COMPARING REGULATION IN 183 ECONOMIES - Doing Business

viDOING BUSINESS 2010of a domestic small to medium-size firm.Accordingly:r Doing Business does not measure allaspects of the business environmentthat matter to firms or investors—or allfactors that affect competitiveness. Itdoes not, for example, measure security,macroeconomic stability, corruption,the labor skills of the population, theunderlying strength of institutionsor the quality of infrastructure.4 Nordoes it focus on regulations specific toforeign investment.r Doing Business does not assess thestrength of the financial system orfinancial market regulations, bothimportant factors in understandingsome of the underlying causes of theglobal financial crisis.r Doing Business does not cover allregulations, or all regulatory goals,in any economy. As economies andtechnology advance, more areas ofeconomic activity are being regulated.For example, the European Union’sbody of laws (acquis) has now grownto no fewer than 14,500 rule sets.Doing Business measures just 10phases of a company’s life cycle,through 10 specific sets of indicators.The indicator sets also do not coverall aspects of regulation in a particulararea. For example, the indicatorson starting a business or protectinginvestors do not cover all aspects ofcommercial legislation. The employingworkers indicators do not cover allaspects of labor regulation. Measuresfor regulations addressing safety atwork or right of collective bargaining,for example, are not included in thecurrent indicator set.BASED ON STANDARDIZED CASESCENARIOSDoing Business indicators are built on thebasis of standardized case scenarios withspecific assumptions, such as the business being located in the largest businesscity of the economy. Economic indicatorscommonly make limiting assumptionsof this kind. Inflation statistics, for example, are often based on prices of con-sumer goods in a few urban areas.Such assumptions allow global coverage and enhance comparability. Butthey come at the expense of generality.Business regulation and its enforcement,particularly in federal states and largeeconomies, differ across the country. Andof course the challenges and opportunities of the largest business city—whetherMumbai or São Paulo, Nuku’alofa orNassau—vary greatly across countries.Recognizing governments’ interest insuch variation, Doing Business has complemented its global indicators with subnational studies in such countries as Brazil, China, Colombia, the Arab Republicof Egypt, India, Kenya, Mexico, Morocco,Nigeria and the Philippines.5In areas where regulation is complexand highly differentiated, the standardized case used to construct the DoingBusiness indicator needs to be carefullydefined. Where relevant, the standardized case assumes a limited liabilitycompany. This choice is in part empirical: private, limited liability companiesare the most prevalent business form inmost economies around the world. Thechoice also reflects one focus of DoingBusiness: expanding opportunities forentrepreneurship. Investors are encouraged to venture into business when potential losses are limited to their capitalparticipation.FOCUSED ON THE FORMAL SECTORIn constructing the indicators, DoingBusiness assumes that entrepreneurs areknowledgeable about all regulations inplace and comply with them. In practice, entrepreneurs may spend considerable time finding out where to go andwhat documents to submit. Or theymay avoid legally required proceduresaltogether—by not registering for socialsecurity, for example.Where regulation is particularlyonerous, levels of informality are higher.Informality comes at a cost: firms inthe informal sector typically grow moreslowly, have poorer access to credit andemploy fewer workers—and their workers remain outside the protections oflabor law.6 Doing Business measures oneset of factors that help explain the occurrence of informality and give policymakers insights into potential areas ofreform. Gaining a fuller understandingof the broader business environment,and a broader perspective on policy challenges, requires combining insights fromDoing Business with data from othersources, such as the World Bank Enterprise Surveys.7WHY THIS FOCUSDoing Business functions as a kind ofcholesterol test for the regulatory environment for domestic businesses. A cholesterol test does not tell us everythingabout the state of our health. But it doesmeasure something important for ourhealth. And it puts us on watch to changebehaviors in ways that will improve notonly our cholesterol rating but also ouroverall health.One way to test whether Doing Business serves as a proxy for the broaderbusiness environment and for competitiveness is to look at correlations between the Doing Business rankings andother major economic benchmarks. Theindicator set closest to Doing Businessin what it measures is the Organisationfor Economic Co-operation and Development’s indicators of product marketregulation; the correlation here is 0.75.The World Economic Forum’s GlobalCompetitiveness Index and IMD’s WorldCompetitiveness Yearbook are broader inscope, but these too are strongly correlated with Doing Business (0.79 and 0.72,respectively). These correlations suggestthat where peace and macroeconomicstability are present, domestic businessregulation makes an important difference in economic competitiveness.A bigger question is whether theissues on which Doing Business focusesmatter for development and poverty reduction. The World Bank study Voicesof the Poor asked 60,000 poor peoplearound the world how they thought theymight escape poverty.8 The answers wereunequivocal: women and men alike pin

ABOUT DOING BUSINESStheir hopes above all on income fromtheir own business or wages earned inemployment. Enabling growth—and ensuring that poor people can participatein its benefits—requires an environmentwhere new entrants with drive and goodideas, regardless of their gender or ethnicorigin, can get started in business andwhere good firms can invest and grow,generating more jobs.Small and medium-size enterprisesare key drivers of competition, growthand job creation, particularly in developing countries. But in these economies upto 80% of economic activity takes placein the informal sector. Firms may be prevented from entering the formal sectorby excessive bureaucracy and regulation.Where regulation is burdensomeand competition limited, success tendsto depend more on whom you knowthan on what you can do. But whereregulation is transparent, efficient andimplemented in a simple way, it becomeseasier for any aspiring entrepreneurs,regardless of their connections, to operate within the rule of law and to benefitfrom the opportunities and protectionsthat the law provides.In this sense Doing Business valuesgood rules as a key to social inclusion. Italso provides a basis for studying effectsof regulations and their application. Forexample, Doing Business 2004 found thatfaster contract enforcement was associated with perceptions of greater judicialfairness—suggesting that justice delayedis justice denied.9In the current global crisis policymakers face particular challenges. Bothdeveloped and developing economies areseeing the impact of the financial crisisflowing through to the real economy,with rising unemployment and incomeloss. The foremost challenge for manygovernments is to create new jobs andeconomic opportunities. But many havelimited fiscal space for publicly fundedactivities such as infrastructure investment or for the provision of publiclyfunded safety nets and social services.Reforms aimed at creating a better investment climate, including reforms ofbusiness regulation, can be beneficial forseveral reasons. Flexible regulation andeffective institutions, including efficientprocesses for starting a business and efficient insolvency or bankruptcy systems,can facilitate reallocation of labor andcapital. And regulatory institutions andprocesses that are streamlined and accessible can help ensure that, as businessesrebuild, barriers between the informaland formal sectors are lowered, creatingmore opportunities for the poor.DOING BUSINESS AS ABENCHMARKING EXERCISEDoing Business, in capturing some keydimensions of regulatory regimes, hasbeen found useful for benchmarking.Any benchmarking—for individuals,firms or economies—is necessarily partial: it is valid and useful if it helpssharpen judgment, less so if it substitutesfor judgment.Doing Business provides 2 takes onthe data it collects: it presents “absolute”indicators for each economy for each ofthe 10 regulatory topics it addresses, andit provides rankings of economies, bothby indicator and in aggregate. Judgmentis required in interpreting these measures for any economy and in determining a sensible and politically feasible pathfor reform.Reviewing the Doing Business rankings in isolation may show unexpectedresults. Some economies may rank unexpectedly high on some indicators. Andsome economies that have had rapidgrowth or attracted a great deal of investment may rank lower than others thatappear to be less dynamic.But for reform-minded governments, how much their indicators improve matters more than their absoluteranking. As economies develop, theystrengthen and add to regulations toprotect investor and property rights.Meanwhile, they find more efficient waysto implement existing regulations andcut outdated ones. One finding of DoingBusiness: dynamic and growing economies continually reform and update theirviiregulations and their way of implementing them, while many poor economiesstill work with regulatory systems datingto the late 1800s.DOING BUSINESS—A USER’S GUIDEQuantitative data and benchmarking canbe useful in stimulating debate aboutpolicy, both by exposing potential challenges and by identifying where policy makers might look for lessons andgood practices. These data also providea basis for analyzing how different policyapproaches—and different policy reforms—contribute to desired outcomessuch as competitiveness, growth andgreater employment and incomes.Seven years of Doing Business datahave enabled a growing body of researchon how performance on Doing Business indicators—and reforms relevantto those indicators—relate to desiredsocial and economic outcomes. Some405 articles have been published inpeer-reviewed academic journals, andabout 1,143 working papers are availablethrough Google Scholar.10 Among thefindings:r Lower barriers to start-up are associated with a smaller informal sector.11r Lower costs of entry encourageentrepreneurship, enhance firmproductivity and reduce corruption.12r Simpler start-up translates intogreater employment opportunities.13How do governments use DoingBusiness? A common first reaction isto doubt the quality and relevance ofthe Doing Business data. Yet the debatetypically proceeds to a deeper discussionexploring the relevance of the data to theeconomy and areas where reform mightmake sense.Most reformers start out by seekingexamples, and Doing Business helps inthis. For example, Saudi Arabia used thecompany law of France as a model for revising its own. Many countries in Africalook to Mauritius—the region’s strongest performer on Doing Business indi-

viiiDOING BUSINESS 2010cators—as a source of good practices forreform. In the words of Luis GuillermoPlata, the minister of commerce, industry and tourism of Colombia,It’s not like baking a cake where you followthe recipe. No. We are all different. But wecan take certain things, certain key lessons, and apply those lessons and see howthey work in our environment.Over the past 7 years there has beenmuch activity by governments in reforming the regulatory environment fordomestic businesses. Most reforms relating to Doing Business topics were nestedin broader programs of reform aimed atenhancing economic competitiveness. Instructuring their reform programs, governments use multiple data sources andindicators. And reformers respond tomany stakeholders and interest groups,all of whom bring important issues andconcerns into the reform debate.World Bank support to these reformprocesses is designed to encourage critical use of the data, sharpening judgmentand avoiding a narrow focus on improving Doing Business rankings.METHODOLOGY AND DATADoing Business covers 183 economies—including small economies and some ofthe poorest countries, for which little orno data are available in other data sets.The Doing Business data are based ondomestic laws and regulations as well asadministrative requirements. (For a detailed explanation of the Doing Businessmethodology, see Data notes.)INFORMATION SOURCES FOR THE DATAMost of the indicators are based on lawsand regulations. In addition, most of thecost indicators are backed by official feeschedules. Doing Business respondentsboth fill out written surveys and providereferences to the relevant laws, regulations and fee schedules, aiding datachecking and quality assurance.For some indicators part of thecost component (where fee schedulesare lacking) and the time componentare based on actual practice rather thanthe law on the books. This introduces adegree of subjectivity. The Doing Business approach has therefore been to workwith legal practitioners or professionalswho regularly undertake the transactions involved. Following the standardmethodological approach for time andmotion studies, Doing Business breaksdown each process or transaction, suchas starting and legally operating a business, into separate steps to ensure a better estimate of time. The time estimatefor each step is given by practitionerswith significant and routine experiencein the transaction.Over the past 7 years more than11,000 professionals in 183 economieshave assisted in providing the data thatinform the Doing Business indicators. Thisyear’s report draws on the inputs of morethan 8,000 professionals. Table 14.1 liststhe number of respondents per indicatorset. The Doing Business website indicatesthe number of respondents per economyand per indicator. Respondents are professionals or government officials whoroutinely administer or advise on the legaland regulatory requirements covered ineach Doing Business topic. Because of thefocus on legal and regulatory arrangements, most of the respondents are lawyers. The credit information survey is answered by officials of the credit registry orbureau. Freight forwarders, accountants,architects and other professionals answerthe surveys related to trading across borders, taxes and construction permits.The Doing Business approach todata collection contrasts with that ofenterprise or firm surveys, which captureoften one-time perceptions and experiences of businesses. A corporate lawyerregistering 100–150 businesses a yearwill be more familiar with the processthan an entrepreneur, who will registera business only once or maybe twice. Abankruptcy judge deciding dozens ofcases a year will have more insight intobankruptcy than a company that mayundergo the process.DEVELOPMENT OF THE METHODOLOGYThe methodology for calculating eachindicator is transparent, objective andeasily replicable. Leading academics collaborate in the development of the indicators, ensuring academic rigor. Sevenof the background papers underlyingthe indicators have been published inleading economic journals. One is at anadvanced stage of publication.Doing Business uses a simple averaging approach for weighting subindicators and calculating rankings. Other approaches were explored, including usingprincipal components and unobservedcomponents. The principal componentsand unobserved components approachesturn out to yield results nearly identical tothose of simple averaging. The tests showthat each set of indicators provides newinformation. The simple averaging approach is therefore robust to such tests.IMPROVEMENTS TO THEMETHODOLOGY AND DATA REVISIONSThe methodology has undergone continual improvement over the years. Changeshave been made mainly in response tocountry suggestions. For enforcing contracts, for example, the amount of thedisputed claim in the case study wasincreased from 50% to 200% of incomeper capita after the first year of data collection, as it became clear that smallerclaims were unlikely to go to court.Another change relates to starting abusiness. The minimum capital requirement can be an obstacle for potentialentrepreneurs. Initially, Doing Businessmeasured the required minimum capitalregardless of whether it had to be paidup front or not. In many economies onlypart of the minimum capital has to bepaid up front. To reflect the actual potential barrier to entry, the paid-in minimum capital has been used since 2004.This year’s report includes changesin the core methodology for one set ofindicators, those on employing workers. The assumption for the standardizedcase study was changed to refer to asmall to medium-size company with 60employees rather than 201. The scope of

ABOUT DOING BUSINESSthe question on night and weekly holidaywork has been limited to manufacturingactivities in which continuous operation is economically necessary. Legallymandated wage premiums for night andweekly holiday work up to a thresholdare no longer considered a restriction. Inaddition, the calculation of the minimumwage ratio was modified to ensure that aneconomy would not benefit in the scoring from lowering the minimum wage tobelow 1.25 a day, adjusted for purchasing power parity. This level is consistentwith recent World Bank adjustments tothe absolute poverty line. Finally, the calculation of the redundancy cost was adjusted so that having severance paymentsor unemployment protections below acertain threshold does not mean a betterscore for an economy.All changes in methodology are explained in the Data notes as well as onthe Doing Business website. In addition,historical data for each indicator andeconomy are available on the website,beginning with the first year the indicatoror economy was included in the report.To provide a comparable time series forresearch, the data set is back-calculatedto adjust for changes in methodology andany revisions in data due to corrections.The website also makes available all original data sets used for background papers.Information on data corrections isprovided in the Data notes and on thewebsite. A transparent complaint procedure allows anyone to challenge the data.If errors are confirmed after a data verification process, they are expeditiouslycorrected.NEW THIS YEARThis year’s report presents initial findings in 2 new areas: the ease of obtainingan electricity connection and the levelof adoption in national legislation ofaspects of the International Labour Organization’s (ILO) core labor standardson child labor. Neither of these pilotindicator sets is included in the DoingBusiness rankings.PILOT INDICATORS ON GETTINGELECTRICITYWhere the quality and accessibility ofinfrastructure services are poor, companies’ productivity and growth suffer.According to firm surveys in 89 economies, electricity was one of the biggest constraints to their business.14 TheDoing Business pilot data set on gettingelectricity is the first to compare distribution utilities around the world onhow efficiently they respond to customerrequests for connections.The pilot indicators track the processa standardized local private business goesthrough in obtaining an electricity connection. By applying its methodology toelectricity provision, Doing Business aimsto illustrate some of the real implicationsof weak infrastructure services for e

Additional copies of Doing Business 2010: Reforming through Difficult Times, Doing Business 2009, Doing Business 2008, Doing Business 2007: How to Reform, Doing Business in 2006: Creating Jobs, Doing Business in 2005: Removing Obstacles to Growth and Doing Business in 2004: Understanding Regulations may be purchased at www.doingbusiness.org.