When Marzenna Weresa asked her students at the Warsaw School of Economics in Poland what they wanted to do after graduation, most said they wanted to work for a transnational corporation. That was in 2005. But now, “more and more want to start their own businesses,” Professor Weresa says, an enthusiasm she attributes to the country’s changing business landscape.
The business environment in Poland improved the most out of 185 economies in 2011-2012, according to a recent World Bank report called Doing Business 2013. The report, which has been published annually for a decade, takes note of reforms that create more jobs and support economic growth.
Doing Business found that 108 economies implemented 201 regulatory reforms over the past year, and that the difficulty of doing business has declined globally since 2005. Reforms this year have included everything from eliminating minimum capital requirements to start a business in Rwanda to setting up 24-hour “customs clearance zones” along the border in Georgia, making it easier for traders to complete the customs process in one stop.
“This is progress,” says Donald Lessard, professor of international management and engineering systems at MIT’s Sloan Business School. But, Mr. Lessard notes, there is still plenty of work to be done,especially in the area of helping businesses build ties to the global economy.
Regulations like “rule of law and the ease of establishing a business are important basic conditions for business growth,” says Lessard. Without laws on the books – that are also enforced – it’s easy for corruption and extraofficial business dealings to take place, he says. Regulations – like Poland's move to digitize records, thus making it easier for businesses to register property, or Costa Rica's new electronic system for municipal taxes which eases compliance – can help build healthy business environments.
Back in Poland, which moved up seven spots in this year’s Doing Business rankings to No. 55, the change Weresa saw in her students’ budding entrepreneurial interests could “reflect regulatory changes in Poland that protect intellectual property and make it more inviting to start a new business,” she says.
Indeed, Eastern Europe, along with Central Asia, surpassed East Asia and the Pacific as the second-most business-friendly region this year, according to Doing Business. OECD high-income countries are considered the most business friendly, although Singapore was ranked No. 1 for the seventh year in a row. It sustained this ranking even though it made no new regulatory changes this year.
Countries in Central Asia and Eastern Europe have implemented 397 institutional and regulatory reforms since 2005, including Latvia's 2009 reform which created a way for businesses to settle insolvency issues outside of court, decreasing pressure on the legal system. The consistency of these changes could, in part, be attributed to reforms expected of countries that have entered or are trying to enter the European Union.
Though the results of the World Bank’s study were largely positive, not all regions are moving forward. In past reports, the Middle East and North Africa showed consistent improvement and efforts in terms of business regulations. But that momentum slowed after the Arab uprisings that spread across the region in the spring of 2011.
And even in regions where some countries are making big leaps in easing regulation, variations can be great. Over the past eight years, Colombia, for example, implemented 25 regulatory and institutional reforms, like the “antipaperwork” law in 2005. This law eliminated close to 80 steps required for starting a business in Colombia, and inhibited government agencies from introducing new processes. Meanwhile, neighboring Venezuela’s business landscape “deteriorated as measures added to the complexity and cost of regulatory processes,” according to Doing Business.
Doing Business found that governments tend to focus on regulatory processes reforms – like the cost of starting a business or getting connected to electricity – over modifications to legal institutions, such as the framework for getting credit or protecting investors. The report notes just a little more than twice as many process reforms were implemented since 2005 than legal reforms.
Part of the reason a premium is placed on changes to regulatory processes is the impact burdensome rules can have on businesses. “If it takes 77 days and 15 permits to establish a business, or if costs are very high to become regularized,” then starting a business in the official economy is unattractive, Lessard says.
“The main issue is making sure firms thrive…. By emphasizing the ease of doing business, [governments] are saying ‘we want you to succeed’ as opposed to ‘we’ll tolerate you,’” he says.