When a society creates business-friendly conditions, it unlocks opportunity for individuals and communities. But while many countries succeed in promoting such an environment, others fall far short. A new study from the World Bank looks at the numbers worldwide and explains the importance of economic freedom.
The bank, which has promoted economic development in low-income countries since the end of World War II, studied conditions in 190 countries. Researchers found, for example, that starting a business in the countries ranked in the bottom 50 takes nearly six times as long on average as in those in the top 20.
The point isn’t that governments should have no regulations. Protecting public health and safety are key societal needs, for example. But in setting economic regulations and procedures, officials and agencies should be mindful not to place needless obstacles in the way of business creation and expansion. Increasing the efficiency of government and businesses procedures also is important. Small and medium-sized businesses can especially benefit from such improvements in developing countries.
“Governments can foster market-oriented development and broad-based growth by creating rules that help businesses launch, hire and expand,” World Bank Group President David Malpass said. “Removing barriers facing entrepreneurs generates better jobs, more tax revenues and higher incomes, all of which are necessary to reduce poverty and raise living standards.”
Business-friendly environments “are associated with lower levels of poverty,” the bank’s report says, “and improved regulatory efficiency can stimulate entrepreneurship, startups, innovation, access to credit and investment.”
World Bank staff compiled information on regulation affecting 10 aspects of business operations: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency.
On the positive side, the bank found that during 2017-18, 115 countries implemented 294 measures to remove barriers to business operations.
Here are some of the report’s central findings:
» Credit bureaus and registries. Eighty-eight percent of countries studied now have processes to determine credit worthiness, up from 67% in 2006. The launch of a credit bureau in Kenya “helped to reduce interest rates, collateral and default rates for loans at commercial banks,” the report says. In India, “lenders in the microfinance industry observed 50% lower default rates as well as higher operational efficiencies.”
» Property rights and land registry. Ensuring property rights is a fundamental guidepost for a well-functioning economy, but many poor nations lack a comprehensive registry of privately held land within their borders. Only 3% of low-income nations, in fact, have a full listing of private land holdings.
» Tax filing. Online tax filing has enabled major new efficiencies for many businesses, the bank said. The number of countries with an online system for tax filing has increased from 43 in 2006 to 106 now. This change has helped the Czech Republic reduce the average time for filing and paying business taxes from 866 hours in 2006 to the current 230 hours.
» Business reorganization. Having procedures in place to address business insolvency “reduces failure rates of small and medium-size enterprises,” the World Bank notes, “and prevents the liquidation of insolvent but viable businesses.” More than 40 countries have strengthened their procedures on this issue since 2006 — a step the bank says boosts domestic investment by an average of about 3% annually.
“Economic freedom to do business goes hand in hand with economic development and a thriving private sector,” the World Bank concludes, “and these in turn underpin poverty elimination and the pursuit of shared prosperity.” These are enduring principles of benefit to all nations.