A new company has 63 days to get ten pieces of paper and give up a third of its yearly income
Debates about supply side reform often come down to slogans: flexible labor markets, deregulation, and more competition. Even when everyone agrees about what to do, however, nothing much usually happens.
Suppose you are an economy minister serious about improving the supply side of your economy but short on specific ideas about what to do. One interesting answer comes from a research group at Harvard University organized by Andrei Shleifer, a distinguished economist who focuses on how governments make economic life harder than it need be.
Shleifer’s research looks at 75 countries and asks how many formal steps it takes to establish (legally and without bribes) a new company, how long it takes to do so, and what it costs. For if a country makes it hard to create companies, don’t be surprised if new companies are few and far between. And if companies are not created, where will growth and employment come from?
The table gives a flavor of the odyssey involved in setting up a business: an average for 75 countries shows more than ten separate steps of getting various certificates and a cumulative time of 63 days spent in getting the paperwork done (assuming no bureaucratic delays) and total payments to government as high as one third of a year’s income.
The numbers are stunning, particularly when you ask what does the state really do other than register a name and give out a tax number? Who has time to spend a 110 days, as in the Slovak Republic, running around government offices? What struggling entrepreneur has the money to spend a $1,000, as in Poland, on paperwork?
Canada wins this contest of bureaucracies: government interventions are minimal, user friendly, and come at low cost; Canada’s performance is even better than the US. Who is worst? Bolivia. In between sits the rest of the 75, including Western Europe. Italy, to cite just one example, is a bureaucratic embarrassment where it takes four months for an entrepreneur to set up a business.
Brazil, a typical Latin American country looks pretty awful in this competition; so do most Eastern European economies. Go beyond North America, the Nordic countries, Australia, and New Zealand — the world supply side leaders — indeed, and conditions become awful real fast.
Harvard’s researchers ask: is this red tape strictly necessary? Attempts to show the benefits of entry regulation on business fail miserably. Bureaucracies, Shleifer concludes, impose hurdles mostly to set themselves up for rip-offs, bribes, or safe, comfortable jobs. Not only does an economy suffer by having fewer jobs than it might with more user-friendly entry conditions, it also suffers the burden of paying for and enduring a bureaucracy. Because excessive entry regulation serves no other purpose, reforming governments should act: eliminate the obstacle course.
An argument is made, of course, that these hurdles mean nothing in practice: if obstacles to operating in the formal economy are too cumbersome, businesses simply go underground. They work just as well, the argument goes, so where is the damage? Nonsense. Not only is it bad economic strategy to criminalize business formation and operation by pushing it underground, the fact is that a lot of businesses simply won’t come into existence, not even in the informal sector.
Suppose, once again, that you are a minister in charge. Despise corruption and bureaucratic excess; you demand change. What do you do?
Brazil once experimented with a minister of debureaucratization. The new minister went around the country, looked at every single form to be filled out in the various interfaces with the government. He eliminated perhaps a third of them. This was a real triumph in a country where officials love to stamp papers for just about anything.
What happened next? Nobody remembers: its job supposedly finished, the ministry went out of existence. Bureaucracy, however, is harder to kill. Today, Brazil’s paper maze is stronger than ever. This confirms a rule that Shleifer and his colleagues intuit: the only way to control bureaucrats is to get rid of as many as you can, permanently. So long as they squat in their offices, bureaucrats will find something to do and, unfortunately, it usually comes down to “protecting the public from business” or, in other words, impeding business from working.
According to research on the status of small business in Ukraine carried out by the International Financial Corporation, in 1999 an average of eleven calendar days were necessary in order to get licenses and 18 days (the law says five) for registration. In order to register independently, the businessperson paid from 145 to 750 hryvnias, and if he/she used intermediaries, it cost 734 (officially 119). The extant regime of registration includes five-six documents. In comparison to Brazil, Bolivia, or Italy, this is not much, but we remind you that the issue is of small business. If we charge the same for small and big business, will we have the latter in Ukraine?
Debates about supply side reform often come down to slogans: flexible labor markets, deregulation, and more competition. Even when everyone agrees about what to do, however, nothing much usually happens.
Suppose you are an economy minister serious about improving the supply side of your economy but short on specific ideas about what to do. One interesting answer comes from a research group at Harvard University organized by Andrei Shleifer, a distinguished economist who focuses on how governments make economic life harder than it need be.
Shleifer’s research looks at 75 countries and asks how many formal steps it takes to establish (legally and without bribes) a new company, how long it takes to do so, and what it costs. For if a country makes it hard to create companies, don’t be surprised if new companies are few and far between. And if companies are not created, where will growth and employment come from?
The table gives a flavor of the odyssey involved in setting up a business: an average for 75 countries shows more than ten separate steps of getting various certificates and a cumulative time of 63 days spent in getting the paperwork done (assuming no bureaucratic delays) and total payments to government as high as one third of a year’s income.
The numbers are stunning, particularly when you ask what does the state really do other than register a name and give out a tax number? Who has time to spend a 110 days, as in the Slovak Republic, running around government offices? What struggling entrepreneur has the money to spend a $1,000, as in Poland, on paperwork?
Canada wins this contest of bureaucracies: government interventions are minimal, user friendly, and come at low cost; Canada’s performance is even better than the US. Who is worst? Bolivia. In between sits the rest of the 75, including Western Europe. Italy, to cite just one example, is a bureaucratic embarrassment where it takes four months for an entrepreneur to set up a business.
Brazil, a typical Latin American country looks pretty awful in this competition; so do most Eastern European economies. Go beyond North America, the Nordic countries, Australia, and New Zealand — the world supply side leaders — indeed, and conditions become awful real fast.
Harvard’s researchers ask: is this red tape strictly necessary? Attempts to show the benefits of entry regulation on business fail miserably. Bureaucracies, Shleifer concludes, impose hurdles mostly to set themselves up for rip-offs, bribes, or safe, comfortable jobs. Not only does an economy suffer by having fewer jobs than it might with more user-friendly entry conditions, it also suffers the burden of paying for and enduring a bureaucracy. Because excessive entry regulation serves no other purpose, reforming governments should act: eliminate the obstacle course.
An argument is made, of course, that these hurdles mean nothing in practice: if obstacles to operating in the formal economy are too cumbersome, businesses simply go underground. They work just as well, the argument goes, so where is the damage? Nonsense. Not only is it bad economic strategy to criminalize business formation and operation by pushing it underground, the fact is that a lot of businesses simply won’t come into existence, not even in the informal sector.
Suppose, once again, that you are a minister in charge. Despise corruption and bureaucratic excess; you demand change. What do you do?
Brazil once experimented with a minister of debureaucratization. The new minister went around the country, looked at every single form to be filled out in the various interfaces with the government. He eliminated perhaps a third of them. This was a real triumph in a country where officials love to stamp papers for just about anything.
What happened next? Nobody remembers: its job supposedly finished, the ministry went out of existence. Bureaucracy, however, is harder to kill. Today, Brazil’s paper maze is stronger than ever. This confirms a rule that Shleifer and his colleagues intuit: the only way to control bureaucrats is to get rid of as many as you can, permanently. So long as they squat in their offices, bureaucrats will find something to do and, unfortunately, it usually comes down to “protecting the public from business” or, in other words, impeding business from working.
