points in annual economic growth.
“An indication of the pay-off comes from France and Turkey, each of which saw new business registration increase by 18% after the governments reduced the time and cost of starting a business last year,” the report says.
Other examples it highlights include Slovakia’s reform of collateral regulation, which helped to increase the flow of bank loans to the private sector by 10%.
The report also makes a strong diagnosis on the social impact of heavy and ineffective regulation. “Heavy regulation and weak property rights exclude the poor – especially women and younger people – from doing business.” It not only fails to protect them, but often harms them, concludes the report.