WHAT with the Gleneagles summit and last week’s special summit at the United Nations, this has been a boom year for the bureaucrats and non- governmental organisations whose business is international aid. The coming years should be boom times, too, for the politicians and bureaucrats on the receiving end of sharply increased aid, coupled with the cancellation of old debt.
We are promised that, from now on, the extra money will actually reach the poor, instead of somehow sticking to the palms of those in power over them. Between now and 2015, there is to be an international blitz on providing the poorest with better education, health, water, roads and public services.
All these are undeniably public goods, however doubtful it is that the targets that figure in the UN’s Millennium Development Goals bear any relation to reality. But to “make poverty history” (and to pay for these services in the long run), something else is needed, something that has barely figured in this welfare-centred debate. That something is individual earning power. Kurt Hoffmann, director of the Shell Foundation, puts it well: “Fundamentally and unequivocally, poverty is about a lack of cash. Virtually everyone, including the very poor in Africa, lives in a cash economy. And cash comes from having a job.”
Creating hundreds of millions of jobs ought to be right at the centre of this debate, not at its margins. Those jobs will not materialise without policies that make it easier for businesses to start up, obtain credit, respond flexibly to market conditions, retain enough of their profits to expand and market their products without undue obstruction.
Doing Business in 2006 is a dry-as-dust title; but the compelling, often disturbing stories it tells about the destructiveness of red tape, and about the power of simple, inexpensive reforms to transform people’s prospects, are of vastly greater practical use than the collected sermons of Jeffrey Sachs.
This is the third such comparative survey published by the World Bank and International Finance Corporation, and now it covers 155 countries, from Afghanistan to Zimbabwe. It measures the costs and difficulty of starting up a business, of hiring and firing, getting credit, contract enforcement and property rights, paying taxes and coping with customs. And it does a great deal to explain why the poorest countries continue to fall further behind.
Since 2003, for example, developed countries have cut the time that it takes to start a business from 29 days to 19 — and to less than a week in North America, Australia and parts of Scandinavia. In poor countries, where every permit is liable to involve a bribe, the procedures are so complicated that it still takes an average of 56 days. Starting a business, as the authors say, is “a leap of faith” that governments should be encouraging, yet the dicier the regime, the higher the hurdles.
Start-up costs in Zimbabwe are 14 times annual average income; in Syria the minimum capital requirement, which is zero in 46 countries, is $60,832 (£33,400), 51 times average annual Syrian incomes. By contrast, Afghanistan has replaced 28 separate procedures with a one-stop shop, cutting the time taken from 90 days to seven and creating 120,000 new jobs in the formal sector. No doubt some NGOs are appalled by this “what is good for Afghan Carpets Inc is good for Afghanistan ” approach, but promoting private enterprise offers workers a better deal than handicraft workshops reliant on charitable subsidy.
Inflexible labour markets are a familiar European story, but it might astonish the “race to the bottom” anti-globalisation crowd to learn that regulation of hiring, firing and working hours is vastly stricter in Burkina Faso, famine-struck Niger and Sierra Leone, or that a businessman in Benin has to pay far higher social taxes than his counterpart in Denmark. The result, of course, is pernicious; rigid regulations inhibit the development of sound businesses and confine job opportunities to the entirely unprotected informal sector that accounts for 70 per cent of developing country jobs. And large informal sectors mean lower revenues for governments and a precarious existence for workers and their families.
Lack of access to credit is a serious problem, and it is closely related to the difficulty and expense of property registration. China has so many restrictions on what assets can be counted as collateral that, the report estimates, its businesses hold more than $2,000 billion in dead capital, “enough to build another Great Wall”. Yet establishing electronic credit registries is effective and cheap; they can be set up for around $2 million (again, Afghanistan has done it).
Taxation is another headache. The revived interest in flat corporate taxes derives from the absurd and burdensome complexity of taxation policies. The report cites the example of Belarus, where a business is liable to pay 11 taxes, involving 113 separate payments to three agencies, all on paper and taking 1,188 hours a year to complete, for a grand total of 122 per cent of gross profit. The choice is between evasion and going under.
Half a dozen countries levy taxes that exceed profits, and poor countries in general tend to levy the highest taxes on business — on the ground that they need them to cover fiscal deficits and fund public services. There is, the report says, no evidence that this works. “Higher rates typically do not raise revenue . . . they push business into the informal economy.”
Lower tax burdens do stimulate economies, the report finds; a 1 per cent cut in corporate tax rates typically effects a 3.7 per cent increase in the number of firms, and up to 1.1 per cent higher employment. More interestingly, in the context of the flat tax debate, it argues that simplifying business taxation may be as important as the rate levied. After Russia cut rates by a third in 2001, its tax revenues increased by an annual 14 per cent; Latvia’s revenues jumped by 37 per cent; but countries that cut taxes while retaining exemptions, so that taxation retained its complexity, have been less successful. Income tax is typically only a quarter of the business tax burden; Hungary’s is only 16 per cent of net profit, but when 15 other taxes are added in, the final bill is 57 per cent of net profit.
In 90 per cent of the countries surveyed, firms ranked tax administration among the top five obstacles to doing business and in some, dealing with the bureaucracy was considered a bigger problem than the actual rates, not least because the more complex the system, the more likely it is that “informal payments” will be needed to smooth the path. Ask any Italian businessman.
As a rule of thumb, the heavier the regulatory burden, the larger the black economy and the bleaker are poor people’s chances of escaping poverty. The theme of this report is streamline, simplify. It is by no means addressed only to the Wretched of the Earth. To learn that of the 30 least business-friendly countries in the world, 23 are in Sub-Saharan Africa is no surprise. But did you know that Germany ranks below Lithuania, France below Fiji, and Italy below Bangladesh? Or that in Europe, only Denmark and Britain, in that order, make it into the top ten?
Doing Business in 2006
www.worldbank.org
