Mavericks Don't Always Mean Reform
WASHINGTON -- Regulatory reform is not a very sexy issue. But when you realize that rules and regulations in some places such as Latin America are so onerous that up to 90 percent of business owners choose to stay in the underground economy -- and that in turn means no health care coverage for workers, little access to credit, poor job security, all the while depriving the state of much needed income -- regulatory reform takes on a whole new light.
The good news in the World Bank's annual Doing Business report released this week is that most developing regions around the world are figuring out how to make it easier for a business to begin operations, pay taxes and obtain credit. The bad news is that Latin America continues to lag behind. As a region, it is one of the least active reformers in the world.
Eastern Europe and Central Asia stand out as the top performers.
According to the report, 26 of its 28 countries have implemented more than
25 percent of the total reforms worldwide. Meanwhile, only half of the countries in Latin America and the Caribbean made any sort of pro-business reform between June 2007 and June 2008.
Fourteen Latin American countries did nothing to make it easier for local companies to operate, and Bolivia and Venezuela adopted specific measures that make it harder. A complicated bankruptcy procedure is now the only option for distressed companies in Bolivia, while Venezuela has reintroduced a tax on financial transactions.
Since 2003, the Doing Business report has tracked reforms that affect small and medium-size enterprises by using benchmarks such as reductions in the capital required to start a business, or procedures to register online or to obtain a construction permit. Over the years, Latin American countries have consistently underperformed even when reform could have been achieved by a simple executive order and without legislative action.
There are some significant exceptions. Colombia was the top Latin American reformer this past year and was among the top 10 in the world for a second year in a row. The Dominican Republic also joined the list of top 10 reformers, a notable achievement for a nation in the Caribbean, where inaction in this area is the norm.
While it is difficult to say why such a big percentage of the region resists reform, two of the authors of Doing Business, Svetlana Bagaudinova and Sylvia Solf, noted that in the more dynamic regions, there is a healthy competition among countries to do better than the next and a willingness to learn from the best practices of others.
Many Eastern European nations are motivated by the prospects of joining the European Union, while there is nothing anywhere near comparable in the Americas. With the exception of Colombia, which studied the "Celtic tiger" model of Ireland, and El Salvador and Guatemala, which dispatched officials to Colombia, few countries in the region have made learning from others about business reform a part of their economic agenda.
Perhaps Latin America also harbors so many poor performers because there is no urgency among many of them to reform. Particularly among the commodity-rich countries, worrying about the local business climate for small and medium-size enterprises seems less pressing.
That could easily be the case with Azerbaijan, with an economy 80 percent dependent on oil and gas. But it is the world's top business regulation reformer this year. According to Bagaudinova, the former Soviet republic has begun to diversify its economy by making it easier for other businesses to begin, grow and, hopefully, flourish. Among its many reforms, Azerbaijan created a one-stop bureaucratic shop for registering companies, cutting the number of procedures from 13 to six and reducing in half the time required to complete them.
But don't expect to see Bolivia, Ecuador and Venezuela, the worst performers in Latin America, pay much heed to Azerbaijan or other top reformers. Instead of dispatching officials to learn about how governments encourage business creation, you are more likely to find those countries'
unconventional leaders busy strengthening ties with Russia or Iran, nations that don't exactly stand out for their sound economic policies.
Indeed, while being a maverick may be popular at this end of the continent these days, Latin America could use leaders more willing to follow in the footsteps of top reformers. After all, the region appears to have benefited little from those so determined to do things differently that they neglect to do things better.