How to be your own boss - in 215 highly regulated days

A new report by the World Bank shows the maze of red tape and corruption that entrepreneurs must navigate before they even stock a shelf.

Fernando Rezende always wanted to be his own boss. So last spring, after answering a newspaper ad for an auto-repair shop for sale in Rio de Janeiro, he quit his job as a mechanic, sold his car, and withdrew his life savings from the bank.

Seven months later, he is the proud owner of MasterCar Mechanic.

Sort of.

The title of Mr. Rezende's garage is still in the name of the previous proprietor. And the courts have yet to determine, among other things, if former employees are owed money, if there are any outstanding lawsuits, and if all the old bills have been paid.

"This was a lot more difficult than I thought," he says. "The bureaucracy is such that seven months on I am still not legally the owner."

Yet Rezende's bureaucratic slog could look downright breezy to budding entrepreneurs in other parts of the world. In Congo, for example, a mere 215 days and nine years' salary is all it takes to open a small business. And in Haiti, it's 203 days and twice the average annual wage.

This is if nothing else goes wrong - such as the four-month strike by Brazilian social-security and bank workers that delayed Rezende's entire process.

Starting a small business is a leap of faith, even under the best conditions. One-third of small businesses in the United States close within the first two years. But in the world's poorest countries, governments aren't doing their minicapitalists any favors. Filling out the right forms and applying for all the necessary licenses can take months. Fees can cost more than most people earn in a decade. And the pressure to grease palms to avoid a mountain of red tape lurks around every corner.

The result is a recipe for poverty and graft: fewer jobs, a smaller tax base, less money for governments to spend on social programs, and a larger underground, or informal, economy.

These are the findings of an ambitious study by the World Bank, called "Doing Business in 2004," a first-of-its-kind look at what it takes to open and operate small businesses around the world. And the results are sure to ruffle feathers. That's because the 200-page report puts the blame for poverty squarely on the shoulders of the poor countries themselves. At a time when developing nations pin their plight on the inequities of globalization, prohibitive tariffs that freeze them out of US and European markets, and price-distorting handouts to the world's wealthiest farmers, the World Bank says the silver bullet to eradicating poverty lies right within the poor countries' own borders.

The solution: Do less. Much less.

"One of the main messages of our report is that many governments have put a lot of effort and a lot of resources into regulating businesses," says Simeon Djankov, who headed the team that produced the report. "What they should be doing is simplifying."

Run a maze before opening a spa

Simplifying is an idea that Mikhail Saguirian can get behind. After putting together a business plan and securing funds to start a fitness club in suburban Moscow, it took almost a year of navigating the maze of government offices and a phalanx of inspectors before he could swing open the doors.

Even now, six months after the ribbon cutting, Mr. Saguirian still doesn't have all the documents and permissions he needs to operate legally.

"Just a week ago we obtained the medical certificate, enabling us to run our spa center," which offers massages and herbal health treatments, he says.

And yet Saguirian has it better than most, at least according to the World Bank report. In 2002, it took 19 steps - from checking for name uniqueness to notarizing documents - and 51 days to form a limited-liability company in Russia. In 2003, it was down to 12 steps and 29 days. Russia, Turkey, El Salvador, and Pakistan, are among a handful of countries simplifying procedures.

Many others have done little to simplify regulation, and are even reversing past improvements. "In Peru, we reduced the time required to create a private company from 200 days to two days, in 1990," says Peruvian economist Hernando de Soto, whose 1986 book, "The Other Path," first drew the connection between red tape and poverty. "From everything we can see, we are now up again to 120 days."

That figure - or in the case of Indonesia, 168 days; or Zimbabwe, 122 days - is directly tied to a country's poverty level, according to the report. While statistics rarely tell the whole story - wars, educational opportunities, and geopolitical disadvantages play their part - the most-regulated countries are a who's who of world paupers. Congo (13 steps, 215 days) is among the 10 poorest countries in the world, according to the CIA's World Factbook. Sierra Leone (12 times the average annual salary in fees) is in the bottom five. Even Brazil, with its well-educated population and abundant natural resources, is 94th in the world in average GDP; it takes 15 steps and five months to start operating there.

This contrasts with the industrialized world. In Canada, the ninth wealthiest nation per capita in the world, it takes two steps - on the Internet - to form a limited-liability company. In the US, No. 2 in the world, the five steps take four days, and only one step - registration - costs money ($210). A business in Denmark, No. 11 in the world, can open in four days - at no cost.

Red tape is also a problem even after the "open for business" sign goes up. The report details onerous rules for hiring and firing workers, securing credit, and going through bankruptcy. Such rules invite abuse. "I tried to work without giving bribes, but it was hopeless," Saguirian says. "When you try to do things by the proper legal route, all sorts of obstacles suddenly appear."

Saguirian says that when he filed the paperwork to establish water service, a "mistake" was found. His water was shut off for a month. "Can you imagine a fitness club with no water?" he asks.

He says that even now, officials demand "revisions" to his business plan. "Sometimes they suggest that friendly cooperation would improve if I provide free memberships to them, or host parties for them and their friends," he says. "It's a constant problem."

Regulation's ties to corruption

Indeed, the most regulated countries tend to be the most corrupt. The more hoops that entrepreneurs have to jump through, the report says, the more likely they'll have to pay for the privilege. Haiti, Angola, and Zimbabwe, three of the most-regulated countries, are high on the list of watchdog Transparency International's corruption list. New Zealand, Denmark, and Singapore are the least regulated and the least corrupt.

Some countries are reducing the instances in which a business applicant has to interact with a person, thus reducing the opportunity for abuse. India, South Korea, and Chile have taken steps to computerize the process.

While Russians still have to deal with corruption, things are improving. In the past, small businesses would need a krysha - a gang paid to protect the business from other criminals and racketeers - to keep things running smoothly. But now, Saguirian says, "It's possible to exist nowadays without some big guys with guns standing behind you."

Mr. Djankov says the report is already spurring change. His team has fielded calls from around the world and is conducting meetings with business leaders in Brazil, Nigeria, and other parts of Africa. He says these meetings help educate the business communities, so when they petition their governments for change, they have concrete figures and can offer solutions.

The World Bank, Djankov adds, recognizes that certain regulation is crucial for consumer, environmental, and workplace protection, but wants to end unnecessary rules, like having to notarize hundreds of documents. And development experts note that while reducing red tape will help the little guy, other policy changes are needed as well.

"You need public policy that deals with the problem of poor access to credit. You need public policy that ensures people acquire ... the skills that they need to start a business," says Nancy Birdsall, president of the Center for Global Development a Washington-based group that focuses on reducing poverty. "That might include subsidizing the training of small entrepreneurs who would then provide training [to others]."

A major obstacle that Djankov and his team have encountered is that many governments are wary of implementing changes that come out of Washington. Latin American officials complain that in the 1990s they went too far with "Washington consensus" reforms - curbing inflation and privatizing industries - and got burned. Djankov counters, to looks of incredulity, that they didn't go far enough.

In fact, the "Doing Business" report ( default.aspx) - which compared domestically owned businesses with fewer than 50 employees operating in the capital cities of 131 countries - is part of an evolution at the World Bank. Economists there found that recommendations made to Latin America and Eastern Europe throughout the 1990s did not achieve expected results. While big changes had taken place at the macroeconomic level, there was stasis where the rubber met the road.

"If somebody from, say, Bolivia [18 steps, 67 days] comes and says, 'Well, we followed exactly the Washington consensus, and it doesn't work in Bolivia,'" says Djankov, "the right response is, 'Look at your regulatory environment for small businesses - it's nothing like what the Washington consensus tells you you have to have.' "

He also takes issue with countries that say they are too poor to implement these reforms. He argues that not only are they cost-free, but they free up money for education and healthcare.

Whatever the cost savings, Saguirian sees simplification as the key to getting his country's economy cooking. "There is a real need in Russia to streamline the process," he says, "So new products or services can be launched more rapidly."

Interview/Hernando De Soto

His mission: fewer barriers

Since the publication of his 1986 book, "The Other Path," Hernando De Soto has been at the forefront of the move to cut red tape in the developing world. His work was the basis of much of the World Bank report.

What are some of the positive changes you have tracked since "The Other Path" was published?

Many of the measures we put into Peruvian legislation ... have not only worked in Peru, but they have had influence abroad. There is no doubt today ... that it is much easier to do business than it was before.

We know that various countries in the world, from South Africa to Mexico, have taken up the reforms and adapted them to their own national contexts. There are almost 30 countries using our administrative simplification process.

Is there one thing you would recommend to a head of state who calls saying he or she has this problem?

The first thing we recommend is measuring the cost of doing business. We focus specifically on the situation of the poorest sector of the population, which is the majority.... The only real incentive to motivate governments to make changes against vested interests is to show that these interests actually harm the majority of the population, which, poor or not, are the ones who elect politicians.... The next thing is to make sure that changes affect the majority of constituents. If you're going to pass deregulation that helps only big companies you are not going to get many brownie points.

The other important thing is to find out the ultimate causes of these roadblocks so they won't happen again. Removing bad regulations and corrupt procedures is like cleaning the windshield of your car: You can't do it just once; you have to continuously keep it clean. It is not enough to do away with norms, because many countries produce so many norms and regulations that things silt up again.

A head of state might want to reform, but how does he go about it?

You need ... procedures that force executive branches to inform people on what they are doing, allowing for public scrutiny, and allowing people who don't agree to challenge it. All developed countries have these mechanisms. The Swiss, for example, have of system of sharing draft legislation with key sectors in society.... The British have a system of consulting directly with politicians on regulations, which they call surgery, and the United States has comment and notice periods, sunset laws, etc. The fact that they all have different mechanisms shows that they have to be customized to the situation in each country.

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