We tend to take things for granted. Going out and starting a business here in the United States is simple – it only takes a few days and a fraction of your income. You just need to have an idea and a work ethic to make your entrepreneurial potential a reality. Yet, we often forget that it is not so in other parts of the world. And it is not just a different reality – it’s a very different reality.
It takes about a month to get a business started in Tanzania. In Saudi Arabia, the minimal capital requirement is over 1,000% of income per capita. In Nicaragua, the cost of starting a business is 131% of income per capita.
These problems don’t go away once you have your business registered and you are ready to work. In Moldova, you have to go through 37 different procedures to enforce a contract. In Uganda, dealing with licenses costs over 800% of per capita income. In Argentina, firing costs constitute 139 weeks of salary.
These and other numbers are available in the new 2007 edition of the Doing Business report, published by the World Bank. Taking a closer look at business practices in 175 countries, the report highlights the importance of a good business climate in generating private sector activity that leads to job and wealth creation.
Some question the validity of the numbers available in the Database, but what’s undisputable and so well-documented is that barriers to doing business are real. Those barriers stifle private sector activity and undermine efforts to bring prosperity to people around the world.
One of the first people who started talking about these issues publicly several decades ago is a now world-famous Peruvian economist, Hernando de Soto. De Soto went out and tried to start his own company in Peru, only to discover just how many resources businesspeople spend on dealing with red tape and overregulation. He saw that businesses get pushed into the informal sector because the incentives were not there for them to become part of the formal economy – it was just too costly.
So de Soto set out to remove those barriers – reduce the number of days it takes to open a business, reduce the costs of contract enforcement, improve access to credit, and others – by challenging the Peruvian lawmakers and the private sector to work together to improve the quality of regulations.
CIPE has been involved in similar initiatives since its inception. In fact, Hernando de Soto was the first person to walk through our doors when we first opened in the early 1980s.
What we’ve seen in country after country is that barriers to doing business have a negative effect on investment flows, job creation, incomes, and social stability. Countries that have moved towards more liberal economic environments have reaped the fruits of economic growth, and those that have instead chose to choke private enterprise have been finding themselves left out of the global economic system.
We hear more and more in regards to economies in all parts of the world, but especially in the Middle East and North Africa region, that tens of millions of new jobs have to be created in the coming decades to accommodate all of the new entrants into the labor force. We are seeing that good education in many countries no longer guarantees a job – there are simply not enough of them to go around.
The answer to many of these problems is painstakingly simple. Reduce the barriers to doing business and let people create their own futures, start their own companies, create jobs for themselves and others, and feed the economic engine of growth and prosperity for decades to come. While there are undoubtedly some other components of success, this one, perhaps, is the most important.
By now you should ask – “How can this be done?” The answer to this question is not as simple. Every country presents its own sets of challenges in improving the legal and regulatory environment. Yet, at the core of it lies the ability of policymakers to work together with the business community to create rules and regulations that make market economies possible but don’t overregulate to the point where doing business becomes a burden.
It’s rare for information to drive policy reform. But the Doing Business Database may be one of those cases where pointing out the obvious can lead to real economic opportunities. You can check it out on the World Bank website.