Analytics, Business, Economics, Modern EU

Growing literature shows that government action to create a sound, predictable regulatory environment is central to whether or not economies perform well and whether that performance is sustainable in the long run.

Business regulation can aid both to correct and prevent traditional types of market failures, such as negative externalities, incomplete markets and information asymmetries. However, regulation can also be used as an intervention when market transactions have led to socially unacceptable outcomes such as improper wealth distribution and inequality. Governments have the ability to design and enforce regulation to help ensure the existence of a level playing field for citizens and economic actors within a society.

Governments in many economies work together with the private sector to create a thriving business environment. One way of doing this is through implementing effective business regulation that ensures that all actors have fair and equal opportunities to participate in a competitive market. More specifically, effective business regulation can encourage firm creation and growth and minimize market distortions or failures.

Doing Business 2017 presents quantitative indicators on business regulation and the protection of property rights that can be compared across 190 economies. In 2005, it was possible to get the permits to start a business in less than 20 days in only 41 economies; in 2016, this was possible in 130 economies.

Private sector’s importance

Business regulations are a specific type of regulation that can encourage growth and protect individuals in the private sector. The role of the private sector is now almost universally recognized as a key driver of economic growth and development. Nearly 90% of employment (including formal and informal jobs) occurs within the private sector—this sector has abundant potential that should be harnessed. Governments can work together with the private sector to create a thriving business environment.

More specifically, effective business regulation can encourage firm start-up and growth as well as minimize the chance for market distortions or failures. Of course, a discussion of the benefits of business regulation must be accompanied by a parallel discussion of its costs.

Many businesses complain about the negative impacts of excessive regulation—or as it is more commonly known, “red tape.” The answer is not always more regulation; rather, the more effective answer advocated by Doing Business is smarter regulation, that aims to strike a balance between the need to facilitate the activities of the private sector while providing adequate safeguards for the interests of consumers and other social groups, argued Paul M. Romer, Chief Economist and Senior Vice President, The World Bank. 

A number of indicators to measure business’ efficiency

- Starting a business: procedures, time, cost and paid-in minimum capital to start a limited liability company;

- Dealing with construction permits: procedures, time and cost to complete all formalities to build a warehouse and the quality control and safety mechanisms in the construction permitting system;

- Getting electricity: procedures, time and cost to get connected to the electrical grid, the reliability of the electricity supply and the transparency of tariffs;

- Registering property: procedures, time and cost to transfer a property and the quality of the land administration system;

- Getting credit: movable collateral laws and credit information systems;

- Protecting minority investors: minority shareholders’ rights in related-party transactions and in corporate governance;

- Paying taxes: payments, time and total tax rate for a firm to comply with all tax regulations as well as post-filing processes;

- Trading across borders: time and cost to export the product of comparative advantage and import auto parts;

- Enforcing contracts: time and cost to resolve a commercial dispute and the quality of judicial processes;

- Resolving insolvency: time, cost, outcome and recovery rate for a commercial insolvency and the strength of the legal framework for insolvency;

- Labor market regulation: flexibility in employment regulation and aspects of job quality;

Some examples

-Procurement. Public procurement is the process of purchasing goods, services or works by the public sector from the private sector. Overall, public procurement represents on average 10 to 25% of GDP, making the procurement market a unique pool of business opportunities for the private sector. The EU estimates that public procurement amounts to between 10 and 25% of GDP globally, see: 

http://ec.europa.eu/trade/policy/accessing-markets/publicprocurement/.

The WTO estimates that public procurement represents between 10 and 15% of GDP, see https://www.wto.org/english/tratop_e/gproc_e/gproc_e.htm.

-Taxes. The paying taxes indicator set is expanded in 2017 to include postfiling processes—those processes that occur after a firm complies with its regular tax obligations. These include tax refunds, tax audits and tax appeals. In particular Doing Business measures the time it takes to get a value added tax (VAT) refund, deal with a simple mistake on a corporate income tax return that can potentially trigger an audit and good practices in administrative appeal processes.

The VAT refund is an integral component of a modern VAT system. The VAT has statutory incidence on the final consumer, not on businesses. According to the tax policy guidelines set out by the Organisation for Economic Co-operation and Development (OECD) a VAT system should be neutral and efficient.

Data show that OECD high-income economies process VAT refunds the most efficiently with an average of 14.4 weeks to issue a reimbursement (even including some economies where an audit is likely to be conducted).

-Gender. This year for the first time Doing Business adds gender components to three indicator sets included in the distance to frontier score and ease of doing business ranking. These are starting a business, registering property and enforcing contracts. Thus, twenty-three economies impose more procedures for women than men to start a business. Sixteen limit women’s ability to own, use and transfer property. And in 17 economies, the civil courts do not value a woman’s testimony the same way as a man’s.

- In the ease of doing business ranking the situation seems good for all the EU member states and the Baltics. Thus, Denmark is ranked 3^rd, Norway 6^th, the UK 7^th on the world list, while the US is on the 8^th.

Besides, positive ranking is registered among other Baltic Sea Area states: Sweden - 9, Estonia -12, Finland -13, Latvia -14, Germany -17, Lithuania - 21 and Poland -24. 

The Baltic States’ neighbors –Belarus and Russia are, correspondingly on 37 and 40^th place, while Ukraine is on the 80^th.

- Improvements in business. In 2015/16, 137 economies worldwide implemented 283 business regulatory reforms. This represents an increase of more than 20% compared to last year. In fact, the number of economies that implemented at least one reform increased from 122 to 137, indicating that there are more economies trying to improve in the areas measured in Doing Business. And 139 economies made an improvement in the distance to frontier score; doing business is now easier and less costly in those economies compared to last year.

With 49 reforms, starting a business continues to be the indicator set with the highest number of reforms followed by paying taxes with 46. Of the economies in Europe and Central Asia, 96% implemented at least one Doing Business reform.

Information on good practices. Showing where the many good practices identified by Doing Business have been adopted; in: http://www.doingbusiness.org/data/good-practice.

The indicators in the Report are used to analyze economic outcomes and identify what reforms of business regulation have worked, where and why. Data used in Doing Business 2017 are of June 2016.

Doing Business measures aspects of regulation affecting 11 areas of business life. Ten of these areas are included in this year’s ranking on the ease of doing business: - 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. However, the experts agree that there are three main indicators: starting a business, registering property and enforcing contracts to be important for corporate “survival”.  

The report also measures features of labor market regulation, which are shortly included in the text though not in the ranking.  

See the report and other years’ publications at: www.worldbank.org

Data on new business density (number of newly registered companies per 1,000 working-age people) for 136 economies; in:

http://www.doingbusiness.org/data/exploretopics/entrepreneurship. 

Reforms in business & economies in Europe and other parts of the world

Area of reforms         Number of reforms in 2015/16      Region with the highest share

         of reformers in 2015/16

Starting a business                               49                                    Middle East & North Africa

Dealing with construction permits         18                                    Europe & Central Asia

Getting electricity                                  21                                    Europe & Central Asia

Registering property                             22                                    Europe & Central Asia

Getting credit                                        34                                    East Asia & Pacific

Protecting minority investors                19                                     Europe & Central Asia

Paying taxes                                         46                                     Europe & Central Asia

Trading across borders                         32                                     South Asia

Enforcing contracts                               18                                     Europe & Central Asia

Resolving insolvency                             24                                     Sub-Saharan Africa

Case studies:

- Getting Electricity (Factors affecting the reliability of electricity supply);

- Getting Credit: Legal Rights (Two approaches to developing an integrated secured transactions regime) and Getting Credit: Credit Information (Casting a wide net to expand financial inclusion);  

- Protecting Minority Investors (Achieving sound corporate governance);  

- Paying Taxes (Assessing postfiling processes), and  

-Trading Across Borders (Technology gains in trade facilitation). 

Recent changes in the Baltic States

Out of 3 Baltic States only two were mentioned in the summaries on improving business regulations and/or reforms making it easier to do business:

Latvia:

-Getting credit. Latvia improved access to credit information by launching a private credit bureau. 

-Paying taxes. Latvia made paying taxes less complicated by improving its online systems for filing corporate income tax returns and mandatory labor contributions.

Lithuania:

-Getting electricity. Lithuania made getting electricity faster by introducing time limits on the utility to conduct necessary connection procedures and lowering the connection tariff. 

Examples from other world’s regions: administrative vs. legal approach

In Japan the government aims to improve the economy’s Doing Business ranking from 19 (among 31 OECD high-income economies) to the top three. To achieve this goal, some country’s experts in 2015 outlined 31 reform recommendations classified into six different categories depending on whether the reform was administrative or legal and on the level of potential political resistance.6 Proposed administrative changes with low political resistance include the electronic submission and processing of export and import documents, fast-track procedures for property transfers and the consolidation of bureaucratic processes at the Legal Affairs Office.

Administrative changes with medium political resistance focus on the reduction of the number of procedures to obtain a construction permit, development of specialized commercial courts and expansion of case management systems.

Recently some reform efforts have advanced beyond the geographic boundaries of individual states. In 2015, 10 economies came together to form the Association of Southeast Asian Nations (ASEAN) Economic Community, a single market economy for goods, services, capital and labor, which—once it is realized—could result in a market larger than the European Union or North America. This year the 10 ASEAN economies implemented a total of 31reforms across the Doing Business indicators—including six reforms in the area of paying taxes and six reforms in the area of getting credit.

Reference: World Bank. 2017. Doing Business 2017: Equal Opportunity for All. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0948-4.