J. Chaaban The Need for Good Governance Reform Jad Chaaban Lebanese Economic Association Strengthening Private Sector Resilience under Conflict: Lessons Learned and the Way Forward November 2008

J. Chaaban Main messages Impediments to smooth business operations are pervasive in the Arab countries This talk will focus on Governance as related to corruption: Bribes to “get things done” are a widespread phenomenon Bribing can be the result of a self-enforcing mechanism, where the Government has little room to intervene –Corruption as “greasing the wheel” Public sector wages and corporate taxes play an important role in limiting bribery Institutional reform should be implemented to increase the efficiency of the public sector and strengthen private sector resilience

J. Chaaban Reform in business regulations is good for job creation Source: World Bank Investment Climate Assessment, 2006 Following reforms to improve business registration: - Business registration went up by 18.8% from 1998 to 2004 in Pakistan; - Business entry increased by 28% in Vietnam; - Georgia reduced the minimum capital required to start a new business from 2,000 lari to 200 ($85). Business registrations rose by 20% between 2005 and 2006.

J. Chaaban Growth and improved economic performance reduce the risk of civil war Source: Collier and Hoeffler, 2002.

J. Chaaban Corruption is everywhere: –'hongbao' in China –'baksheesh' in Arab countries –'matabiche' in central Africa –'propina' in Latin America, –'pots de vin' in France –'mazzetta' in Italy –or just plain bribery. On average, 35% of firms in developing countries pay bribes to get things done As high as 50% in Lebanon and 75% in Algeria Business regulations impose a high burden on companies, and this exacerbates the negative impact of conflict

J. Chaaban IraqLebanonPalestine Middle East & North AfricaOECD Ease of Doing Business Rank Enforcing Contracts Procedures (number) Time (days) Cost (% of debt) Closing a Business Time (years) no practice Cost (% of estate) no practice22no practice Recovery rate (cents on the dollar) Doing business legislation in Iraq, Lebanon and Palestine is highly inefficient with regards to investment under uncertainty Source: World Bank Doing Business Database

J. Chaaban Source: World Bank Investment Climate Assessment, 2006

J. Chaaban CountriesNumber of procedures Delay in days Cost (%income) Minimum capital required (%income) Corruption index Egypt Iraq Jordan , Kuwait Lebanon Oman Saudi Arabia , Sudan Syria , Tunisia Palestine , United Arab Emirates Yemen , Arab mean World mean OECD Canada Source: World Bank Doing Business and Governance databases, 2005

J. Chaaban

J. Chaaban It seems that firms prefer to: –Evade taxes: thus low revenues to finance public sector reforms –Pay bribes: poor entrepreneurs who cannot afford paying bribes are excluded Sales amount reported by a typical firm for tax purposes (%) Parallel ‘market’ for business registration transactions Solutions: Streamlining of procedures Incentive pay for public servants Higher income taxes on firms: more accountability

J. Chaaban

Liquidation/ exit Establishment or incorporation Ongoing operations Establishment of a business should be inexpensive and the process kept at a minimum. Minimum capital requirements should be at a minimum Compliance should be straightforward and inexpensive. Labor law should not discourage hiring of foreign personnel Customs formalities inexpensive and speedy Liquidation cost at a minimum. Voluntary liquidation should be a speedy matter. Provide financial instruments to help firms in times of crisis Recommendations

J. Chaaban Thank you