globeandmail.com
    Globe Advisor is moving, click here to see

Education Centre
 

Home Page 

Investment Strategies 

Tax Zone 

Financial Planning 

Estate and Insurance 

Financial Courses 

Resources 

 
From The Archives
Canadian MoneySaver 

Mutual Fund Insight 

Value Investing Guide 

The Wise Investor 

   
    

Poor nations told roadblocks to small business curb growth

By BRUCE LITTLE
00:00 EDT Monday, September 13, 2004   

The World Bank is up to its new tricks again, with the publication last week of its second "Doing Business" report. The title sounds boring; the study is anything but.

It's a guidebook for poorer countries that want to harness the energies of small entrepreneurs and put them to work at something they are fully capable of doing -- putting others to work.

The bank has plunged headlong into the task of comparing the ease or difficulty of doing business in 145 countries and found some startling -- and vital -- differences. Rich countries (and a few poor ones that are beginning to make big strides) make it easier for their citizens to do business. Poor ones throw up huge roadblocks that prevent ordinary folk from doing the kind of things we take for granted -- opening a shop, starting a small factory, or launching a small business that might grow.

It costs three times as much to enforce a contract in a poor country as in a rich one, double the time to get through a business insolvency or register a property and quadruple the cash to start a business.

In Canada, eighth on the ease-of-doing-business list, a would-be entrepreneur can set up a business by going through only two procedures that take three days to complete; the cost comes to about 1 per cent of average annual income.

In Brazil, however, a would-be entrepreneur must go through 17 separate procedures, requiring 152 days to complete, at a cost equal to almost 12 per cent of average income to start a business. Egypt requires only 13 steps taking 43 days, but the cost comes to 63 per cent of an average income. Moreover, the entrepreneur must put up capital equal to more than eight times average income, a requirement unknown in either Canada or Brazil.

The first edition of the report last year caused a stir when it first presented such data for so many nations. It built upon the pioneering work of Peruvian economist Hernando de Soto, first to chronicle barriers obstructing ordinary business folk. He said poor nations shoot themselves in the foot with heavy- and ham-handed regulation. A much lighter, but more intelligent, touch is needed.

"Being in the top 20 on ease of doing business doesn't mean zero regulation," the World Bank says. Indeed, more regulation is often needed to protect investors and debtors.

The report deals easily with the myth that social protection demands heavy business regulation. It's dead easy to do business in Norway, Sweden, Denmark and Finland, but "few would argue that they scrimp on social benefits relative to other countries."

The key is to expand the formal economy where rules are clear and honestly administered by officials who need no bribes to fill out a simple form, and to shrink the informal economy where entrepreneurial potential is limited. "You're making it easier for business -- and that's true," says Simeon Djankov, one of the report's authors. "But the main beneficiaries are not the business people themselves, but the people they hire."

The people who lose out are those not hired, and that group consists largely of women, the young (even those with good schooling) and the unskilled.

In Africa and Latin America, women account for three-quarters of workers in the informal economy, where pay is low and employee benefits such as health care and pensions are almost non-existent.

In the highly regulated formal economy, only one-third of workers are women. Why? Because it's so hard to fire people, employers want workers who are likely to stay on the job for a long time. Women have a habit of getting pregnant and want more time off to take care of family responsibilities, so employers don't want them.

Says Mr. Djankov: "The question about regulation is: Who does it protect?"

The report makes a devastating estimate of potential gains from regulatory reform. It split countries studied into four equal groups, ranked according to ease of doing business. In countries where it was least difficult to do business, the economy grew an average of 2.6 per cent a year over the past decade. At that rate, economies can double their size in 27 years.

But in countries that make it hardest for entrepreneurs to operate, the growth rate was only 1 per cent, a snail's pace that takes the doubling time to 70 years, roughly three generations. The World Bank went one step further. It figured the bottom quarter of countries on the list could lift their grow rates by 2.2 percentage points annually -- to 3.2 per cent a year --if they carried out a wide range of reforms.

That would cut the doubling time to 22 years. Quite a payoff!

blittle@globeandmail.ca

Growth potential

Additional annual growth, in %, from a hypothetical improvement to the top quartile in the ease of doing business.

Countries ranked by ease of doing business, quartiles

Additional growth....Actual growth

2.2%...................1%

1.4%...................1.3%

1.4%...................1.4%

-........................2.6%

SOURCE: WORLD BANK

 

 

In The News
 
Mutual Fund News
Mutual Funds: A Special Investigation
Mergers & Acquisitions
Income Trusts
Streetwise Insight
Economic Insight
Analysts and Investment Banking
 
Education Centre
 
Home Page 
Investment Strategies 
Tax Zone
Financial Planning
Estate and Insurance 
Financial Courses 
Canadian MoneySaver
Mutual Fund Insight
The Wise Investor 
Value Investing Guide 
Resources
 
Newswires
 
Canada NewsWire
CCN Matthews
Filing Services Canada
GlobeNewsWire
PR Newswire
Search the News
  Symbol*

 
Keyword(s)
  Industry* 

Source 
 The Globe and Mail
 Reuters
 Canadian Newswires
 U.S. Newswires
* Can only be used when searching The Globe and Mail and Newswires.