Undercover Economist

Darkest Peru? It’s a beacon for business

Between 2009 and 2010, Peru cut the cost of setting up a new business from $685 to $564, the number of separate bureaucratic procedures from nine to six, and the time the whole affair took from 41 to 27 days. It’s an impressive (indeed, world-leading) improvement, and one which presumably will help Peruvian entrepreneurs create jobs, fulfil the desires of Peruvian citizens, and make money into the bargain.

These statistics come from the World Bank’s Doing Business project, which since 2003 has been publishing data on the ease of doing business around the world, with indicators such as how long it takes to establish a business, how easy it is to buy and sell commercial property, or how time-consuming and expensive it is to clear customs. (I should declare an interest: in 2004 and 2005, I helped with some of the superficial details of the Doing Business project.)

Yet the Peruvian good news story feels oddly precise. The Doing Business methodology is a kind of time-and-motion study of the process of establishing a hypothetical business with some quite specific characteristics. Local experts, typically lawyers, examine the standardised case study and figure out all the papers that must be filed, departments that must be notified and official fees to be paid.

The focus on this case study allows the Doing Business project to produce specific, comparable information but the risk is that the experience of actual companies is rather different. The World Bank being a pluralistic place, it also gathers and publishes an alternative measure of the burden of regulation and bureaucracy on local businesses: surveys asking local businesses about the obstacles they face – bureaucratic or otherwise.

Mary Hallward-Driemeier of the World Bank and Lant Pritchett, an economics professor at Harvard’s Kennedy school, have published a discussion paper comparing the results produced by the two methods. Up to a point, they are in accord: countries which look good on paper also perform well in the enterprise surveys – and the more streamlined the rules, the less trouble businesses claim to have.

And yet for most countries (those in the most bureaucratic two-thirds, according to Doing Business) the relationship breaks down: what the case studies show and what businesses actually report bear no resemblance to each other. And there is huge variation within countries: some companies seem to live blessed existences while others are all but under attack from officialdom. Pritchett quotes an Indian saying, “Show me the face and I’ll show you the rule.” In short, when the rules are bad enough (and they are pretty bad, in a large number of countries), the rules cease to be directly relevant.

“If your Doing Business number says it would take you 350 days unless you pay a bribe, you are in a country where nobody doesn’t pay a bribe,” says Pritchett.

Quite so, and it seems plausible that a researcher seeking some direct measure of the costs of silly regulations will do better to consult the enterprise surveys than Doing Business’s hypothetical case study.

Yet the case study approach has great merits. Partly, it has rhetorical power – a fact appreciated by the Peruvian economist Hernando de Soto when he pioneered the time-and-motion approach to regulatory reform in the 1980s. Also, the case studies of Doing Business go beyond identifying that a problem exists and point to specific laws and regulations that are causing trouble and enabling bribery. For example, Doing Business has established that a cheap, politically uncontroversial way to streamline regulations and climb the World Bank’s ranking is to establish an online one-stop shop for registering new businesses. Perhaps it is no coincidence that this is the direction Peru’s reforms have taken.

Also published at ft.com.