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The Donor Committee for Enterprise Development
www.Enterprise-Development.org
Reforming the Business Environment:
Current Thinking and Future Opportunities
Thematic Overview of the Papers presented at
the Cairo Conference,
29 November to 1 December 2005
15 March 2006
Table of Contents
A. Introduction 3
B. Systemic approaches 3
B.1 Dimensions of the problem 3
B.2 The Process of Reform 4
B.3 Public-Private Dialogue (PPD) 5
B.4 Other systemic issues 5
C. Radical Treatments 5
C.1 The Regulatory Guillotine 5
C.2 The Bulldozer Initiative 6
D. Assessment Tools 6
D.1 Overview 6
D.2 Sectoral level, Value Chain Analysis 7
D.3 Regulatory Impact Assessment (RIA) 8
E. Business registration and formalisation 8
F. Tax Regimes for Small Business 9
G. The Land Market and Investment 9
H. Inspections 11
I. Other outstanding issues 11
J. Donor responses 11
K. Conclusion 12
Annex A: List of Papers and Presentations, with hyperlinks 13
Annex B: Papers and Presentations focusing on particular countries 16
Annex C - Conference Communique 17
A. Introduction
Most of the poor will only be able to work their way out of poverty if they can start and 'grow' their own businesses - or find employment in another, growing business. In many developing countries, however, these businesses face enormous regulatory barriers. Development agencies have therefore become interested in ways to reform the business environment, so that businesses and economies can grow; while various terms are in use, this Paper uses the term 'business environment' to refer to both the policies, law and regulations, and the institutions, or 'rules of the game', that affect private sector development[1].
Given the current interest in this theme, the Donor Committee for Enterprise Development (www.enterprise-development.net) recently organised a Conference in Cairo, to review current knowledge. The Conference featured about 60 peer-reviewed Papers, presented mostly in break-out sessions. Since most speakers prepared both a presentation and a Paper, there are about 110 documents in all; these were provided to the participants on a CD-ROM, and have since been posted on www.businessenvironment.org.
Given the importance (and volume) of such a body of knowledge, this Paper has been written to index some of the learning points arising from the Cairo Conference; it is designed to enable the reader to find materials of most interest to the individual, as quickly as possible. Each of the Cairo Papers and presentations have been referenced by the Session number in which they were presented, so the Session number is also given as a reference throughout this Paper (in parentheses), to enable readers to find the original material.
A complete list of Papers and presentations is included as Annex A, with hyperlinks - again organised by Session number. Annex B lists the Papers that focus on particular countries. Annex C reproduces in full the final version of the Conference Communique, synthesising the messages coming out of the presentations and discussions in Cairo.
Papers giving practical experience are referred to more in the text below than those outlining new projects or future plans; it is a personal selection, and is not intended to be either comprehensive, or representative of any official viewpoint. Indeed, the Conference essentially consisted of peer-reviewed submissions, so is not necessarily a comprehensive overview of the current 'state of the art' - there may be gaps. Occasionally, therefore, references are given to other publications that are relevant.
This report has been prepared by Jim Tanburn (). Thanks go to the Business Environment Working Group, including particularly Martin Clemensson and Simon White, who were central to the Cairo Conference process; particular thanks also to SDC for their support for this Paper.
B. Systemic approaches
B.1 Dimensions of the problem
To quote from an earlier study, "modern day business enterprises in Africa and transition countries suffer regulatory barriers which were largely absent in 18th and 19th Century Europe and North America when these areas were industrialising"[2]. A graphical illustration of this point is shown in Figure 1; it was used by both Welch (2.1) and Waddington (3.4).
Shen (3.1) made a similar point by showing the cost of registering property, expressed both in days and as a percentage of property value; at 14.4%, sub-Saharan Africa had by far the highest registration cost, relative to property value, of any region. As a result, much capital remains informal and illiquid; in his Opening Speech, for example, President Mkapa of the United Republic of Tanzania noted that the informal, extra-legal economy in his country "holds assets worth USD 29 billion, much more than what Tanzania has received over the years in terms of FDI, aid or loans. In other words, what the poor of Tanzania own, if made liquid, is much more than what the outside world can ever give them!!"
Many presentations singled out a particular aspect of the overall system; for example, Messick (3.1) singled out the lack of means to enforce contracts, as the most important source of economic stagnation and under-development. Hallberg (5.1) listed the aspects of Investment Climate reform that the World Bank Group gives most priority to: core themes include:
· judicial and other dispute resolution mechanisms
· legal institutions for a market economy
· personal and property rights
· corporate governance
· regulation and competition policy
Non-core Investment Climate themes for the Bank include:
· tax and policy administration
· infrastructure services for private sector development
· other financial and private sector development
· export development and competitiveness
· trade facilitation and market access
B.2 The Process of Reform
Some papers did consider the process of reform; Rodrigo (3.1) lists various types of regulatory decision-making processes, and typical situations where they are commonly used:
· expert (typically using tools such as Regulatory Impact Assessment, or RIA)
· consensus (e.g. Netherlands)
· political (most commonly in times of political crisis)
· benchmarking ( popular in smaller countries)
· empirical (often used in the United States - again with RIAs)
Court (4.3) gives an overview of the literature and issues in political reform processes, noting the 4 'I's in influencing policy: Information, Interests, Ideologies and Institutions. He also includes the diagram shown here as Figure 2 on the Policy Cycle. A similar cycle is noted by Waddington (3.4).
Most presentations indicated that political will was of central importance, and some presentations addressed the political economy aspects (especially Session 4.1, although the presentations and Papers for that Session were not available at the time of writing). Indeed, the question of demand for reform remains challenging, since the countries most in need of reform are not always the ones that are most enthusiastic to do so. Also, whose demand is most likely to lead to pro-poor growth in the longer term?
B.3 Public-Private Dialogue (PPD)
Public-private dialogue (PPD) can in principle enable the private sector and civil society to generate pressure for reform, and several presentations focused on this theme; PPD was presented as a structured consultation process between the public and private sectors, to improve the business environment. Herzberg presented experiences from 40 countries, while Gamser similarly presented DFID's experiences from many countries (both 2.4).
Both Papers give a wide range of experiences and insights, that allow readers to benefit from achievements and lessons learned; for example, should partnerships should be restricted to government and business, or should they also include other stakeholders, such as labour unions, academics, NGOs and consumer groups? In general, a phased introduction of additional stakeholder groups is suggested. Similarly, the issue of possible 'capture' of the process by larger firms is discussed.
Session 4.4 included three additional presentations touching on the PPD theme; for example, Lamotte considered how to ensure that the voice of entrepreneurs is heard, outlining a number of cases from ILO's experience; this included partnering with radio stations in Uganda to provide a forum for advocacy and feedback, leading to reform of several regulations and policies that had discriminated against small business.
PPD, therefore, can generate demand for reform; anecdotally, the various benchmarking exercises around the business environment have also generated some political will for reform from countries that find themselves low in the rankings. Finally, a website has recently been launched to develop the PPD theme further, at www.PublicPrivateDialogue.org; it makes additional case study material available.
B.4 Other systemic issues
Reinprecht (1.3) touched on the influences of local cultures on the reform process; she proposed a series of culturally-specific factors that can enhance business environment reform, and others that can impede it. She also reviewed a range of tools and methodologies for analysing cultural features, and for facilitating the cultural aspects of the reform process. Other systemic issues, however, remain to be addressed more thoroughly in future. For example, few presenters discussed the theme of corruption in any detail[3]; one exception was the presentation on the BEEPS survey findings in transition countries (Fankhauser, 1.1). Similarly, little mention was made of other possible pre-requisites for good reform processes, such as the need to attract and retain talented staff in the Ministries of reforming governments.
It is generally easier to create new legislation, than to abolish or simplify existing legislation; President Mkapa recommended in his opening speech, for example, that "if it is not absolutely necessary to make a law, it is absolutely necessary not to". Similarly, implementation of reformed legislation is often a challenge in developing countries. There was some discussion, therefore, of alternatives to regulation, particularly for dispute resolution (Messick, 3.1). In addition, some initiatives cut through the 'Gordian knot' of the many regulations; these more radical treatments are outlined in the following Section.
C. Radical Treatments
C.1 The Regulatory Guillotine
In 1984, the Government of Sweden found that it could not compile an official list of all the regulations in force; there were too many, spread across multiple authorities. It therefore gave all of the relevant authorities one year in which to list the current regulations, after which time any regulations not listed would not have any force. Some screening was also applied, to ensure that those regulations which were listed met some basic quality standards. In education alone, apparently, 90% of the rules were eliminated.
This experience in simplifying regulations was later disseminated by the OECD, and used with success in Hungary, Mexico and Korea. Jacobs and Associates (www.regulatoryreform.com) has trademarked the term Regulatory Guillotine, and helped to implement the approach in Kenya, Moldova and Ukraine (Jacobs, 4.2). The reviews lasted 2-6 months, during which time many regulations were eliminated. For example, Moldova had 67 Inspectorates with over 1,100 regulations for business. After review, it was decided that:
· 426 formal acts met the criteria of review and should be included in the Registry
· 285 formal acts (or 35 % of those relevant to businesses) should be amended
· 99 formal acts (or 12 % of those relevant to businesses) should be discarded (many of these had not been published or authorized by higher level laws)
Similarly, Kenya was found to have over 1,300 business licenses (including 600 by local authorities) and fees imposed by 178 State bodies, with more being added all the time. 35 licenses were eliminated in 2005, and more reviews are now planned. In Ukraine, 15,000 regulations were identified, of which 4,900 were repealed during 2005.
C.2 The Bulldozer Initiative
A similar approach was adopted in the Bulldozer Initiative in Bosnia and Herzegovina (Herzberg, 2.4). A commitment to implement 50 reforms in 150 days created a sense of urgency and momentum, leading to 'ignition'. Social marketing was used extensively to reach out to people in all areas, who were invited to propose specific reforms; the process was therefore highly participatory, and an example of Public-Private Dialogue. It did benefit from the rather special political conditions prevailing at the time, though, including particularly the support of the High Representative. Nonetheless, the achievements of this initiative were impressive.
D. Assessment Tools
D.1 Overview
The Sections above have briefly addressed the political economy aspects of business environment reform; development agencies, however, seek methodologies that can be replicated in many countries. In particular, they generally prefer to start with assessment tools, and so an overview of assessment tools was presented early in the Conference by Silva Leander (1.1). She summarised 30 survey instruments, including both public and private-sector organisations, and mostly available on the internet. The summary proposes typologies of survey, based on the following categories:
· quantitative (measurable) vs. qualitative (perceptions of business people)
· aggregated at national-level to compare between countries vs. disaggregated to uncover variations within countries, especially large ones (e.g. World Bank in India, IMD in China)
· studies of specific features: regulation (Doing Business), corruption (Transparency International), economic freedom / civil liberties (Heritage Foundation, Freedom House, World Bank Governance)
· studies of specific sectors (e.g. MIGA in Asia) or firm sizes (e.g. FIAS informal economy studies in Rwanda and Sierra Leone)
"If readers are looking for studies that consider many aspects of the investment climate, and then aggregate them to create a single index, then the World Economic Forum’s Global Competitiveness Report [www.weforum.org] and the International Institute for Management Development’s (IMD) World Competitiveness Scoreboard [www.imd.ch] are the ones to consult."
"For country investment climate (IC) surveys, the [DFID] Team recommends The World Bank’s Investment Climate Surveys [www.worldbank.org/research/PICS/]. Their comprehensive and in-depth analysis makes them ideal for facilitating dialogue between governments, the private sector and civil society. For a lighter comparative approach we suggest the Commonwealth Business Council’s Business Environment Surveys (BES). Both the ICAs and BESs are repeated at 4-yearly and 2-yearly intervals respectively, thereby helping to shed light on how investment climates are changing over time."
The order in which countries are ranked varies, according to the methodology used; Krylova (4.3) points out that Uganda scores more highly than China in economic freedom and regulatory burden, yet attracts rather less FDI. Other Papers describing experiences with assessment tools included Reissner in the SADC region (1.1), Anh and Baan using an ILO methodology in Lao PDR (1.4) and Palmade at the sectoral level (1.1); the latter is outlined in more detail in the next Section.