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Doing Business in 2005: Recent EU Entrants Are Top Reformers While Others in the Region Struggle to Reduce Red Tape for Business, Miss Large Growth Opportunities


Regional Contacts:
Southern Europe, Central Asia; Western Europe        

Georg Schmidt                                                        

Phone: +(202) 458 2934                                

Cell:     +(202) 294 4854                                

Email:
gschmidt@ifc.org
       

Central & Eastern Europe

Irina Likhachova                

Phone: +(202) 473 1813

Cell:     +(202) 247 7231

Email:
ilikhachova@ifc.org

David Wofford  

Phone: +(202) 473 6802

Cell:   (202) 997 1516

Email:
dwofford@ifc.org

Corrie Shanahan  
Phone: +(202) 473-2258

Cell:   (202) 294 4697

Email:
cshanahan@ifc.org


WASHINGTON, September 8, 2004Slovakia was the world’s top reformer in improving its investment climate over the past year, allowing it to join the top 20 economies in the world on ease of doing business, according to a new report from the World Bank Group.

The report also finds that, while new entrants into the European Union were also among the top reformers of investment climate, several economies in Europe and Central Asia (ECA) continue to rank among the world’s least friendly for business.


In Slovakia, the amount of time required to start a business was cut in half, time to recover debt fell by three quarters, a new private credit registry opened, and employment regulation was made more flexible. The country witnessed a jump of 12 percent in new business registrations after simplifying its entry procedures and a 10 percent increase in credit to the private sector after its collateral law reforms.


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 such reforms, while often simple, can help create job opportunities for women and young people, encourage businesses to move into the formal economy, and promote economic growth.


The report, however, 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.


On average, it takes a business six procedures, 8 percent of income per capita, and 27 days to get started in high-income OECD countries; in ECA countries, the same process takes 10 procedures, 15 percent of income per capita, and 42 days.  Among the worst regional performers in time of business registration were Belarus (79 days) and Azerbaijan (123 days).


Potential investors in Canada and the United Kingdom enjoy all seven main types of access to the ownership and financial information of publicly listed companies, while investors in Bosnia and Herzegovina, Bulgaria, and Turkey have less than half as much access.


Overall, rich countries undertook three times as many investment climate reforms as poor countries last year. European Union members were especially active in enacting reforms, with almost two reforms per country. 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 ECA economies:


       
Of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, 16 were in ECA. EU entrants reformed the most; Central Asian economies reformed the least.
       
Five economies in the region ranked in the top quartile of 145 countries on the ease of doing business: Lithuania, Slovakia, Latvia, Czech Republic, and Estonia. Belarus, Ukraine, Romania, and Uzbekistan scored lowest in the region.
       
Among countries enacting reforms, Turkey streamlined the process for starting a new business, cutting the time from 38 days to 9 and making the list of top 10 reformers in entry regulation.
       
Moldova, Lithuania, Russia, and Hungary were also among those improving business entry regulations.
       
Croatia, Hungary, Latvia, and Poland introduced more flexible employment regulation, making it easier for businesses to expand production.
       
Latvia and Armenia established public credit registries, and Bulgaria established a private credit bureau to facilitate lending.
       
Bosnia and Herzegovina introduced a summary proceeding in courts, cutting the days to enforce contracts in half. In Lithuania a summary proceeding now takes one-third of the regular procedure’s time.
       
Following their reforms, several ECA countries entered the top 10 lists on specific areas of business regulation, for example:  Lithuania and Armenia on the ease of registering property; Albania, Slovakia, and Latvia on legal rights of borrowers and lenders; and the Czech Republic and Slovakia on protecting investors. However, Serbia and Montenegro, Slovenia, and Poland now rank worse on the time required to enforce contracts.

“Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climates 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; it expands the research to 145 countries and adds two new indicators, registering property and protecting investors. Since last year, 13 governments have asked for their countries to be included in the Doing Business analysis.


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,” said Simeon Djankov, an author of the report.


For example, this year’s report catalogs wide variances in hiring and severance costs across countries and shows that high severance costs can discourage job creation. The report also shows that poor regulation of bankruptcy can cause business loans to dry up: in 50 countries, creditors can expect to recover less than 20 cents on the dollar when a business goes bankrupt.


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 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.

Doing Business in 2005
finds that reform took place last year mainly in countries that faced competition and had incentives to measure regulatory burdens.  In the enlarged European Union, accession countries reformed in anticipation of the new competitive pressures on their businesses; existing members reformed to maintain their advantage against the lower-wage producers from accession countries.


In developing countries, performance targets set by the International Development Association and donor country aid programs spurred poor countries to examine regulatory obstacles and propose reforms.  Most reforms focused on simplifying business entry and improving credit information systems.  African countries reformed the least of all regions and had the most regulatory obstacles to doing business, followed by Latin American countries.


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 provided methodological support and review.  The data, methodology, and names of contributors are publicly available online.


The full report is available under embargo to journalists at the World Bank’s Online Media Briefing Center  
http://media.worldbank.org/

Investment climate indicators and analysis, along with information on ordering the report, will be available on the Doing Business website:
http://rru.worldbank.org/doingbusiness