DOING BUSINESS 2009 - JOHN J. HADDAD, Ph.D.

vi Doing Business 2009• Doing Business does not cover allregulations, or all regulatory goals,in any economy. As economies andtechnology advance, more areasof economic activity are beingregulated. For example, the EuropeanUnion’s body of laws (acquis) hasnow grown to no fewer than 14,500rule sets. Doing Business measuresregulation affecting just 10 phasesof a company’s life cycle, through 10specific sets of indicators.Based on standardized casescenariosDoing Business indicators are built on thebasis of standardized case scenarios withspecific assumptions, such as the businessbeing located in the largest businesscity of the economy. Economic indicatorscommonly make limiting assumptionsof this kind. Inflation statistics, for example,are often based on prices of consumergoods in a few urban areas.Such assumptions allow global coverageand enhance comparability. Butthey come at the expense of generality.Business regulation and its enforcementdiffer across an economy, particularly infederal states and large economies. Andof course the challenges and opportunitiesof the largest business city—whetherMumbai or São Paulo, Nuku’alofa orNassau—vary greatly across economies.Recognizing governments’ interestin such variation, Doing Business hascomplemented its global indicators withsubnational studies in such economies asBrazil, China, Mexico, Nigeria, the Philippinesand the Russian Federation. 5 DoingBusiness has also begun a work programfocusing on small island states. 6In areas where regulation is complexand highly differentiated, the standardizedcase used to construct the DoingBusiness indicator needs to be carefullydefined. Where relevant, the standardizedcase assumes a limited liabilitycompany. This choice is in part empirical:private, limited liability companiesare the most prevalent business form inmost economies around the world. Thechoice also reflects one focus of DoingBusiness: expanding opportunities forentrepreneurship. Investors are encouragedto venture into business when potentiallosses are limited to their capitalparticipation.Focused on the formal sectorIn constructing the indicators, DoingBusiness assumes that entrepreneurs areknowledgeable about all regulations inplace and comply with them. In practice,entrepreneurs may spend considerabletime finding out where to go and whatdocuments to submit. Or they may avoidlegally required procedures altogether—by not registering for social security, forexample.Where regulation is particularlyonerous, levels of informality are higher.Informality comes at a cost: firms inthe informal sector typically grow moreslowly, have poorer access to credit andemploy fewer workers—and their workersremain outside the protections oflabor law. 7 Doing Business measures oneset of factors that help explain the occurrenceof informality and give policymakers insights into potential areas ofreform. Gaining a fuller understandingof the broader business environment,and a broader perspective on policy challenges,requires combining insights fromDoing Business with data from othersources, such as the World Bank EnterpriseSurveys. 8Why this focusDoing Business functions as a kind ofcholesterol test for the regulatory environmentfor domestic businesses. A cholesteroltest does not tell us everythingabout the state of our health. But it doesmeasure something important for ourhealth. And it puts us on watch to changebehaviors in ways that will improve notonly our cholesterol rating but also ouroverall health.One way to test whether Doing Businessserves as a proxy for the broaderbusiness environment and for competitivenessis to look at correlations betweenthe Doing Business rankings andother major economic benchmarks. Theindicator set closest to Doing Businessin what it measures is the Organisationfor Economic Co-operation and Development’sindicators of product marketregulation; the correlation here is 0.80.The World Economic Forum’s GlobalCompetitiveness Index and IMD’s WorldCompetitiveness Yearbook are broader inscope, but these too are strongly correlatedwith Doing Business (0.80 and 0.76,respectively). These correlations suggestthat where peace and macroeconomicstability are present, domestic businessregulation makes an important differencein economic competitiveness.A bigger question is whether theissues on which Doing Business focusesmatter for development and poverty reduction.The World Bank study Voices ofthe Poor asked 60,000 poor people aroundthe world how they thought they mightescape poverty. 9 The answers were unequivocal:women and men alike pin theirhopes on income from their own businessor wages earned in employment. Enablinggrowth—and ensuring that poor peoplecan participate in its benefits—requiresan environment where new entrants withdrive and good ideas, regardless of theirgender or ethnic origin, can get started inbusiness and where firms can invest andgrow, generating more jobs.Small and medium-size enterprisesare key drivers of competition, growthand job creation, particularly in developingcountries. But in these economies upto 80% of economic activity takes placein the informal sector. Firms may be preventedfrom entering the formal sectorby excessive bureaucracy and regulation.Where regulation is burdensomeand competition limited, success tendsto depend more on whom you knowthan on what you can do. But whereregulation is transparent, efficient andimplemented in a simple way, it becomeseasier for any aspiring entrepreneurs,regardless of their connections, to operatewithin the rule of law and to benefitfrom the opportunities and protectionsthat the law provides.In this sense Doing Business values(c) The International Bank for Reconstruction and Development / The World Bank