By Elena Mesropyan for LTP
The importance of regulations for economic prosperity
National and international regulatory authorities play a vital role in economies’ potential for healthy growth and transformation. They have an important goal of ensuring viability and development for the society in the long-term because no market participant, especially businesses, would be able to co-exist without appropriate regulations, which would result in chaotic and destructive national environment. Moreover, even though regulations across industries can be very complex and in inhibiting in participants’ eyes, they always exist to ensure that each party is better off.
As Paul Romer, World Bank Chief Economist and Senior Vice President, commented, “Simple rules that are easy to follow are a sign that a government treats its citizens with respect. They yield direct economic benefits – more entrepreneurship; more market opportunities for women; more adherence to the rule of law. But we should also remember that being treated with respect is something that people value for its own sake and that a government that fails to treat its citizens this way will lose its ability to lead.”
Regulations serve the purpose of balancing the business environment, the power distribution and creating legitimate opportunities for everyone. For example, an unregulated labor market may cause negative outcomes for nations and economic growth. Regulations applied to employment protect both employers and employees.
Regulations have a curative role in the banking sphere as they protect financial institutions (and their customers) from dishonest financial conduct of clients that might be aware of their inability to pay back the loan, for example. If regulatory authorities would not impose strict KYC rules, financial institutions would be dealing with much higher rates of bankruptcies and would have to layer extreme risk into higher rates for trustworthy borrowers.
Regulations in the ownership sphere create a transparent environment for businesses to operate with the certainty of owning real estate and other assets. Poorly functioning regulation regarding the ownership (of IP, real estate, land, etc.) creates uncertainty and inability for businesses to operate properly.
The presence of rules with which players in the market should comply, ensures that businesses understand the necessity to consider the outcome of their actions and the way they affect the market. With no rules, financial institutions would be able to rob the borrowing businesses and charge unjustified interest rates, creating a hostile environment for conducting business.
One of the international entities playing an important role in assessing the regulatory environment within the financial services industry is The World Bank. The organization annually conducts extensive research on the regulatory environments within nations to understand the elements of a conducive regulatory environment. The entity then ranks countries based on variety of indexes to indicate economies with the best environments to do business.
As explained by The World Bank, Doing Business measures aspects of regulation affecting 11 areas of the life of a business. Ten of these areas are included in this year’s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.
Hallmarks of global regulatory environments
One of the highlights of Doing Business 2017 has been an indication of a large disparities between high- and low-income economies and the higher barriers that women face to starting a business or getting a job compared to men. In 155 economies,women do not have the same legal rights as men, much less the supporting environment that is vital to promote entrepreneurship. Research shows that a gender gaps exists in women’s access to economic opportunities. While women represent 49.6% of the world’s population, they account for only 40.8% of the formal workforce.
Meanwhile, The World Bank suggests that those economies that have integrated women more rapidly into the workforce have improved their international competitiveness by developing export-oriented manufacturing industries that tend to favor the employment of women. For the most part, legal gender disparities have been shown to have a strong link with female labor force participation. The report also suggests that better performance in Doing Business is on average associated with lower levels of income inequality.
This is particularly the case regarding the starting a business and resolving insolvency indicator sets. The important part of understanding this ranking is that the positions at the top of the ranking do not indicate the absence of regulations or their weakness, but the ability of the governments to create rules that facilitate interactions in the marketplace without needlessly hindering the development of the private sector.
Countries with the best regulatory environment to conduct a business
In the Doing Business 2017 report, New Zealand has been recognized as the economy with the most business-friendly regulation. The country replaced last year’s leader, Singapore, which in the latest report is on the second place, followed by Denmark. For starting a business, for example, New Zealand has the smallest number of procedures required and the shortest time to fulfill them (0.5 days).
Although the top 20 economies already have simple, effective and accessible business regulations, they continued to implement reforms this year with a total of 20 reforms implemented among them. Hong Kong SAR, China, for example, made starting a business less costly by reducing the business registration fee, while Sweden is reported to have made it easier to transfer property, and Norway made enforcing contracts easier by introducing an electronic filing system.
Aside from top performing nations, a set of countries has been distinguished as top improvers based on reforms undertaken. Top-10 improvers this year are Brunei Darussalam, Kazakhstan, Kenya, Belarus, Indonesia, Serbia, Georgia, Pakistan, the United Arab Emirates (UAE) and Bahrain.
On a regional level, OECD high-income economies have on average the most business-friendly regulatory systems, followed by Europe and Central Asia. There is, however, a large variation within those two regions. The Sub-Saharan Africa region continues to be home to the economies with the least business-friendly regulations on average. However, this year the regional improvement in the distance to frontier score for Sub-Saharan Africa was almost three times as high as the average improvement for OECD high-income economies.
Source: The World Bank
Overall, in 2015/16, 137 economies worldwide implemented 283 business regulatory reforms. This represents an increase of more than 20% compared to last year. In fact, the number of economies that implemented at least one reform increased from 122 to 137, indicating that there are more economies trying to improve in the areas measured in Doing Business.
In this year’s report, the World Bank indicated that some reform efforts have advanced beyond the geographic boundaries of individual states. The organization brings an example of The Association of Southeast Asian Nations (ASEAN), which was formed in 2015, bringing together 10 economies. ASEAN Economic Community, a single market economy for goods, services, capital and labor, which—once it is realized—could result in a market larger than the European Union or North America. This year the 10 ASEAN economies implemented a total of 31 reforms across the Doing Business indicators—including six reforms in the area of paying taxes and six reforms in the area of getting credit.
“Business regulations are a specific type of regulation that can encourage growth and protect individuals in the private sector. The role of the private sector is now almost universally recognized as a key driver of economic growth and development. Nearly 90% of employment (including formal and informal jobs) occurs within the private sector—this sector has abundant potential that should be harnessed.
“Governments can work together with the private sector to create a thriving business environment. More specifically, effective business regulation can encourage firm start-up and growth as well as minimize the chance for market distortions or failures,” shared Paul M. Romer, Chief Economist and Senior Vice President of The World Bank.
First appeared at LTP