DB14 Mini Report - World Bank Group

OverviewRegulation is a reality from the beginningof a firm’s life to the end (figure 1.1). Navigating it can be complex and costly. Onaverage around the world, starting a business takes 7 procedures, 25 days andcosts 32% of income per capita in fees.But while it takes as little as 1 procedure,half a day and almost nothing in fees inNew Zealand, an entrepreneur mustwait 208 days in Suriname and 144 inRepública Bolivariana de Venezuela.And this is just the tip of the iceberg. Consider what the new firm must go throughto complete other transactions at theaverage level of time and effort requiredaround the world. Preparing, filing andpaying the firm’s annual taxes could takeup another 268 hours of its staff’s time. Exporting just one shipment of its final products could take 6 documents, 22 days andmore than 1,500. If the firm needs a simple warehouse, getting the facility ready tostart operating could take 26 proceduresand 331 days more—to buy the land, register its ownership, build the warehouseand get electricity and other utility connections. Having sorted out these initialformalities, if the firm becomes embroiledin a legal dispute with one of its suppliersor customers, resolving the dispute couldmean being stuck in court for 622 days,with costs amounting to 35% of the valueof the claim.To operate and expand, the firm will needfinancing—from shareholders or fromcreditors. Raising money in the capitalmarket is easier and less costly whereminority shareholders feel protectedfrom self-interested transactions by largeshareholders. Good corporate governancerules can provide this kind of protection.But among the 189 economies covered byDoing Business, 46 still have only very limited requirements for disclosing majorityshareholders’ conflicts of interest—ornone at all. This undermines trust in thesystem, making it less likely that investorswill take a minority stake in a firm.Similarly, creditors need guarantees thattheir loans will be repaid. Informationabout potential borrowers and solid legal rights for creditors play an important part in providing those guarantees.Yet institutions providing these are notuniversal among the 189 economies:35 have no credit bureau or registry thatdistributes information about borrowers,and 124 lack a modern collateral registry where a creditor can check whethera movable asset being pledged as collateral has any other liens on it. If despite allefforts the firm ends up insolvent, havinginstitutions in place that enable creditorsto recover their assets is also important.On average around the world, creditorsrecover no more than 35% of their initialloan in case of bankruptcy as measuredby Doing Business.In many parts of the world in recent years,Doing Business data show that there hasbeen remarkable progress in removingsome of the biggest bureaucratic obstacles to private sector activity. Yet smalland medium-size enterprises still aresubject to burdensome regulations andvague rules that are unevenly appliedand that impose inefficiencies on the enterprise sector. This curtails the overallcompetitiveness of economies and theirpotential for creating jobs.WHAT DOES DOING BUSINESSMEASURE—AND WHOPERFORMS WELL?Through its indicators Doing Businessmeasures and tracks changes in the In 2012/13, 114 economiesimplemented 238 regulatoryreforms making it easier to dobusiness—18% more reformsthan in the previous year. If economies around the worldfollowed the best practice inregulatory processes for startinga business, entrepreneurswould spend 45.4 million fewerdays each year satisfyingbureaucratic requirements. Ukraine, Rwanda, the RussianFederation, the Philippines andKosovo are among the economiesimproving the most in 2012/13 inareas tracked by Doing Business. Reforms reducing the complexity andcost of regulatory processes continueto be the most common. Less thana third of the reforms recorded byDoing Business in 2012/13—and inthe years since 2009—focused onstrengthening legal institutions. Sub-Saharan Africa is home to 9 ofthe 20 economies narrowing the gapwith the regulatory frontier the mostsince 2009. Low-income economiesnarrowed this gap twice as much ashigh-income economies did. Economies that improve in areasmeasured by Doing Business are onaverage more likely than others toalso implement reforms in otherareas—such as governance, health,education and gender equality. Economies that perform wellon Doing Business indicatorsdo not necessarily havesmaller governments.

2DOING BUSINESS 2014FIGURE 1.1 Regulations as measured by Doing Business affect firms throughouttheir life cycleeconomies that have no regulations in thearea being measured or do not apply theirregulations (considered “no practice”economies), penalizing them for lackingappropriate regulation.At start-ups 3TARTING A BUSINESSs %MPLOYING WORKERSWhen thingsgo wrongs %NFORCING CONTRACTSs 2ESOLVING INSOLVENCYIn dailyoperationss 0AYING TAXESs 4RADING ACROSSBORDERSIn getting alocations DEALING WITHCONSTRUCTION PERMITSs 'ETTING ELECTRICITYs 2EGISTERING PROPERTYIn gettingfinancings 'ETTING CREDITs 0ROTECTING INVESTORSregulations applying to domestic smalland medium-size companies, operatingin the largest business city of each economy, in 10 areas in their life cycle: startinga business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors,paying taxes, trading across borders, enforcing contracts and resolving insolvency. The aggregate ranking on the ease ofdoing business is based on these indicators. Doing Business also documents regulations on employing workers, which arenot included in the aggregate ranking. Inaddition, Doing Business tracks good practices around the world to provide insightsinto how governments have improved theregulatory environment in the past in theareas that it measures (see table 1.5 at theend of this overview).Regulations that protect consumers,shareholders and the public without overburdening firms help create an environment where the private sector can thrive.Sound business regulation requires bothefficient procedures and strong institutions that establish transparent and enforceable rules. Doing Business measuresboth these elements: through indicatorsrelating to the strength of legal institutions relevant to business regulation andthrough indicators relating to the complexity and cost of regulatory processes.The indicators in the first group measurethe strength of the legal and regulatoryframework for getting credit, protectinginvestors, enforcing contracts and resolving insolvency. Those in the second groupmeasure the cost and efficiency of regulatory processes for starting a business,dealing with construction permits, gettingelectricity, registering property, payingtaxes and trading across borders. Basedon time-and-motion case studies fromthe perspective of the business, theseindicators measure the procedures, timeand cost required to complete a transaction in accordance with the relevantregulations (for a detailed explanation ofthe Doing Business methodology, see thedata notes and the chapter “About DoingBusiness”).Doing Business is not about less regulationbut about better regulation. Accordingly, some Doing Business indicators givea higher score for better and more developed regulation, as the protecting investors indicators do for stricter disclosurerequirements for related-party transactions. Other indicators, such as thoseon dealing with construction permits,automatically assign the lowest score toThe economies ranking highest on theease of doing business therefore are notthose with no regulation but those whosegovernments have managed to createa regulatory system that facilitates interactions in the marketplace and protectsimportant public interests without unnecessarily hindering the development of theprivate sector—in other words, a regulatory system with strong institutions andlow transactions costs (table 1.1). Theseeconomies all have both a well-developedprivate sector and a reasonably efficientregulatory system that has managed tostrike a sensible balance between theprotections that good rules provide andthe need to have a dynamic private sector unhindered by excessively burdensome regulations.WHERE IS THE REGULATORYGAP WIDER?To complement the ease of doing business ranking, a relative measure, DoingBusiness 2012 introduced the distance tofrontier, an absolute measure of businessregulatory efficiency. This measure aidsin assessing how much the regulatoryenvironment for local entrepreneurs improves in absolute terms over time byshowing the distance of each economyto the “frontier,” which represents thebest performance by any economy observed on each of the Doing Business indicators since 2003 or the year in whichdata for the indicator were first collected. Because the distance to frontier isan absolute measure, it can be used forcomparisons over time. The measure isnormalized to range between 0 and 100,with 100 representing the frontier. Ahigher score indicates a more efficientbusiness environment and stronger legalinstitutions (for a detailed description ofthe methodology, see the chapter on theease of doing business and distance tofrontier).Analysis based on the distance to frontier measure shows that on averageacross all regions, economies are closest

OVERVIEWTABLE 1.1 Rankings on the ease of doing 95051525354555657585960616263EconomySingaporeHong Kong SAR, ChinaNew ZealandUnited StatesDenmarkMalaysiaKorea, Rep.GeorgiaNorwayUnited KingdomAustraliaFinlandIcelandSwedenIrelandTaiwan, aUnited Arab EmiratesLatviaMacedonia, FYRSaudi uerto Rico (U.S.)South Slovak otswanaTongaBulgariaBrunei 0121122123124125126EconomySt. LuciaItalyTrinidad and TobagoGhanaKyrgyz RepublicTurkeyAzerbaijanAntigua and BarbudaGreeceRomaniaVanuatuCzech San MarinoSt. Vincent and the GrenadinesZambiaBahamas, TheSri sian FederationSerbiaJamaicaMaldivesChinaSolomon IslandsNamibiaVietnamPalauSt. Kitts and NevisCosta ayPakistanLebanonUkrainePapua New GuineaMarshall IslandsGuyanaBrazilDominican RepublicEl SalvadorJordanIndonesiaCape 84185186187188189EconomyHondurasEgypt, Arab Rep.KenyaBangladeshBosnia and HerzegovinaUgandaYemen, Rep.IndiaEcuadorLesothoCambodiaWest Bank and GazaMozambiqueBurundiBhutanSierra agascarSudanGambia, TheIraqIran, Islamic Rep.AlgeriaBurkina FasoMaliMicronesia, Fed. Sts.TogoComorosLao PDRDjiboutiSurinameBoliviaGabonAfghanistanSyrian Arab RepublicEquatorial GuineaCôte d'IvoireCameroonSão Tomé and , RBMyanmarCongo, Dem. Rep.EritreaCongo, Rep.South SudanLibyaCentral African 00100311320320040001012320101113030011Note: The rankings for all economies are benchmarked to June 2013 and reported in the country tables. This year‘s rankings on the ease of doing business are the average ofthe economy‘s percentile rankings on the 10 topics included in this year‘s aggregate ranking. The number of reforms excludes those making it more difficult to do business.Source: Doing Business database.3

DOING BUSINESS 2014Regional performance varies considerablyacross the areas measured by Doing Business. In several areas Europe and CentralAsia has an average performance similarto that of OECD high-income economies.But in dealing with construction permitsthis region is further from the regulatoryfrontier than any other. East Asia and thePacific follows Europe and Central Asiaclosely in some areas but outperformsthat region in dealing with constructionpermits, getting electricity, paying taxesand trading across borders. Latin Americaand the Caribbean has a performance remarkably similar to that of East Asia andthe Pacific except in paying taxes.The Middle East and North Africa hasa very diverse performance. In some areas, such as paying taxes, it is almost asclose to the frontier as OECD high-income economies. In other areas, suchas getting credit, the Middle East andNorth Africa has the lowest performanceamong regions. South Asia has a gap withthe frontier similar to that of Sub-SaharanAfrica in most areas, though it substantially outperforms that region in 3 areas—starting a business, resolving insolvencyand getting credit.The distance to frontier measure provides one perspective on variation in1009080706050403020g insolvencyResolvinng investorsProtectictsg contraEnforcincreditGettingrdersTradingacross boxesPaying taertyng propRegisterielectricityGettingconstrucDealing withtion permitsRegulatory frontierbusinessAcross most areas measured by DoingBusiness, OECD high-income economiesare closer to the frontier on average thanthose of any other region (figure 1.2). Theexceptions are starting a business andregistering property, where Europe andCentral Asia is slightly ahead. Sub-Saharan African economies are furthest fromthe frontier on average in 6 of the 10 areasmeasured by Doing Business: starting abusiness, getting electricity, paying taxes,trading across borders, protecting investors and resolving insolvencyFIGURE 1.2 OECD high-income economies are closest to the frontier in regulatory practiceStartingato the frontier—or best practice—in thearea of starting a business. And they arefurthest from the frontier on average inresolving insolvency. Starting a business is also the area where all regionsare closest together, in line with the evidence on convergence presented later inthe overview. Performance in such areasas getting credit, enforcing contracts andresolving insolvency varies considerablyacross regions.Average distance to frontier(percentage points)4OECD high incomeEurope & Central AsiaSouth AsiaMiddle East & North AfricaEast Asia & PacificLatin America & CaribbeanSub-Saharan AfricaSource: Doing Business database.performance across areas of regulationmeasured by Doing Business. Rankings ofeconomies in these areas provide another. The ease of doing business ranking isjust one number—aggregating an averageof more than 300 data points for eacheconomy. Not surprisingly, the full setof rankings and data across Doing Business topics for an economy can presenta very different picture than the aggregateranking (figure 1.3). Take Estonia, whichstands at 22 in the ease of doing businessranking. Its rankings on individual topicsrange from 7 in trading across bordersto 68 in protecting investors. Japan’s lowest 3 rankings (in paying taxes, starting abusiness and dealing with constructionpermits) average 117, while its highest 3 (inresolving insolvency, protecting investorsand trading across borders) average 13. Japan’s ranking on the overall ease of doingbusiness is 27. Three economies added tothe Doing Business sample this year—Libya, Myanmar and South Sudan—showsimilar variation across topics (box 1.1).This variation can point to important regulatory obstacles for firms. An economymay make it easy to start a business, forexample. But if getting financing is difficult, the constraints will hamper thegrowth of new firms, discouraging entrepreneurship.WHAT IS THE BIGGER PICTURE?Doing Business recognizes that the stateplays a fundamental role in private sector development. Governments supporteconomic activity by establishing andenforcing rules that clarify property rightsand reduce the cost of resolving disputes,that increase the predictability of economic interactions and that provide contractual partners with core protectionsagainst abuse. So it is no surprise to findthat there is no evidence suggesting thateconomies that do well on Doing Businessindicators tend to have governments driven by a “smaller government” philosophy.Indeed, the data suggest otherwise. It isgenerally the bigger governments (asmeasured by government consumptionexpenditure as a percentage of GDP), notthe small ones, that tend to provide moreof the protections and efficient rules promoted by Doing Business.Economies performing well on DoingBusiness indicators include exampleswith large governments as well as those

OVERVIEWFIGURE 1.3 An economy’s regulatory environment may be more business-friendly in some areas than in others1801601201008060Average of lowest 3 topic rankings40Average of all topic rankings20Average of highest 3 topic rankings0SingaporeHong Kong SAR, ChinaUnited StatesKorea, Rep.GeorgiaFinlandIcelandTaiwan, landSaudi aIsraelSpainPolandPuerto Rico (U.S.)Slovak RepublicHungaryLuxembourgMexicoSt. LuciaGreeceBulgariaSt. Vincent and the GrenadinesKyrgyz RepublicItalyGhanaVanuatuGuatemalaBahamas, TheMoroccoZambiaSan MarinoBarbadosKosovoSolomon IslandsSt. Kitts and NevisVietnamMaldivesNamibiaCosta RicaGrenadaAlbaniaBelizeUkraineLebanonGuyanaCape VerdePapua New GuineaKiribatiIndonesiaEl sothoKenyaUzbekistanIndiaTanzaniaMozambiqueGambia, TheMicronesia, Fed. Sts.SudanNigeriaComorosIran, Islamic Rep.Equatorial GuineaSyrian Arab yaCongo, Rep.Central African RepublicAverage ranking140Note: Rankings reflected are those on the 10 Doing Business topics included in this year’s aggregate ranking on the ease of doing business. Figure is illustrative only; itdoes not include all 189 economies covered by this year’s report. See the country tables for rankings on the ease of doing business and each Doing Business topic for alleconomies.Source: Doing Business database.Moreover, economies performing well onDoing Business indicators are on averagemore inclusive along at least 2 dimensions. They tend to have smaller informalsectors, meaning that more people haveaccess to the formal market and canbenefit from such regulations as socialprotections and workplace safety regulations (figure 1.5). And they are more likely to have gender equality under the lawas measured by the World Bank Group’sWomen, Business and the Law indicators.1 These 2 aspects of inclusivenessreflect in part a desire by governmentsto more effectively allocate resources.This means not hampering the productivity of formal businesses through overly burdensome rules. And it means notneedlessly depriving the economy of theskills and contributions of women. Overall, economies with smarter businessregulations are more likely to nurture anenvironment conducive to greater economic inclusion.No set of indicators can possibly capturethe full complexity of a particular reality—in the case of the Doing Business indicators, that faced by entrepreneurs as theygo about their activities while attemptingto comply with the rules established bygovernment. Having a state-of-the-artbusiness registry has less impact on jobcreation or private sector investment inan economy if roads are lacking, crime isFIGURE 1.4 Good performance on Doing Business indicators is not associated withsmaller governmentsDistance to frontier (percentage points), 2012with small ones. Denmark, with amongthe largest governments in the world, isnumber 5 in the ease of doing businessranking; the Netherlands, also with one ofthe largest governments, is number 28.Hong Kong SAR, China, with a relatively small government, is number 2 in theranking. Economies performing poorlyon Doing Business indicators also includeexamples with large and small governments. Zimbabwe, with a large government relative to GDP, ranks at 170; Equatorial Guinea, with a small government,ranks at 166. Nevertheless, on averageeconomies with smaller governmentsdo not perform better on Doing Businessindicators than those with larger governments (figure 1.4).100806040200102030General government final consumption expenditure as % of GDP, 2012Note: The correlation between the distance to frontier and government expenditure is 0.20 and significantlydifferent from zero.Source: Doing Business d

Cover design: The Word Express. Doing Business 2014 Understanding Regulations for Small . report, rankings and highlights from each indicator for the iPhone, iPad and iPod . features/iphone Resources on the Doing Business website. Contents Doing Business 2014 is the 11th in a series of annual