New Zealand shows benefits of keeping business regulation simple
By Michael Klein and Tim Harford
WHAT do Jakarta and many other Asian cities have that Wellington doesn’t? A vast, unregulated scrum of clever and hard-working street vendors, often women and children.
Peanut hawkers and street vendors add colour to the streets of many developing-world cities, but they are a sign of ill-health for the economy.
New Zealand has one of the world’s smallest “informal sectors”.
That’s good news for New Zealanders.
Formal businesses pay their taxes and have to give workers their legal rights. Informal businesses are off the regulatory radar screen.
They can avoid providing basic protection for their employees who are disproportionately women, low- skilled workers and young people.
Yet businesses do not lurk in the informal sector for fun. Unregistered businesses don’t have access to the courts, to police protection and to credit from the banks.
Unregistered property is useless for securing a loan. If entrepreneurs could reasonably enter the formal sector, they would do so.
There is no longer any mystery as to why so much economic activity in developing countries is in the informal sector.
The World Bank’s new report, Doing Business in 2005: Removing Obstacles to Growth, has shown that poor countries are tying up their formal economies in red tape.
Compare New Zealand, where it takes two days to set up a limited liability company, with Indonesia where it takes more than 150 days and Papua New Guinea, Fiji and Samoa, where it takes more than 50 days.
The World Bank believes New Zealand has a lot to contribute as a model to its Pacific neighbours because of its procedures for setting up businesses, hiring new workers, getting credit, enforcing a contract or selling property – all areas in which it is consistently among the cheapest and fastest in the world.
Where a New Zealand business will take on average 50 days to recover a bad debt, it will take a small business in Solomon Islands 18 months and cost more to chase the debt than the debt itself.
Firing an incompetent worker in Kiribati or Vanuatu can cost around a year of that worker’s salary. Starting a new business in Papua New Guinea takes eight bureaucratic steps and costs the equivalent of 30 per cent of a Papua New Guinean’s yearly income.
In New Zealand, it takes two steps to set up a business at the cost of 0.2 per cent of an average Kiwi’s annual income.
The result of too much regulation and a lack of legal enforcement is clear. Businesses in poorer countries won’t do business with large unknown customers except for cash, employers will be slow to hire and conservative about giving a chance to inexperienced workers, and credit goes only to those with the right connections.
We’ve discovered that cutting red tape is more straightforward than many people think.
In Ethiopia last year, the rate of establishing new businesses grew 48 per cent. Surely it is no coincidence that this was the same year that Ethiopia cut the cost of registering a business by almost four years’ salary.
The reform was a matter of abolishing a requirement to publish an unnecessary and expensive public notice in the newspapers.
Ethiopia is a particularly clear example of a common thread in our work – regulations that are often straightforward do the job they were supposed to do without pushing people into the informal sector, where they get no benefit from regulations anyway.
In one year, 58 of the 145 countries included in the report have measurably improved some aspect of their business environment.
Unfortunately, many of the countries which are most in need of reform are not reforming.
That means the people most in need of protection – small businesses, women with part-time work, young people looking for a job – are not getting it.
It is a myth that efficient regulation which protects those it should protect without distorting the economy is a luxury that only New Zealand can afford.
Doing Business in 2005 has shown that regulations that work can be simple to design, cheap to introduce and fair on vulnerable groups.
Michael Klein is chief economist of the International Finance Corp and a vice-president of the World Bank and IFC. Tim Harford is a World Bank/IFC economist. The Doing Business data is available online at http://rru.worldbank.org/DoingBusiness.
Published in the New Zealand Herald, 29 December 2004.