Doing Business Blog - The World Bank Group

Doing Business in India

Ryan Hahn — Tue, 30 Jun 2009 01:45:00 -0400

If you wanted to start a business in India, what city would you pick? The just-released report Doing Business in India 2009 has an answer: Ludhiana. Hyderabad and Bhubaneshwar would also be good choices. Why? These were ranked as the top three cities in India (out of 17 included in the ranking) in the overall ease of doing business.

While the annual Doing Business report ranks countries around the globe on the ease of doing business, the great variation within countries—especially large countries with a federal structure—means that it's also useful to rank the business environment of cities within a country. The Doing Business team started a separate line of subnational reports in 2006 that adapts DB methodology to the ranking of cities within a country. The Doing Business in India 2009 report pares back DB's standard line-up of 10 indicators to 7 to produce the ranking of cities shown above.

Here are a few more highlights from the report:

Substantial variation between cities in the cost of opening a business: "In Patna, Kolkata, and Bhubaneshwar, entrepreneurs spend less than 40% of income per capita to open a business; for those in Mumbai, the cost is almost double."
Big differences in registering property: "In Gurgaon, it takes only 26 days and 7.7% of the property value to register property, easier than in Guwahati, where it takes 84 days and 15.4% of the property value to do so."
A very high number of yearly tax payments in all cities (compared to China, Brazil, or the average for South Asia): "...the number of yearly payments varies from 59 in Ludhiana, Noida, Bengaluru, and Mumbai to 76 in Kochi and 78 in Hyderabad."

Smart Regulation: Key to Competitiveness

Charlotte Nan Jiang — Wed, 20 May 2009 09:56:07 -0400

"Smart Regulation" is a basic concept to many regulatory programs. Canada, for example, set up an External Advisory Committee on Smart Regulation (EASCR) in May 2003 to modernize the regulatory system and support an innovative and dynamic economy. United Kingdom established Better Regulation Executive (BRE) in May 2005 to challenge new legislation and simplify, improve and even scrap existing regulation. Singapore formed Smart Regulation Committee (SRC) in December 2005 to improve the knowledge, awareness and practice of regulation across the public service, too.

Smart regulation is not about regulating less. It is about governments working better to serve the interests of people: better protection, lower costs, faster and more predictable regulatory processes, less overlap and duplication, more rapid alignment with global best practices and greater transparency and accountability. It means "competitiveness" and "efficiency".

It is therefore not surprising that economies rank best in the Doing Business are among the most competitive around the globe. In fact, 19 out of the 25 best performing economies from Doing Business 2008 and 17 from Doing Business 2009 are ranked among the 25 most competitive economies in the Global Competitiveness Report 2008-2009.

Rank	Doing Business 08	Doing Business 09	Global Competitiveness 08-09
1	Singapore	Singapore	United States
2	New Zealand	New Zealand	Switzerland
3	United States	United States	Denmark
4	Hong Kong, China	Hong Kong, China	Sweden
5	Denmark	Denmark	Singapore
6	United Kingdom	United Kingdom	Finland
7	Canada	Ireland	Germany
8	Ireland	Canada	Netherlands
9	Australia	Australia	Japan
10	Iceland	Norway	Canada
11	Norway	Iceland	Hong Kong, China
12	Japan	Japan	United Kingdom
13	Finland	Thailand	Korea
14	Sweden	Finland	Austria
15	Thailand	Georgia	Norway
16	Switzerland	Saudi Arabia	France
17	Estonia	Sweden	Taiwan, China
18	Georgia	Bahrain	Australia
19	Belgium	Belgium	Belgium
20	Germany	Malaysia	Iceland
21	Netherlands	Switzerland	Malaysia
22	Latvia	Estonia	Ireland
23	Saudi Arabia	Korea	Israel
24	Malaysia	Mauritius	New Zealand
25	Austria	Germany	Luxembourg

Doing Business provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business - as they apply to domestic small and medium-size enterprises.

The Global Competitiveness Report measures competitiveness in institutions, infrastructure, macroeconomic stability, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market sophistication, technological readiness, market size, business sophistication and innovation.

Reformers Club 2009: Stimulating growth in difficult times

Ryan Hahn — Fri, 24 Apr 2009 15:34:17 -0400

For the third year running, the Doing Business team has celebrated the top Doing Business reformers from around the world. The Reformers Club this year includes the following countries: Azerbaijan, Albania, Kyrgyz Republic, Belarus, Senegal, Burkina Faso, Botswana, Colombia, Dominican Republic, and Egypt. Representatives of each country received awards at a ceremony held this Wednesday in Vienna.

While Doing Business reforms are a key part of the development agenda in normal times, the tough global macroeconomic environment has made them all that much more important. Colombian Vice Minister Ricardo Duarte explains why after accepting Colombia's award in the video below. Money quote: "In these difficult times, we are convinced that firms are the engine of our economy. They are the ones that create wealth, that create growth."

Singapore Tax Stimulus

Charlotte Nan Jiang — Fri, 24 Apr 2009 14:57:51 -0400

Singapore, the top-ranked economy on the ease of Doing Business for three years in a row, and the 5th out of 181 economies on Paying Taxes, announced a S$20.5 billion ($15 billion) Resilience Package to help businesses and workers on January 22, 2009.

The government will provide a 40% property tax rebate for industrial and commercial properties for 2009 and reduce the corporate income tax rate from 18% to 17% from 2010. It will also give a personal income tax rebate of 20% with a cap of S$2,000 for 2009.

An apparent result of the financial crisis is decreased access to credit. As project financing becomes more precious, the need to maximize returns is magnified. Tax rates and structures, being two important components of operating costs, have ready impacts on the cost models.

Today's businesses have increasingly voiced their taxation concerns. In a recent survey, substantially more respondents ranked tax exemptions, state or local incentives and corporate tax rate as “very important” or “important” for site decisions compared to last year. Now more than ever, countries with well-designed tax systems are able to help their businesses’ growth, and ultimately, overall investment and employment.

Germany Tax Stimulus

Charlotte Nan Jiang — Wed, 22 Apr 2009 06:00:00 -0400

On November 5, 2008, the German Federal Cabinet adopted Bundesministerium für Wirtschaft, Beschäftigungssicherung (German, English) to safeguard prospects for economic growth in Germany. According to the package, the federal government will introduce declining balance depreciation at 25% for movable assets for 2 years. In addition, special depreciation allowances for small and medium enterprises will also be temporarily expanded.

On February 13, 2009, a second stimulus package, Der Gesetzentwurf zur Sicherung von Beschäftigung und Stabilität in Deutschland, was approved by the German Bundestag which would provide further tax cuts.

Germany ranks the 25th out of 181 economies on the Ease of Doing Business 2009 and the 80th in Paying Taxes. In 2007, Germany reduced the corporate income tax from 25% to 15%, introduced straight-line depreciation for fixed assets and reduced trade tax while no longer allowing a deduction of the tax for corporate income tax.

Canada Tax Stimulus

Charlotte Nan Jiang — Tue, 21 Apr 2009 15:09:46 -0400

On March 12, 2009, the Canadian Bill C-10 received Royal Assent. The Bill is an essential part of the government’s Economic Action Plan, which aims to "stimulate economic growth, restore confidence and support Canadians and their families during the synchronized global recession".

The plan reduces the tax burden on Canadian individuals, families and businesses to provide C$20 billion in additional personal income tax relief over 2008-09 and the next five fiscal years. The government is also committed to "long-term business tax reductions with the general corporate tax rate reduced to 19% as of January 1, 2009".

Canada ranks the 8th out of 181 economies on the ease of Doing Business 2009 and the 28th in Paying Taxes. Just in 2007, Canada reduced the corporate income tax rate, abolished a surtax of 1.12% and increased the depreciation rate for various assets.

Singapore focuses on doing business in APEC

Sabine Hertveldt — Tue, 14 Apr 2009 06:00:00 -0400

Singapore, ranked 1 out of 181 economies on the ease of Doing Business, is hosting the upcoming Asia Pacific Economic Cooperation (APEC) Conference this spring. APEC covers 21 countries, and senior APEC officials are making resisting protectionism and accelerating economic integration key priorities for this year’s meeting.

One new feature of the conference is an initiative by Singapore to identify the top areas of regulatory barrier when doing business in economies of APEC. To achieve this, it is introducing an "Ease of Doing Business" survey, based on that of the Doing Business project. It aims to provide suggestions on the areas and types of reforms to regulations that businesses would like to see APEC governments embark on.

Singapore wants to highlight the results from the survey to the APEC governments to help improve the ease of doing business in the 21 member economies. Any business located in one of the 21 APEC countries can complete the survey through this link.

Australia Tax Stimulus

Charlotte Nan Jiang — Mon, 13 Apr 2009 18:05:00 -0400

On February 13, 2009, the Australian parliament approved an A$42.5 billion ($27.06 billion) fiscal stimulus plan designed to retain jobs and protect the economy from the effects of the economic crisis.

Tax bonus and cash payment measures are contained in two Bills: Tax Bonus for Working Australians Bill 2009, and Household Stimulus Package Bill 2009. They provide A$950 bonuses to each low- and middle-income household/individual. The payments will also go to single-income families that currently receive certain tax benefits for families, as well as to farmers, students, and unemployed workers intending to receive education or retraining.

Under the Appropriation (Nation Building and Jobs) Bill (No. 1) 2008-09, tax breaks are also planned for small and general businesses to provide support against loss of jobs.

Australia ranks the 9th out of 181 economies in the Ease of Doing Business 2009 and the 48th on the Paying Taxes indicator.

Argentina Tax Stimulus

Charlotte Nan Jiang — Mon, 13 Apr 2009 15:33:58 -0400

As the global economic crisis deepens, economies are introducing tax reforms as a direct stimulus. With a domestic focus, the impact of these plans may be felt across borders. In the next few blogs, I will present some recently implemented tax stimuli in five countries with the objective of offering a global perspective.

Argentina, which improved its Paying Taxes ranking by 12 in Doing Business 2009 compared to 2008, with more reforms now in the works with the objective of promoting employment, production and consumer confidence to counter an economic crisis.

On December 18, 2008, the Argentine National Congress passed Law 26.476. The Law encourages small and medium businesses to register informally paid workers by pardoning back taxes. Companies are only required to pay 50% of related labor taxes the first year and 75% the second year (Capítulo II. Articulo 16). The law also allows individuals and companies to repatriate capital to be invested in Argentina under a preferential tax rate of 1% to 8% (Titulo III. Articulo 27).

A Response to "The Rise of the Underground"

Patrick — Fri, 03 Apr 2009 15:26:41 -0400

A recent article in the WSJ, The Rise of the Underground touted itself with an interesting lede:

Economists have long thought the underground economy -- the vast, unregulated market encompassing everything from street vendors to unlicensed cab drivers -- was bad news for the world economy. Now it's taking on a new role as one of the last safe havens in a darkening financial climate, forcing analysts to rethink their views.

Apparently, early evidence of the impacts of the global financial crisis "GFC" suggests that the informal sector actually plays a valuable role in absorbing, at least in part, the most vulnerable to the GFC. Mr. Barta suggests that this is a) contrary to the classical view that the transition to formal employment is a key step towards sustainable economic growth and independence, and b) causing economists to reevaluate the informal sector.

We beg to differ on both fronts. Sure, the informal sector provides useful flexibility, doubtlessly more so in times of crisis. But the very reason that the informal sector is booming is its inherently low costs: it doesn’t pay taxes and rarely observes health and safety, labor or consumer protection standards.

Hence the emphasis on transitioning to a formal sector; those ‘costs’ provide valuable social benefits. ContraMr Barta, with the GFC eating up whatever surpluses developing countries may have had and reducing the pool of available donor funds, increasing formal sector participation is perhaps more important than ever.

The paradox is that the very reasons for which we prefer the formal sector are what encourages informality – it is more expensive to comply with all those standards, and especially to pay taxes, than not to. Further, Mr. Barta's picture of a resurgent informal sector in the developing world does remind us of a regrettably eternal truth in development: that those countries the most in need of economic growth, formal jobs and the other accouterments of a developed formal SME sector are often those least friendly to such businesses.

Famously, when Hernando de Soto tried to register an informal clothing business in Peru it took more than 100 days. No one can reasonably claim that anyone benefited from such delays, although in Peru today it still takes more than 50 days to do what in some countries takes barely two. It is hardly a surprise that Peru's informal economy was estimated in 2000 at 60% of GDP.

Fortunately, this raises a way of squaring the circle, at least partly. Now more than ever, countries with flourishing informal sectors would do well to consider their performance in Doing Business 2009 or Doing Business 2010 (forthcoming this September) and how they might, at often little cost and probably great gain, make the transition from the informal sector to the formal one a little easier.

Tajikistan, in Reform Mode

Cemile Hacibeyoglu — Thu, 02 Apr 2009 18:32:33 -0400

In the six-year history of Doing Business, it has become evident that indeed what gets measured gets done. Often, the Doing Business data stimulates debate among policymakers prompting them to address challenges in the regulatory environment in their countries. And policy-makers are often inspired by other reformers. Last year, Kyrgyzstan was the first Central Asian country to make it into the top 10 reformers’ list. This year, two of its neighbors – Kazakhstan and Tajikistan – are also in reform mode.

Earlier in March, a Doing Business reform advisory team visited Tajikistan to support the Government’s business climate reform efforts. Ranked 159th out of 181 economies on the ease of doing business – and last in the Eastern European and Central Asian (ECA) region – Tajikistan seems determined to improve its business climate this year, led by the State Committee on Investments and the President’s Office.

As one of the poorest countries in the ECA region with remittances from its diaspora constituting half its GDP, Tajikistan may at first glance not strike one as an obvious reformer. But its drive to improve the business climate and its consultations with its top-reformer neighbor Kyrgyzstan may indicate otherwise. In fact, there is no better time than the present to reform in Tajikistan. As a result of the financial crisis, a lot of Tajik labor migrants are expected to return to their home country, bringing back capital with them. With a successful reform agenda, Tajikistan may provide a unique opportunity for them to make a new life in a more favorable environment for business.

A Question for the President?

Dahlia Khalifa — Fri, 27 Mar 2009 14:52:38 -0400

If you have a question for World Bank President Robert Zoellick, who will be attending the G20 meetings in London next week, March 31 is your chance to ask. Reuters is collecting questions online, and Zoellick will be responding in a speech while in London next Tuesday. Just follow this link and add your questions to the comments section. (You can also use the #askwb tag on Twitter.)

Better Practice Comes to New York City Building Codes

Sabine Hertveldt — Fri, 27 Mar 2009 10:49:19 -0400

On July 1, 2008, Mayor Michael R. Bloomberg announced the launch of the new City of New York Construction Codes, the first modernization of the Building Code since 1968. The Building Code in New York City had not been updated for almost 40 years. Not anymore. The new Codes require the Building Department to revise the Codes every 3 years to incorporate new standards, technologies and materials. As of July 1, 2009, everyone is required to follow the new rules.

The new Codes are in line with national standards and will enhance building and construction safety through expanded requirements for fire protection, structural integrity, and job site accountability on all new construction projects.

New York follows other states in the United States, including California and the District of Columbia which adopted the 2008 District of Columbia Construction Code, raising the bar on energy efficiency, and California's green building codes dated July 2008, mandating recycled materials, water-efficient landscaping and a 15% increase in its already advanced energy efficiency requirements. In other words, reform of business regulations can inspire more reforms, even amongst regions within the same country.

Regulatory Reform – Lessons from the British BRE

Charlotte Nan Jiang — Wed, 18 Mar 2009 06:00:00 -0400

The past few years have shown incredible convergence in how many governments implement regulatory reforms. Just between June 2007 and June 2008, 113 economies introduced 239 reforms as recorded by Doing Business, the most recorded in a single year since the project started.

On February 24, I attended a regulatory reform session of the Financial and Private Sector Development Forum 2009, in which Jitinder Kohli, Chief Executive of Better Regulation Executive (BRE), shared with us his experience as BRE leads the regulatory reform agenda across the British government.

In his view, business does not prefer regulatory changes. While reducing administrative burdens matters, it is critical to address the flow of regulation. To achieve that, when policy-makers propose a new regulation, BRE works closely with them to assess all the options, both regulatory and non-regulatory, and determine whether the benefits justify the costs. In this way, it improves the quality of advice given to Ministers and encourages informed public debate.

Upon the approval of new regulations, BRE continues to make them simple for business to understand. Common Commencement Dates (CCDs) is one of the ways to keep business abreast of regulatory developments. It is a statement of forthcoming regulations that helps business to prepare for the impact of new or changed legislation. CCDs are announced on two dates a year only – 6 April and 1 October, which provides clarity and stability for business. In addition, e-mail alerts can be sent directly to business, notifying them of regulation changes.

Why Entrepreneurship Matters

Sylvia Solf — Mon, 16 Mar 2009 10:44:56 -0400

Whoever is interested in entrepreneurship should check out this week’s Economist to find an interesting report on the matter. The author demystifies some common misconceptions (e.g.everyone is young, it depends on Venture Capital, it has to change the world, among others) and assesses how the enthusiasm for entrepreneurship is holding up in times of crisis. Not so bad, apparently.

Some resources such as talent and office space are easier to find. That together with less competition in the long run allows newcomers to get their foot in the door. 85% of entrepreneurs in eight emerging markets surveyed for Endeavor indicated that they have been hit by the crisis; 88% thought that it would still get worse. But, they also foresaw that, on average, their businesses would grow by 31%, and the number of employees by 12%.

Yet, office space, availability of talent, and a change in competition is, of course, not everything....either are new great ideas. Looking around the globe, the author finds that cultural and structural differences matter. In some European countries, for example, the stigma of bankruptcy can be so strong that the risk of entrepreneurship might seem overpowering. The fact is that new ideas and entrepreneurship help moving economies forward. This is true at all times, but seems to be a particular source of hope in times of crisis.

So what can governments do? Encourage the daring. It starts by not discouraging or disheartening entrepreneurs before they even get started. Part of this is making business regulations transparent, effective and easy to comply with. Doing Business has been tracking some of those measures by governments over the years, and has just started working on this year’s update. The new Doing Business report to be published in September '09 will cover regulatory reforms in 182 countries in 10 areas from starting to closing a business between June '08 and May '09.

The results should be interesting. Some opine that most efforts will go into reforming insolvency legislation, for obvious reasons one might add. Tax reforms are another bet. But, some governments might also think a bit more medium-to long term, and aim to make life easier for companies so they can either survive now or new ones can emerge creating those needed jobs. We shall see. Stay tuned.

Doing Business - How Useful Are These Indicators Anyway?

Sylvia Solf — Thu, 05 Mar 2009 06:00:00 -0500

This was the big question during a sometimes heated panel discussion I recently attended in Miami. With a lawyer, an investor, and a government official present, one can imagine that the views varied. Juan Pablo Capello from Greenberg Traurig, who has advised many international investors, saw the indicators as quite limited as they focus mostly on local, small and medium size enterprises. In his view, sovereign ratings and legal certainly matter much more for foreign investors. Luis Manuel Kolster from GM countered that actually investors do look at tax rates and regulatory burden, but the decision to invest is also foremost driven by market size and cost. What I found most interesting was the government perspective, or should I say reformer perspective, by Liliana Rojas from the Colombian Ministry of Commerce. At the end of the day, it is governments that create and shape the regulatory environment for businesses. So, are they doing this in the sole hope of attracting sudden large foreign investment? She saw the indicators and rankings as a rather useful tool for benchmarking, informing reform agendas and tracking progress. The goal of these reforms? Promote and support local businesses and, in this way, aid job creation and growth. In the end, all participants agreed that, particularly nowadays, this is an important objective to have.

Reforming Outdated Commercial Laws

Stefka Slavova — Wed, 04 Mar 2009 06:00:00 -0500

Three weeks ago I visited El Salvador and Honduras to discuss different aspects of their reform program inspired by the Doing Business (DB) indicators. In San Salvador, representatives from Central American governments met in a two-day workshop to share successful experiences of regulatory reform and learn from each other.

Panama and the Dominican Republic sent participants as did Honduras, Guatemala and Nicaragua. Some of the participating countries – such as the host nation, Guatemala and Honduras – have been reforming for a while and are planning their next steps. The Dominican Republic was a top-10 reformer last year. Others – such as Nicaragua and Panama – are relative newcomers to the reform field. We will see how much they can and will get done.

One thing that gathered attention at the workshop was how El Salvador succeeded to amend its Commercial Code last year. This was interesting for all, not least because Central American countries have decades-old commercial codes. Take, for example, Honduras. Its Commercial Code dates back to 1950 – a totally different time from today’s economy. It was very timely to meet with the newly appointed Supreme Court of Honduras one day after the workshop to discuss precisely the changes needed to make the Honduran code more in line with needs of the economy today. Some of these have to do with what DB measures in Protecting Investors indicator (150th rank for Honduras last year). Disclosure requirements are minimal (1 out of 10 on the DB scale) and clearly needs to be strengthened. And rules on director liability and shareholders’ rights to sue company directors for prejudicial transactions that cause damages to the company are weak.

Notably, according to local legal experts, when the Honduran Commercial Code came into being in the 1950s, family-owned businesses dominated the economy. Family businesses are still very common today. Still, nearly everyone I met in Honduras agreed that changes are sorely needed. A lot of litigation has sprung up precisely due to the lack of transparency and clear rules of liability of company insiders. Ironically, most of these lawsuits are allegedly among heirs to the family-owned firms of the past. The opinion is that Honduras would do well to review and amend its Commercial Code. The El Salvador experience will come in handy.

China: Tax Reform and the Financial Crisis

Charlotte Nan Jiang — Tue, 03 Mar 2009 16:26:48 -0500

The financial crisis has brought unprecedented challenges to the global economy, and with it a rising demand for regulatory efficiencies.

As a response to current challenges to China’s domestic economy, the Chinese State Administration of Taxation (SAT) issued a notice announcing that the Value Added Tax (VAT) refund rate for export of textiles and garments would be increased from 14% to 15%, to take effect from 1 February.

The obvious result? As estimated by Jingming Bai, Deputy Director of the Chinese Research Institute for Fiscal Science, increasing the VAT refund rate by 1 percentage point would result in US$731 million for Chinese companies.

What’s more, it would save thousands of jobs in the Chinese textiles industry, where the majority of workers are women.

While many countries are coming up with stimulus packages to fight the crisis, tax reforms are an obvious element of fiscal incentives and are indeed expected to be effective at stimulating the economy. In their recent publication, “Tax Incentives as Crisis Response”, Simeon Djankov and Georgi Angelov have outlined three benefits of reforming tax regulations, based on their studies of payroll taxes and social security contributions.

In their view, “First, it is not subject to corruption: the government is not in a position to distribute largesse as under a fiscal expansion program. Second, it works as a direct stimulus – every business and worker in the formal economy gets the benefit. Third, tax reform is quick to implement and can have immediate effects.”

As Doing Business measures the tax burdens and administrative aspects of tax compliance annually, we are looking forward to studying the upcoming tax reforms being implemented to fight this crisis. Most interesting to many is the actual relief that the tax incentives will provide toward alleviating the pain of the financial stress.

Should competition agencies care about the informal sector?

Rita Ramalho — Thu, 26 Feb 2009 06:00:00 -0500

Actually, yes. Informal firms can operate in the same product or geographic markets as formal firms and therefore affect the competition level. So what can competition agencies do to address the informal sector?

The OECD recently held a forum on competition that gathered delegates from over 100 competition agencies. One of the sessions had the purpose of increasing the knowledge about the role of the informal sector for competition.

First, can informality be good for competition? On one hand unregistered firms may be unfair competitors to the formally registered companies because informal firms can gain price advantage by not paying taxes and not complying with regulations. Here the competition agencies have very limited power, since the enforcement of these regulations is often outside their jurisdiction. Addressing these non-compliances are normally the job of tax authorities and other regulation agencies. On the other hand, informal firms can increase the degree of competition in a market by reducing the market share of formal firms. Competition agencies are in fact taking informal firms when computing market shares. The challenge in this case is to measure the market share of informal firms. Competition agencies are being creative about it. For instance, in Bulgaria the competition agency use the purchases of cement (i.e., the main input of the industry being analyzed) to assess the market share of informal firms in the ready-mix concrete market.

Second, are informal firms subject to uncompetitive practices? In some case yes. Informal firms tend to be small with limited market power. These firms often sell to formal ones that can be large players in the market having monopsony power. Since the sellers are not registered firms, the competition agencies have limited to defend them again the buyer with market power.

Competition agencies need to take into account the informal sector when assessing market concentration. However, the informal sector is only a second best solution for increasing competition. Ideally, competition should be increased through formal firms that tend to be more productive, provide better quality products to consumers and give better benefits to workers. Doing Business reforms by promoting formalization can also have a role in increasing fair competition.

Want Higher Productivity? Reduce Entry Costs

Simeon Djankov — Mon, 23 Feb 2009 10:36:59 -0500

Want higher productivity? Reduce entry costs. This is the main finding in a new paper by Levon Barseghyan (Cornell) and Ricardo DeCecio (the Fedreal Reserve). Using the regulation of entry data from Djankov et al (2002), they find that the productivity of countries with entry costs in the lowest decile is 3.43 times higher than that in countries in the highest decile.

What is the mechanism for this difference? The authors find that, "The mechanism through which entry costs influence productivity is that countries with high entry barriers have lower business density and higher variance of employment distribution across firms."

This is an exciting result as the link between regulation and productivity is under-researched. So is the link between regulation and economic growth. But as growth is affected by so many things, studying the possible channels through which the ease of doing business results in higher growth is the way to go. Barseghyan and DeCecio provide evidence for one such channel: from entry costs to entrepreneurship to lower productivity and hence retarded growth.

This result is always of interest, but particularly now when politicians around the world are looking for ways to stop the decline in income caused by the unfolding crisis.