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Doing Business In 2005: Middle Eastern Nations Struggle To Reduce Red Tape For Business, Miss Large Growth Opportunities

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        WASHINGTON, September 8, 2004Jordan made the most progress among Middle Eastern nations in improving its investment climate last year but still maintains along with other nations in the Middle East and North Africa some of the largest capital requirements for startup businesses anywhere in the world, according to a new report from the World Bank Group.

Doing Business in 2005: Removing Obstacles to Growth
, a report cosponsored by the World Bank and International Finance Corporation, the private sector lending arm of the World Bank Group, finds that investment climate reforms, while often simple, can help create job opportunities for women and young people, encourage businesses to move into the formal economy, and promote growth.

Between 2003 and 2004, for example, Morocco witnessed a jump of 21 percent in new business registrations after simplifying its entry procedures.

However, the report, which benchmarks regulatory performance and reforms in 145 nations, finds that poor nations, through administrative procedures, still make it two times harder than rich nations for entrepreneurs to start, operate, or close a business, and businesses in poor nations have less than half the property rights protections available to businesses in rich countries.

Jordan reduced the time it takes to register a new business by nearly nine weeks and is one of the few nations that gives regulators an incentive to maximize the value recovered for creditors when a business must close. Yet the government still requires a new business to have minimum capital equivalent to 11 times the nation’s average per capita income. In Saudi Arabia and Yemen, the minimum capital requirement is 15 times average income; in Syria, the requirement is 50 times average income. By comparison, more than 40 nations worldwide have no minimum capital requirement for a startup business.
Worldwide, rich countries undertook three times as many investment climate reforms as poor countries last year. European nations were especially active in enacting reforms. The top 10 reformers for the most recent survey year were Slovakia, Colombia, Belgium, Finland, India, Lithuania, Norway, Poland, Portugal, and Spain.

Other findings related to Middle Eastern nations:

Of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, only seven were in the Middle East.
Only two nations in the region, Tunisia and Israel, ranked in the top quartile of the countries surveyed on the ease of doing business. Both countries improved further last year. Tunisia improved the recovery rate in bankruptcy and increased the coverage of borrowers in its public credit registry. Israel established a new procedure for debt recovery in the courts, which takes less than seven months. Previously, it took a year for creditors to collect overdue debt.
Among nations enacting reforms, Jordan improved the process for starting a new business the most, by cutting the number of procedures from 14 to 11 and the number of days from 98 to 36.
Still, Jordan is one of six Middle Eastern countries, together with Morocco, Egypt, Saudi Arabia, Yemen, and Syria, in the list of 10 countries with the highest minimum capital requirement for starting a business.
Algeria, Morocco, and Yemen also reduced the number of days necessary to start a business. Saudi Arabia reformed its public credit registry, nearly doubling the number of borrowers with information available at the registry.

“Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climate more business friendly,” said Michael Klein, World Bank/IFC Vice President for Private Sector Development and IFC Chief Economist.  

Doing Business in 2005
updates the work of last year’s report on five sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business; expands the research to 145 countries; and adds two new indicators, registering property and protecting investors. “This year, Doing Business gives policymakers an even more powerful tool for measuring regulatory performance in comparison to other countries, learning from best practices globally, and prioritizing reforms. Since last year, 13 countries have asked to be included in the Doing Business analysis,” said Simeon Djankov, an author of the report.

The main research findings
of Doing Business in 2005:

Businesses in poor countries face larger regulatory burdens than those in rich countries. Poor countries impose higher costs on businesses to fire a worker, enforce contracts, or file for registration; they impose more delays in going through insolvency procedures, registering property, and starting a business; and they afford fewer protections in terms of legal rights for borrowers and lenders, contract enforcement, and disclosure requirements. In administrative costs alone, there is a threefold difference between poor and rich nations. The number of administrative procedures and the delays associated with them are twice as high in poor countries.

The payoffs from reform appear to be large. The report estimates that an improvement from the bottom to the top quartile of countries in the ease of doing business is associated with an additional 2.2 percentage points in annual economic growth. An indication of the payoff comes from Turkey and France, each of which saw new business registration increase by 18 percent after the governments reduced the time and cost of starting a business last year. Slovakia’s reform of collateral regulation helped increase the flow of bank loans to the private sector by 10 percent. The payoff comes because businesses waste less time and money on unnecessary regulation and devote more resources to producing and marketing their goods and because governments spend less on ineffective regulation and more on social services.

Heavy regulation and weak property rights exclude the poor – especially women and younger people – from doing business. The report finds that weak property rights and heavy business regulation conspire to exclude the poor from joining the formal economy. “Heavy regulation not only fails to protect women, young people, and the poor – those it was intended to serve – but often harms them,” said Caralee McLiesh, an author of the report.  Doing Business shows that countries with simpler regulations can provide better social protections and a better economic climate for business people, investors, and the general public. The report builds on noted economist Hernando de Soto’s work, showing that while it is critical to encourage registration of assets, it is as important – and harder – to stop them from slipping back into the informal sector.

The top 20 economies
in terms of ease of doing business are New Zealand, United States, Singapore, Hong Kong/China, Australia, Norway, United Kingdom, Canada, Sweden, Japan, Switzerland, Denmark, Netherlands, Finland, Ireland, Belgium, Lithuania, Slovakia, Botswana, and Thailand.

The Doing Business project is the product of more than 3,000 local experts – business consultants, lawyers, accountants, and government officials – and leading academics, who provide methodological support and review.  The data, methodology, and  names of contributors are publicly available online.

The full report is available online to journalists at the World Bank’s Media Briefing Center

Investment climate indicators and analysis, along with information on ordering the report, are available on the Doing Business website: