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ECONOMY: Critics Question World Bank Calls for More Deregulation

Emad Mekay

WASHINGTON, Oct 7 2003 (IPS) - In an effort to convince developing countries to adopt further deregulation of their economies, the World Bank said Tuesday its research found that countries with the least regulation have the highest levels of business and are more likely to grow far faster than those which regulate heavily.

But critics of the bank say the Washington-based institution, which has traditionally worked to promote Western economic models in developing nations, was trying to weaken a strong alliance of developing countries that resisted demands of liberalisation and opening doors for Northern investments from rich nations during last month’s global trade talks in Cancun, Mexico.

The high-profile trade talks collapsed on Sep. 14 after the “Group of 22” of developing nations, backed by protest groups, banded together to demand that the World Trade Organisation make trade more just.

The group rejected pressure to further open up their markets for trade and investment form rich nations.

But the 230-page report from the bank, “Doing Business in 2004”, argues that poor countries will have to follow the lead of rich nations if they want to make their economies grow.

The report says that poor nations tend to regulate their businesses the most, and that such laws often hinder business activity, slow down growth and scare off foreign investments.

The bank’s survey, which collects and analyses data on more than 130 countries, assesses each country’s laws and regulations, with contributions from local consultants who assist entrepreneurs.

Areas covered include starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business.

“The report provides policy makers and the public with quantitative measures on business regulations’ data that will facilitate the reform efforts of governments,” said Michael Klein, World Bank vice president for Private Sector Development, in a press statement.

To prove their point, the report’s authors compare the time-taxing bureaucracy in the developing countries and those in rich nations to demonstrate that deregulation used in rich nations could be adopted with success in poor nations.

For example, the report says, resolving bankruptcy takes six months in Ireland but more than 11 years in India.

While businessmen incur no expense to register their operations in Denmark, they have to pay five times the national per capita income to do so in Cambodia. Registering a business can take an average of 203 days in Haiti, but only two days in Australia.

According to the report, a group of poor countries – Bolivia, Burkina Faso, Chad, Costa Rica, Guatemala, Mali, Mozambique, Paraguay, the Philippines and Venezuela – have the heaviest regulations.

A much wealthier group -Australia, Canada, Denmark, Hong Kong (China), Jamaica, the Netherlands, New Zealand, Singapore, Sweden, and the United Kingdom – regulate the least.

“Heavier regulation brings bad outcomes,” according to the report, whose authors say that too many laws produce greater inefficiency in public institutions, longer delays and higher cost and result in higher unemployment.

Regulation, the bank says, also causes increased corruption and less productivity and investment, but not better quality of private or public goods.

The report suggests that countries reduce the number of procedures to those that are truly necessary like statistical registration and tax and social security registration and use the latest technology to make the registration process electronic.

“These changes have produced excellent results in wealthy countries such as Canada and Singapore, in middle-income countries including Latvia and Mexico, and in poor countries including Honduras, Moldova, Pakistan, and Vietnam,” says the report.

But the bank’s critics say the institution’s advice contradicts what developing countries actually need, as demonstrated at the WTO talks in Cancun – their own pace.

“The Bank report’s authors must not have heard the cry of over 90 developing countries at the WTO summit in Cancun who explicitly said they did not want to undertake the deregulatory reforms called for in an Investment Agreement,” said Rick Rowden of Action Aid USA.

Bank officials insists that the survey shows that liberalisation works, no matter what some countries and economists say.

“By bringing concrete evidence to the debate, ‘Doing Business’ highlights the need for change and informs the development of new regulations and institutions,” said Simeon Djankov, one of the authors of the report.

But critics say that they doubt whether further deregulation is the correct path, accusing the bank of doing dirty work for rich nations, which often control international institutions.

“They (the World Bank) oftentimes use this (research) to promote the agenda for developed countries that are battering for things in the WTO,” said Aldo Caliari of the Washington-based Centre of Concern.

Caliari said that developing nations should not completely heed the advice in the report and do what is in their own interest.

“If you as a country have already liberalised certain sectors of your economy, you won’t have any incentive to oppose the inclusion of those rules in a multilateral system,” he said. “When you go to negotiations, you have already lost your main bargaining chips.”

Rowden of Action Aid faulted the report on another count – when rich countries were themselves developing over the last few centuries, they largely lacked the many rules and conditions now forced speedily on poor nations.

These include basics like universal suffrage, modern bureaucracies, enforcement of intellectual property rights laws, corporate governance laws and regulations such as bankruptcy laws and competition laws, and even central banks and securities regulations, he said.

Critics say that the rich countries developed these institutions much later in their industrialisation processes than many might think.

“In fact, the history suggests that these institutions were more the result of, rather than prerequisites for, successful industrialisation,” Rowden said.

The bank says it will continue to publish the report over the next two years, to expand its data and analysis to another half dozen topics. Topics in next year’s report include registering property, dealing with licenses and inspections, and protecting investors.

In 2006, the report will cover trading across borders, improving law and order, and paying taxes.