Breaking barriers, building business
Development as a global objective for improving the economic well-being of ordinary people is a relatively recent concept. It was first embodied in the Charter of the United Nations with: ’the United Nations shall promote higher standards of living, full employment, and conditions of economic and social progress and development.’ When the charter was signed in June 1945, what did people have in mind when they spoke about economic and social development?
The concept was not well defined, but over time, at least among economists and policymakers, it has come to mean improved economic opportunity through increased production of goods and services. The implicit assumption has been that growth will lead to rising living standards, increases in longevity, reduced mortality and improved nutrition.
Between 1950 and 2007, world GDP per capita expanded at an average annual rate of 2.1%. This expansion, although with considerable variation in different regions of the world, was associated with a remarkable evolution in three key indicators of human welfare. In the 40-year period to 2007:
• Infant mortality fell from 140 to 44 per 1,000 live births;
• Average life expectancy at birth rose from 43 to 66 years;
• Illiteracy among adults fell from 53% to 18%.
Equally impressive was a sharp drop in the incidence of poverty. Data from a comprehensive study by the World Bank shows that between 1990 and 2005, the share of the world’s population living in extreme poverty fell from 42% to 25.2%. While this still left about 1.37 billion people living in harsh conditions, the progress and the trend was undeniable. It led many to ask themselves what could be done to accelerate growth everywhere, particularly in Africa and South Asia, the two regions of the world that still had very large numbers of poor people.
These insights resulted in a remarkable re-examination among economists and policymakers of the relative importance of various factors, policies and institutions in creating the conditions for sustainable growth. Concretely, they questioned how factors, policies and institutions interact with each other and how successful countries have been in identifying and adopting them. To reach the varied answers to these questions, six factors are especially relevant.
1. Social inclusion refers to arrangements in place for education and health care that influence an individual’s capacity to live better. This is desirable for two reasons: as pointed out by Nobel laureate Amartya Sen, a healthy life prevents morbidity and premature mortality; and just as importantly, education and good public health allow more effective participation in the economic and political life of a nation. For example, illiteracy can be a major barrier to participation in economic activities. Without access to education and information, participation in the political process is likely to be vulnerable to the manipulations of demagogues, as seen in recent years in various corners of the world.
2. The quality of macroeconomic management is crucial. Many things happen when governments fail in their efforts to manage the macroeconomic environment. First, government credibility is undermined in the private sector and civil society. The effectiveness of government policy is closely linked to government credibility, the equivalent of political capital that should never be wasted. Beyond issues of credibility, poor management of public resources limits choices and curtails the ability of government to respond to the most pressing needs, such as education, training and research, and development. As a consequence, countries fall behind with respect to others, and catching up, if it can be done at all, require extra effort and expenditure of greater resources than would have been necessary in the presence of good policies.
3. Transparency and accountability have overriding importance. Societies operate better on some presumption of trust; the need is for openness and the freedom to deal with one another with a presumption of honesty underpinning human relations. This is tremendously important in preventing corruption, and financial and other abuses. Experience shows that where there is trust, citizens and business pay their taxes. In turn, this enables governments to formulate policies to achieve various social ends. As societies see the fruits of these efforts, trust in government is reinforced and a country enters into a 'virtuous cycle' of development. Of course, ‘vicious cycles’ are also possible and have been seen more often than anyone would care to remember.
4. The role of technology and innovation has received particular attention in sustainable development. As countries make considerable progress in establishing more stable macroeconomic frameworks, attention turns to other drivers of productivity, and technology and innovation play an increasingly important role. Economic output is no longer just a function of capital and labour. Increasingly, it is about knowledge and its acquisition.
These issues are critical because technological differences have been shown to explain much of the variation in productivity between countries. In recent years, the relative importance of technology adoption and innovation for national competitiveness has increased as progress in the dissemination of knowledge and the growing use of information and communications technologies (ICT) has become more widespread. For example, strong productivity growth recorded in the United States over the past 20 years has been linked to the widespread adoption of information technologies, with notable productivity increases registered in sectors using ICT intensively.
5. Economic opportunities refer to the chances individuals have to utilize economic resources for the purpose of consumption, production or exchange. Freedom to enter markets can make a significant contribution to development. Indeed, a considerable share of the progress made in India and China over the past 20 years reflects a reorientation of policies that relaxed barriers to entry to goods, labour and financial markets.
6. The quality of rules underpinning the business environment in which the private sector operates is also an integral element in creating a framework for sustainable growth. Governing often translates into the issuing of licenses and permits. From cradle to grave, the average citizen has to enter into transactions with government offices or other bureaucracies to obtain a birth certificate, get a passport, pay taxes, open a new business, drive a car, register property, engage in foreign trade, sell a good or service to the government, hire an employee, use publicly provided health services, be allowed to build a house, and more.
The World Bank Group’s Doing Business Report (DBR) has become an excellent annual compendium of the burdens and reforms of business regulation in 183 countries. For a large number of companies, the picture that emerges from the report is not attractive. For example, it takes 21 procedures in Equatorial Guinea to start a new business and an average of 177 days to fulfill them. It takes 1,442 days to enforce a contract in Bangladesh and 819 in Greece. In Argentina, it takes 25 procedures to get a construction permit and 365 days to actually receive it.
The data in the report eloquently highlight the extent to which many countries discourage the development of entrepreneurship in their private sectors. The sobering irony of the DBR is that countries with the greatest need for entrepreneurship and private sector development are those that generally create the greatest obstacles to the creation of new enterprises, or intervene in ways that retard the emergence of entrepreneurial capacities that are central to the development of an enabling environment for innovation. Not surprisingly, the prevalence of corruption is highly correlated with incidences of red tape and excessive regulation. The correlation coefficient between the country rankings of Transparency International’s Corruption Perceptions Index and the rankings for the World Bank’s DBR is close to 0.80: the greater the extent of bureaucracy and red tape, the greater the incidence of corruption.
The early results of nearly a decade of Doing Business reports and the associated reforms the Doing Business project has generated are encouraging. Lower barriers to business start-ups are associated with a smaller informal sector. Lowering the cost of market entry encourages entrepreneurship, enhances firm productivity and reduces corruption. Over the past six years, across all regions of the world, there have been substantial reductions in the time and cost to start a business, in the time it takes to transfer property between local firms and in the time it takes to import and export. More generally, we have seen a strengthening of the legal institutions underpinning the economy and covering issues such as property rights, contract enforcement, getting credit and resolving insolvency.
While successful development has a broad range of interlocking components, creating a better regulatory climate for the private sector is crucially important. The World Bank Group’s Doing Business project is contributing to the achievement of that goal.