Will Russia ride the wave of reform? – Vedomosti

9th September, 2004

This op-ed was published in the Russian-language business paper, Vedomosti.
Read the original version in Russian.

By Michael Klein and Tim Harford

A wave of reform has been sweeping across Europe. Governments are discovering that they can free up their budgets, increase growth, and give economic opportunities to the most vulnerable – often with very simple reforms.

The World Bank and International Finance Corporation have been producing objective indicators of the everyday costs of doing business: setting one up, closing one down, hiring a worker, selling some property, or trying to raise a loan. Last year’s report, Doing Business in 2004, showed that the richest countries benefited from the most efficient regulations. The new report, Doing Business in 2005, has been tracking who has reformed, and how they have benefited. Unlike many such reports, which are based purely on subjective opinions, the Doing Business reports use objective, transparent indicators based on expert legal analysis of the law and customary practice.

Eight of the ten countries who reformed the most were from Europe, including Poland, Lithuania, and Slovakia. Meanwhile, many countries in the former Soviet Union have made little attempt to reform their bureaucratic regulatory systems. The result is lower growth and exclusion for young workers trying to get jobs, get credit, or start their own businesses.

Where does the Russian Federation stand? With the reformers of Europe? Or on the sidelines? The truth is a bit of both: progress has been made, but tempting opportunities for reform remain untouched.

Russia has been making effective reforms in several areas. Russia is one of the best places in the world for employers who wish to hire new staff: Russian employers have the flexibility to use extended term contracts and apprentice wages, and are free from unrealistically high minimum wages. Our analysis shows that flexible rules like these help the most vulnerable people: women and young workers find it much easier to get jobs if employers can hire them on flexible contracts which give them a chance to prove themselves.

Russia also boasts one of the least expensive systems for trading property, and recently took steps to improve the integrity of the ‘cadastre’ in which land and buildings are registered. That may not seem important until you consider that many businesses are only able to get loans because they can prove legal ownership. Better property systems mean more credit – especially for smaller businesses.

In 2002, Russia was one of the showcase reformers of business start-up, reducing the number of procedures required to start up a business from 19 (among the worst anywhere in the world) to 12, and reducing the time it takes to turn a business idea into reality from 51 to 29 days. Last year, Russia remained in the top 20 reformers of business start-up: the procedures were cut back further to from 12 to 9. New business registrations grew by an impressive 14 per cent. In countries where even more dramatic reforms have taken place, the growth, too, has been more dramatic.

Nevertheless, it’s important that the progress doesn’t stop there. It’s worth remembering that countries like Australia and Canada can register a business in two simple steps without collapsing into chaos – and do so cheaply, and in two or three days.

Nor is it difficult to implement many of the reforms identified by Doing Business in 2005. Many are simple administrative procedures, for example, Russia’s use of business help centers to give entrepreneurs a single point at which they can access all the relevant authorities.

According to our objective measures, corporate governance represents the biggest opportunity for reform in Russia. The Russian stock market is one of the world’s top twenty by capitalization, but could be substantially larger after simple reforms. The simplest of all is to improve disclosure: of family ownership, of indirect ownership, of voting agreements, and all using external verification. We estimate that if Russia was to stiffen its requirements for disclosure to the levels seen in Slovakia, the Czech Republic, or Lithuania, market capitalization could grow by around sixty per cent.

It used to be that disclosing ownership and financial information cost a lost of money. The Internet has changed all that. Many countries are taking advantage – not just the United States or United Kingdom, but Egypt, Thailand and Brazil. There is a big opportunity here for Russia to attract both foreign and domestic investment by reassuring investors that they can see clearly if their holdings are at risk.

Disclosure is not the only area where Russia could improve. Shareholders should enjoy the right to buy newly issued shares – such ‘pre-emptive’ rights limit the risk of expropriation. Small shareholders in Tomskneft would have been grateful for such rights in 1999, when the majority shareholder Yukos diluted their ownership from 49 per cent to 9 per cent. In the end, it is not just they who suffer, but any Russian company trying to raise capital by convincing potential investors that their money is safe.

The World Bank Group will continue to track the cost of doing business across the world, to find out the most effective reforms and the biggest success stories. Russia has provided us with some of the best such stories, and in doing so has improved opportunities for many citizens. We look forward to more good news next year.

Michael Klein is chief economist of the International Finance Corporation, and a World Bank / IFC vice president. Tim Harford is an IFC economist.

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