Business and Regulation

A New Kind Eastern Promise

It is now easier to do business in
Europe than East Asia, says a new report.

IN “BIOSHOCK”, a hit video game from last year that was heavily influenced by the libertarian philosophy of Ayn Rand, the main villain builds a fantastical city under the sea, where businesses can escape the stifling grasp of government. If you are an internationally minded entrepreneur looking to set up a small to medium-sized business, that is probably going a little far. But where should you set up shop? Much depends on where the government acts as your concierge, and where it acts as your parole officer. “Doing Business 2009”, the latest edition of an annual survey carried out by the World Bank and one of its subsidiaries, the International Finance Corporation, comes to a surprising conclusion: it is now easier to do business in eastern Europe than in East Asia.
Every year the survey tracks the state of business regulation in 181 countries and then ranks them using a scorecard that takes into account how long it takes to set up a business, how easy it is to hire and fire workers, and the level of corporate taxes, among other things. This year, as in the previous five years, economies in eastern Europe and Central Asia have consistently seen the fastest pace of positive reform (see chart). Last year their average ranking was neck and neck with that of countries from East Asia and the Pacific. But this year the eastern European countries pulled ahead, with an average ranking of 76, compared with an average ranking of 81 for East Asian countries.

On average, it takes 21 days to register a business in eastern Europe, which is 27 days faster than in East Asia. Setting up a company in Indonesia costs 77.9% of the average annual income per person; in Georgia it costs 4%—though there is the small matter of political risk to factor in. Firing a worker costs an average of 53 weeks’ salary in East Asia, compared with 27 in eastern Europe. All this cutting of red tape has brought results: Poland now has as many registered businesses relative to its population as Hong Kong does.
Eastern Europe’s rapid progress has been due, in part, to the accession requirements imposed by the European Union (EU). These include regulatory reforms that are often enacted by countries that aspire to membership, but have yet to be admitted. For instance, the EU requires new members to create a “one-stop shop”—a single point of contact at which entrepreneurs can register their businesses. Before Macedonia became a candidate for EU membership in 2005, it took 48 days to start a business there. After three years of reforms, it now takes nine days.

Governments in eastern Europe have discovered the virtues not only of a light touch, but also of a swift gavel. The report finds that commercial disputes are, on average, settled more quickly and at less expense in eastern Europe than in East Asia. Bulgaria reduced trial times by requiring judges to refuse incomplete filings rather than allowing multiple extensions.
East Asian countries still have the edge in some respects: it is easier to move goods across their borders, for example. Government-imposed fees to export a standard 20-foot cargo container average $859 in East Asia, compared with $1,428 in eastern Europe. Businesses in East Asia also face lower taxes. Taxes on profits in eastern Europe are among the lowest in the world, typically around 10%, but labour taxes and compulsory pension contributions increase the overall tax burden on business.
Of course, a few East Asian economies are still miles ahead of eastern Europe. Singapore ranked first for the third successive year. Hong Kong was fourth, behind New Zealand and America. But Georgia, Estonia, Lithuania and Latvia secured places in the top 30, even as Russia lagged behind in 120th place. Azerbaijan was the top reformer. It cut the number of procedures needed to start a business by half, eased restrictions on working hours, moved its tax system online and introduced new laws protecting minority shareholders. True, laws on the books may be different from real conditions on the ground. Still, the number of registered new firms jumped 40%.
Eastern Europe is not the only region that has done surprisingly well. The study also found that economies in Africa implemented more positive reforms in the past year than in any previous year on record. These examples prove that countries need not be rich or powerful to create a better environment for business. Businessmen need not retreat under the waves to the gloomy world of “Bioshock” just yet.