Wednesday, September 9, 2009

Doing Business Report 2010--Nepal edition

The IFC has published its annual ease of doing business ranking-- Doing Business Report-- yesterday. This recent report is seventh in a series of annual reports published by the IFC and the World Bank. The report, Doing Business 2010: Reforming through Difficult Times, lists Singapore as a consistent and top reformer this year as well. The other top reformers on the list are New Zealand, Hong Kong, the US, the UK, Denmark, Ireland, Canada, Australia, Norway, and Georgia. Here is the full ranking. Here is an overview.

The report notes that despite global economic crisis, over 70 percent of the 183 economies covered by the report made progress. Reformers around the world focused on making it easier to start and operate businesses, strengthening property rights, and improving commercial dispute resolution and bankruptcy procedures.Two-thirds of the reforms recorded in the report were in low- and lower-middle-income economies. For the first time a Sub-Saharan African economy, Rwanda, is the world’s top reformer of business regulation, making it easier to start businesses, register property, protect investors, trade across borders, and access credit. The top ten reformers for this year are Rwanda, Kyrgyz Republic, Macedonia, FYR, Belarus, UAE, Moldova, Colombia, Tajikistan, Egypt, and Liberia. Rwanda has made fascinating progress in almost all the indicators.

The major indicators used are: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing business. Note that these indicators do not assess market regulation or the strength of the financial infrastructure; macroeconomic conditions, infrastructure, workforce skills and security.

However, the regulatory environment for business influences how well firms cope with the crisis and are able to seize opportunity when recovery begins. Where business regulation is transparent and efficient, it is easier for firms to reorient themselves and for new firms to start up. Efficient court and bankruptcy procedures help ensure that assets can be reallocated quickly. And strong property rights and investor protections can help establish the basis for trust when investors start investing again.

So, how come the countries that are always in the top ten list consistently and persistently sticking around the top. It is because:

They follow a longer-term agenda aimed at increasing the competitiveness of their firms and economy. Such reformers continually push forward and stay proactive. They do not hesitate to respond to new economic realities. Consistent reformers are inclusive. They involve all relevant public agencies and private sector representatives and institutionalize reforms at the highest level. Successful reformers stay focused, thanks to a long-term vision supported by specific goals. 

In South Asia, Pakistan was the top reformer, followed by Maldives, Sri Lanka, Bangladesh, Nepal, Bhutan, India, and Afghanistan. It is surprising that India is in the second last position in South Asia.

How is Nepal doing this year?

Nepal’s rank is unchanged at 123 position in terms of ease of doing business. Specifically, starting a business was harder in Nepal (rank 87 in 2010 but 75 in 2009); dealing with construction permits was slightly harder (rank 131 in 2010 and 130 in 2009); employing workers also became difficult (rank 148 in 2010 but 147 in 2009); registering property became easier (rank 26 in 2010 and 29 in 2009); getting credit became difficult (rank 113 in 2010 but 109 in 2009); protecting investors became harder (rank 73 in 2010 but 70 in 2009); paying taxes also became harder (rank 124 in 2010 but 111 in 2009); trading across borders became cumbersome (rank 161 in 2010 but 159 in 2009); no change in enforcing contracts (ranking maintained at 122); and no change in closing business (ranking maintained at 105).

Overall, there was improvement in just one indicator-- registering property. Nepal’s Finance Act 2008 reduced the fee for transferring a property from 6 percent to 4.5 percent of the property’s value. Nepal did not make doing business any easier in the economy this year as well and it languished at the bottom. It is kind of expected because of transportation obstructions, forced closure of industries, labor union strikers, depleting industrial security, no improvement in infrastructure, severe power shortage, and labor market rigidities.

In order to start a business in Nepal, it still takes 7 procedures, 31 days and cost equivalent to 53.6 percent of income per capita. This cumbersome process and high cost exist despite no minimum capital requirement for starting a business. Compare this with doing business in South Asia: it takes 7.3 procedures, 28.1 days, cost equivalent to 27 percent of income per capita, and minimum capital requirement equivalent to 26.9 percent of income per capita.

In dealing with construction permits (the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections), it takes 15 procedures, 424 days, and cost equivalent to 221.3 percent of income per capita. Compare this with South Asia,it takes 18.4 procedures, 241 days, and cost equivalent to 2310.6 percent of income per capita. Compare this with OECD average: it takes 15.1 procedures, 157 days, and cost equivalent to 56.1 percent of income per capita.

In employing workers, the difficulty of hiring index is 67, rigidity of hours index is zero, difficulty of redundancy index is 70, rigidity of employment index is 46, and redundancy costs is equal to 90 weeks of salary. Compare this with South Asia:  the difficulty of hiring index is 27.8, rigidity of hours index is 10, difficulty of redundancy index is 41.3, rigidity of employment index is 26.3, and redundancy costs is equal to 75.8 weeks of salary. And, to OEDC average: the difficulty of hiring index is 26.5, rigidity of hours index is 30.1, difficulty of redundancy index is 22.6, rigidity of employment index is 26.4, and redundancy costs is equal to 26.6 weeks of salary. Note that each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices.

In registering property, it takes 3 procedures, 5 days and cost 4.8 percent of property values. Compare this with South Asia: it takes 6.3 procedures, 105.9 days and cost 5.6 percent of property values. And to OECD average: it takes 4.7 procedures, 25 days and cost 4.6 percent of property values.

In getting credit, strength of legal rights index is 5, depth of credit information index is 2, public registry coverage (% of adults) is zero, and private bureau coverage (% of adults) is 0.3. Compare this with South Asia: strength of legal rights index is 5.3, depth of credit information index is 2.1, public registry coverage (% of adults) is 0.8, and private bureau coverage (% of adults) is 3.3. And with OECD average, strength of legal rights index is 6.8, depth of credit information index is 4.9, public registry coverage (% of adults) is 8.8, and private bureau coverage (% of adults) is 59.6. Note that the Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau.

In protecting investors, extent of disclosure index is 6, extent of director liability index is 1, ease of shareholder suits index is 9, and strength of investor protection index is 5.3. Compare this with South Asia: extent of disclosure index is 4.3, extent of director liability index is 4.3, ease of shareholder suits index is 6.4, and strength of investor protection index is 5. And with OECD average, extent of disclosure index is 5.9, extent of director liability index is 5, ease of shareholder suits index is 6.6, and strength of investor protection index is 5.8. Note that the indicators above describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection.

In paying taxes, an entrepreneur have to make 34 payments per year, spend 338 hours per year preparing tax stuff, pays 16.8 percent tax on profits, labor tax and contributions equal to 11.3 percent, other taxes equal to 10.7 percent and total tax rate is 38.8 percent of profit. Compare with South Asia: an entrepreneur have to make 31.3 payments per year, spend 284.5 hours per year preparing tax stuff, pays 17.9 percent tax on profits, labor tax and contributions equal to 7.8 percent, other taxes equal to 14.2 percent and total tax rate is 40 percent of profit. Compare with OECD average: an entrepreneur have to make 12.8 payments per year, spend 194.1 hours per year preparing tax stuff, pays 16.1 percent tax on profits, labor tax and contributions equal to 24.3 percent, other taxes equal to 4.1 percent and total tax rate is 44.5 percent of profit.

In trading across borders, it takes 9 documents, 41 days, and costs US$ 1764 per container to export a standardized shipment of goods. Meanwhile, it takes 10 documents, 35 days, and US$ 1825 to import a standardized shipment of goods. Compare this with South Asia: it takes 8.5 documents, 32.4 days, and costs US$ 1364.1 per container to export a standardized shipment of goods, while it takes 9 documents, 32.2 days, and US$ 1509.1 to import a standardized shipment of goods. And with OECD average: it takes 4.3 documents, 10.5 days, and costs US$ 1089.7 per container to export a standardized shipment of goods, while it takes 4.9 documents, 11 days, and US$ 1145.9 to import a standardized shipment of goods.

In enforcing contracts (commercial), it takes 39 procedures, 735 days, and costs 26.8 percent of claim. Compare this with South Asia: it takes 43.5 procedures, 1052.9 days, and costs 27.2 percent of claim. And with OECD average: it takes 30.6 procedures, 462.4 days, and costs 19.2 percent of claim.

In closing a business (resolve bankruptcies), it takes 5 years, costs 9 percent of estate and recovery rate is 24.5 cents on the dollar (claimants recover from the insolvent firm). Compare with South Asia: it takes 4.5 years, costs 6.5 percent of estate and recovery rate is 20.4 cents on the dollar. And with OECD average: it takes 1.7 years, costs 8.4 percent of estate and recovery rate is 68.6 cents on the dollar.

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