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ECONOMY: Bank Urges More Deregulation, Critics Hear Same Old Tune

Emad Mekay

WASHINGTON, Sep 8 2004 (IPS) - âÇ The World Bank said Wednesday that poor countries will have to follow the lead of rich nations in knocking down regulations facing businesses if they want to make their economies grow.

The advice came in a report called "Doing Business in 2005: Removing Obstacles to Growth", which says that poor nations tend to regulate their businesses the most, and that such laws often slow down growth and scare off foreign investment.

"Poor countries that desperately need new enterprises and jobs risk falling even further behind rich ones who are simplifying regulation and making their investment climates more business friendly," said Michael Klein, World Bank vice president and the chief economist of the Bank’s private sector arm, the International Finance Corporation (IFC).

But critics of the Washington-based institution say it continues to peddle advice that has proven disastrous for economies in Latin America and Africa..

According to the report, Slovakia and Colombia were most successful in improving their investment climates over the past year. The Bank said they created electronic one-stop shops for new businesses, reduced regulatory delays by weeks, improved credit registries, and made it easy to fire and hire workers.

The report said that the top 20 economies in terms of ease of doing business are New Zealand, the United States, Singapore, Hong Kong/China, Australia, Norway, the United Kingdom, Canada, Sweden, Japan, Switzerland, Denmark, the Netherlands, Finland, Ireland, Belgium, Lithuania, Slovakia, Botswana, and Thailand.

The report found that on average, it takes a business in a rich nation six procedures, eight percent of income per capita, and 27 days to get started; in a poor or lower-middle-income economy, the same process takes 11 procedures, 122 percent of income per capita, and 59 days.

In more than a dozen poor countries, registering a new business takes more than 100 days, said the report, which covers 145 countries.

It is the second year that the World Bank has issued rankings based on five sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business. It also added two new indicators to the five categories from last year: registering property and protecting investors.

Simeon Djankov, an author of the report, told reporters Wednesday that the purpose of the report is to give policymakers a tool for measuring regulatory performance in comparison to other countries and to learn "from best practices globally".

The report also follows a standard line from the World Bank that economic liberalisation and opening up local markets will come with large payoffs.

The report estimates that an improvement from the bottom to the top quarter of countries in the ease of doing business is associated with an additional 2.2 percentage points in annual economic growth. For example, Turkey and France each saw new business registration increase by 18 percent after their governments reduced the time and cost of starting a business last year.

It takes less than six months to go through bankruptcy proceedings in Ireland and Japan, but more than 10 years in Brazil and India.

It costs less than one percent of a person’s assets to resolve bankruptcy in Finland, the Netherlands, Norway, and Singapore – but nearly half their assets in Chad, Panama, Macedonia, Venezuela, Serbia and Montenegro, and Sierra Leone, says the report.

Bank officials who spoke to the press Wednesday said that their report proved that heavy regulation and weak property rights exclude the poor – especially women and younger people – from doing business.

"Does cumbersome business regulation matter? Yes, and particularly for poor people," said the report.

"Heavy regulation not only fails to protect women, young people, and the poor – those it was intended to serve – but often harms them," said Caralee McLiesh, an author of the report.

But analysts monitoring the World Bank say that it still is trying to promote an economic theory that may not be fit for all. They point to the fact that rich countries were themselves developing over the last few centuries; they largely lacked the many rules and conditions now forced speedily on poor nations.

Critics say that the rich countries developed such institutions as bankruptcy laws and competition laws, and even central banks and securities regulations, much later in their industrialisation processes than many might think..

They also refer to the experience of Latin American countries, and some African countries, who, despite following the advice of the World Bank and its sister institution, the International Monetary Fund, grew sluggishly under those economic plans.

Latin American economies grew by 80 percent from 1960 to 1979, but by just 11 percent from 1980 to 1999, when they started following the advice of the Bank and the IMF. In the last four years, growth has dropped to one percent.

"So we are having another lost decade here," said Mark Weisbrot, co-director of the Centre for Economic and Policy Research in Washington. "And this is in a 25-year period of growth failure. I think it’s very doubtful that regulation contributed to this. And if you do not have growth, you cannot do much about jobs or poverty or any other economic or social problems."

Weisbrot said that some regulations were sometimes unnecessary but added that the Bank may be looking at the wrong priorities, especially in the case of Latin American countries.

"I do not think that anybody would allege that regulations have increased in this 25-year period of failure as opposed to the prior period. So clearly, this isn’t the main problem. It could be a minor problem in some cases."

Weisbrot said that policies imposed on poor nations by the two institutions and the Group of Seven most industrialised countries were more at fault for failed growth rates.

"If you try to explain why these economies have barely grown over the past 25 years I think that the Bank should look at the failures of macro-economic polices especially fiscal policy, interest rates, trade and industrial policy and other elements of liberalisation and deregulation," he said. "Any of those is likely to show more significance than some sort of over-regulation."