1 Doingbusiness Indicators How and when to use for investment climate reform programs James Emery, PEP Africa/IFC Maputo March 21, 2006

2 Doingbusiness has helped generate reforms l Simpler business entry in Brazil, Bulgaria, El Salvador, Ethiopia, Indonesia, Peru, Serbia and Montenegro, Yemen l Faster court enforcement in Jordan, Serbia and Montenegro l New credit registries in Afghanistan, Chengdu (China), Russia l Fewer licenses and approvals required in Georgia and Poland

3 Regulation of Entry Labor Regulations Contract Enforcement Credit Markets Credit information Collateral Bankruptcy Corporate Governance Property Registration Updates of ‘04 topics Business Licensing Taxation Trade Infrastructure Transport Customs Standards Updates of ‘04 and ‘ Doingbusiness indicators

4 Example 1: Business Registration l Doing Business effective when indicators capture process to be reformed l Know the process and how the indicators are constructed l Doing Business can aid in reform design, highlighting constraints l Doing Business indicators useful as outcome measures for reform program l Independent l Updated annually l Benchmarked against competition/neighbors

5 Reform Design: Identifying Binding Constraints 1. Obtain certification of unique name 2. Open a provisional bank account 3. Incorporate through public deed 4. Register provisionally with the Commercial Registry 5. Publish articles in official gazette 6. Apply for operation license 7. Inspection 8. Declare activity at tax department 9. Register for VAT 10. Declare activity at Employment center 11. Register with Social Security 12. Subscribe worker’s compensation insurance 13. Final commercial registration Source: Doing Business database Procedures Time (Number of days) Cost (% of GNI per capita)

6 Monitoring Reform Outcomes Time reduced from 153 days to 113 Procedures reduced from 14 to

7 Example 2: Licensing l For comparative purposes, DB focuses on construction sector licensing l DB data on Licensing and Business Startup can mask sectoral licensing proliferation l DB doesn’t highlight licensing as priority l Doesn’t capture pervasiveness of sectoral licensing accross sectors l Doesn’t provide design/ monitoring/ benchmarking relevance for general issue of sectoral licensing l DB looking at including additional sectors

8 MozKen 54 15Dealing with licenses 7013Getting credit 88100Paying Taxes 94113Registering property Trading across borders 11342Hiring and firing workers Closing a business 11582Enforcing contracts 13993Starting a business Kenya and Mozambique’s DB Rankings: Licensing the least of problems

9 Licensing in Kenya l Over 600 licenses; many redundant l Others serve no regulatory purpose l Frequent and rigid renewal requirements Multiple and ineffective inspections (e.g. firms employ FT staff to handle only licenses) l Proliferation of licenses as off budget revenue generators A similar situation in Mozambique?

10 Addressing Licensing Reform l FIAS Administrative barriers study highlighted issues l Additional advisory work to inventory and triage licenses l Led to government adopting Guillotine reform program l Similar issues identified in Mozambique following simplification of business registration

11 l Surveys provide firm perceptions of importance of constraints l Encompass broader range of investment climate determinants l Provide differential impact by sector and firm size, other attributes l Incorporate qualitative factors – corruption and service delivery l Enterprise surveys to be completed for most countries and then updated every 3-4 years Using Enterprise Surveys with Doingbusiness

12 l Effectiveness of benchmarking l Governments orient reform programs around improving rankings l Malawi with Presidential push establishing working groups around 5 DB indicators l Burkina Faso WB/IFC program oriented to improve rankings l Nigeria State level initiative l Visible progress measured annually builds reform momentum Why aggregate? Creates pressure for reform

13 l Simple average (what is currently used) l Assign statistical weights l principal components l unobserved components l Assign economic weights l enterprise surveys l economic outcomes’ analysis Which weights to use?

14 How to weight? Principal components vs. equal weights Ease of Doing Business ranking Principal components ranking Correlation = 99.7%

15 Ease of Doing Business ranking Unobserved components ranking Correlation = 98.2% How to weight? Unobserved components vs. equal weights

16 How to weight? Using enterprise surveys Implied weights for Serbia, 2004

17 How to weight? Economic analysis of outcomes Value added Size of informal sector Unemployment Ease of Starting a Business11.8%10.9%9.4% Ease of Dealing with licenses10.8%11.8%8.0% Ease of Hiring and Firing5.9%7.1%17.9% Ease of Registering Property10.9%10.6%13.7% Ease of Getting Credit10.6%8.9%8.6% Ease of Protecting Investors4.4%5.1%0% Ease of Paying Taxes8.7%12.0%13.1% Ease of Trading13.5%12.1%6.2% Ease of Enforcing Contracts12.2%11.8%13.0% Ease of Closing a Business11.3%9.7%10.1% Note: Weights are the regression coefficients in regressions of value added, the size of the informal sector and employment on the “ease of” indicators. Higher weights indicate that the “ease of” indicators exhibit a stronger relationship with value added, the size of the informal sector or unemployment respectively. Weights implied by regression analysis

18 l DoingBusiness provides excellent tools to: l Catalyze reform (transparent rankings) l Prioritize areas of reform l Benchmark w/other countries l Monitor progress annually l But only if constraint adequately captured by Doing Business: licensing and financial sector l Beware the indicator trap: Ethiopia business registration l Use enterprise surveys as complement l Deeper analysis and recommendations often required l Use rankings as overall progress monitor, also to keep pace with reform elsewhere Conclusions

19 Charting a course for reform in Mozambique Ease of Doing Business Starting a Business Dealing with licenses Hiring and Firing Workers Registering Property Paying Taxes Trading Across Borders Enforcing Contracts Cost and quality of electricity-- Cost in Kwh (US Cents)4322 Number of power outages/month Transportation cost (US $)-- Beira/Maputo 20 foot container (by land) Beira/Maputo 20 foot container (by sea) Value added per worker (US$)