RED TAPE AND LESS GREEN
October 6, 2004
Developing countries are heavily overburdened with regulation. This burden prevents economic development and the creation of wealth, says a new study from the World Bank.
The researchers point out that many of the impediments to the creation of a business in developing countries are virtually nonexistent in rich countries. For example:
- In Haiti, it takes 203 days to register a new company -- 201 days longer than in Australia.
- In Sierra Leone, it costs more than 12 times an average annual income to start a company -- compared with nothing in Denmark.
- In Nigeria, recording a property sale involves 21 procedures, takes 274 days, and official fees amount to 27 percent of the value of the transaction.
- In contrast, the process only takes a day and costs only 2.5 percent of the price of the property in Norway.
These regulations force most businesses into the underground economy, causing negative outcomes. These firms cannot use their unofficial property as collateral, thus limiting credit markets. They must expend resources avoiding detection and bribing officials -- encouraging graft.
Even rules intended to help the general populace are damaging. For example, in Turkey, women who marry are allowed a year to decide whether to quit their jobs and get a generous stipend package if they do. Accordingly, employers hire men -- only 16 percent of Turkish women have formal jobs.
The study argues that scrapping these rules should be relatively painless and largely beneficial:
- The authors estimate that the benefit of reforms are 25 times the costs.
- If the worst-regulated countries joined the best-regulated countries, they would boost their annual growth rate by 2.2 percentage points.
Source: "Measure first, then cut -- The Global business environment," Economist, September 11, 2004; based upon: "Doing Business in 2005," World Bank, Oxford Press, September 2004.
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