Doing Business in 2006: Lack of Regulatory Reforms Killing Business in Africa
Simeon Djankov, Manager, Monitoring, Analysis and Policy Unit at the World Bank.

Doing Business in 2006: Lack of Regulatory Reforms Killing Business in Africa

Lack of regulatory reforms continues to weaken business in poor countries, says the World Bank.

By Gerald Rulekere
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First published: December 5, 2005

If Ugandans have been wondering why the government is levying more and higher taxes, a new report will tell them that Uganda is just among other African countries that have been found to levy the highest business taxes in the world.

These taxes have been found to have adverse effects on disadvantaged members of society, especially women as consumers and as small-scale entrepreneurs.

Apart from traders’ complaints of increased import taxes and regulations under the East African Customs Union, many Ugandans are burning under a regime of increased airtime, fuel and license taxes, which have led to increase in prices of many products.

The Doing Business in 2006: Creating Jobs report shows that such high taxes are behind the high youth unemployment rates. Simeon Djankov, Manager, Monitoring, Analysis and Policy Unit at the World Bank, is the lead author of the report.

The report released by the World Bank Group in mid September 2005 shows that on average, 62 percent of gross profits in many African countries are taxed away. These high taxes create incentives to evade, driving many firms into the underground economy, and do not translate to higher revenues for governments.

For example, business taxes in Mauritania are so high that evading 20 percent of them would increase a company’s gross profit by as much as 60 percent.

As if that is not enough, the report says that many African nations continue to thwart small and medium businesses with heavy legal burdens and piecemeal reforms, which complicate doing business. This finding compares with the performance of Eastern Europe, the fastest reforming region in the world, which is aggressively courting entrepreneurs with far-reaching reforms that streamline business regulations and taxes.

The report cosponsored by the World Bank and the International Finance Corporation, the private sector arm of the World Bank Group, finds that such reforms, while often simple, can create many new jobs.

"Jobs are a priority for every country, and especially the poorest countries. Doing more to improve regulation and help entrepreneurs is key to creating more jobs--and more growth. It is also a key to fighting poverty. Women, who make up three quarters of the work force in some developing economies, will be big beneficiaries. So will young people looking for their first job. The past year's diverse range of successful reformers - from Serbia to Rwanda - are showing the way forward. We can all learn from their experience," a news release sent to us quotes Paul Wolfowitz, President of the World Bank Group as saying.

The annual report, which for the first time provides a global ranking of 155 nations on key business regulations and reforms, finds that African nations impose the most regulatory obstacles on entrepreneurs and have been the slowest reformers over the past year. Meanwhile, every country in Eastern Europe improved at least one aspect of the business environment.

"Many African countries that desperately need new enterprises and jobs risk falling even further behind other countries that are simplifying regulation and making their investment climates more business friendly," said Michael Klein, World Bank/IFC Vice President for Private Sector Development and IFC Chief Economist.

The report tracks a set of regulatory indicators related to business startup, operation, trade, payment of taxes, and closure by measuring the time and cost associated with various government requirements. It does not track variables such as macroeconomic policy, quality of infrastructure, currency volatility, investor perceptions, or crime rates.

What the report does show is how easy it is to do business in a particular country. For example, an entrepreneur in Mozambique must undergo 14 separate procedures taking 153 days to register a new business. In Sierra Leone, if all business taxes were paid, they would eat up 164 percent of a company’s gross profits. In Burundi, it takes 55 signatures and 124 days from the time imported goods arrive in ports until they reach the factory gate. Uganda is not among those countries reviewed in the report.

Overall, European nations were the most active in enacting reforms. The top 12 reformers in the past year, in order, were Serbia and Montenegro, Georgia, Vietnam, Slovakia, Germany, Egypt, Finland, Romania, Latvia, Pakistan, Rwanda, and the Netherlands.

However, the authors of the study did note exceptions in Africa. Rwanda is among the biggest reformers in the past year, with reforms of the courts, customs procedures, and upgrading the credit registry. Mauritius also reformed in several areas and is among the countries with the most business-friendly conditions, as is South Africa. Yet for every three African countries that improved business regulations, another one made them more costly.

Click here to listen Simeon Djankov's speech:
Doing Business in 2006: Creating Jobs BOOK FORUM
Monday, November 28, 2005

Some of the reforms in African countries in the past year:

  • Mozambique cut the property transfer tax from 10 to 2.4 percent of the property value, the largest cost reduction in the world.
  • Kenya and Mauritius improved credit information sharing by amending their banking acts. This makes it easier for lenders to evaluate creditworthiness.
  • Ghana, Senegal, and Tanzania revamped their tax codes and eased tax burdens on businesses.
  • Rwanda abolished mandatory pre-shipment inspections. Cameroon set time limits on going through customs, reducing delays. Mauritius introduced risk analysis for inspections, also reducing delays at the customs office.
  • In Mauritania, the Nouakchott port now operates around the clock, compared with only 60 hours a week previously.
  • Burundi introduced a new summary procedure for debt recovery and allowed private bailiffs to operate, reducing delays in the courts.
  • Rwanda created specialized court chambers for business and tax matters, reducing court delays.

Not all reforms were business-friendly:

  • Madagascar increased the minimum capital requirement for starting a new business to $5,350, or 25 times the average annual income.
  • Chad increased notary fees, and transfer and registration taxes to raise the total cost of registering property from an already steep 17 percent to 22 percent of the property value.

Doing Business in 2006 updates the work of last year’s report in seven sets of business environment indicators: starting a business, hiring and firing workers, enforcing contracts, registering property, getting credit, protecting investors, and closing a business. It expands the research to 155 countries and adds three new indicators, dealing with business licenses, trading across borders, and paying taxes.

The World Bank statement says the new indicators in this year’s report further reinforce the overwhelming need for reform, especially in poor countries like Uganda.

The report also shows that reforming the administrative costs of trading can remove significant obstacles to exporting and importing. Contrary to popular belief, customs paperwork and other red tape (often called "soft infrastructure") cause the most delays for exporting and importing firms. Less than a quarter of the delays are caused by problems with "hard infrastructure" such as poor ports or roads.

“In Ethiopia, exporters have to get 33 signatures before their goods reach the port of exit. For manufacturers in Africa, the administrative burdens of trading can pose larger costs than tariffs and quotas. In Nigeria, for example, administrative costs can account for as much as 18 percent of the value of exports,” the report says.

The top 30 economies in the world in terms of the report’s ease-of-doing-business index, in order, are New Zealand, Singapore, the United States, Canada, Norway, Australia, Hong Kong/China, Denmark, the United Kingdom, Japan, Ireland, Iceland, Finland, Sweden, Lithuania, Estonia, Switzerland, Belgium, Germany, Thailand, Malaysia, Puerto Rico, Mauritius, the Netherlands, Chile, Latvia, Korea, South Africa, Israel, and Spain.

Other African countries with high ranks are Namibia (33), Botswana (40), Zambia (67) and Kenya (68). Nine of the 10 countries with lowest rank on this report’s ease-of-doing-business indicators are African: the Democratic Republic of Congo, Burkina Faso, Central African Republic, Chad, Sudan, Niger, Togo, Congo Republic, and Mali.

The report notes that all the top countries regulate businesses, but they do so in less costly and burdensome ways. The Nordic countries, all of which are on the top 30 list, do not regulate too little. Instead, they have simple regulations that allow businesses to be productive and focus intervention where it counts—protecting property rights and providing social services.

Just 8 percent of economic activity in Nordic countries occurs in unregistered (informal sector) businesses. The reason is that regulations are simple to comply with and businesses receive excellent public services for what they pay in taxes. For example, Denmark has the world’s best infrastructure. Norway ranks highest on human development indicators, with Sweden right behind it.

"In the Nordic countries, as well as the other top 30, reformers do not have to choose between making it easy to do business and providing social protection. They can do both," said Simeon Djankov, an author of the report.

The Doing Business project is based on the efforts of more than 3,500 local experts – business consultants, lawyers, accountants, government officials, and leading academics around the world, who provided methodological support and review.

BOOK FORUM Monday, November 28, 2005
Doing Business 2005: Poor Nations Struggle To Reduce Red Tape For Business, Miss Large Growth Opportunities

By Gerald Rulekere
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First published: December 5, 2005
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Gerald Rulekere is a Journalist and member of Ultimate Media Consult. He has written and published extensively on business and gender issues and been writing for Ultimate Media Consult (U) Ltd for the last two years. A professional and graduate journalist, Rulekere is always looking for an opportunity to better his writing especially for international media.