In an interview with Reuters, published Friday November 2, World Bank Vice President Michael Klein argues that the reforms in Africa that reduce the time and cost to set up a business and register property as well as the streamlining of licensing procedures could result in a much higher rate of growth in that continent, perhaps even emulating the economic boom in Asia. Does the evidence back him up?
The Doing Business reports published annually by the World Bank, show that regulations and procedures do indeed raise the costs of starting or running a business in many African countries. Of 178 countries ranked in an Ease of Doing Business index, there are 2 African countries in the top 50 (Mauritius and South Africa) and two more--Ghana and Kenya--in the top 100. Most African countries are ranked at or near the bottom of the list.
It is plausible that reforms in regulations carry benefits other than a better ranking from the World Bank. Regulatory costs tend to be felt most heavily by small or informal businesses and often deter entry into the business sector. For example, a recent paper by Miriam Bruhn shows that the streamlining business registration procedures in Mexican states led some wage earners to quit their jobs to start their own businesses. Reducing red tape is also likely to result in some micro-businesses moving from the informal to the formal sector, which is probably good for poverty reduction in the short term.
But will regulatory reforms lead to a boom in investment and growth? Unlikely. A recent paper by Benn Eifert, using data from 140 countries, looks at reforms of regulations covered by Doing Business over the period 2003-06 and finds no evidence of an increase in aggregate investment or employment following the period of reform.
Why is it unlikely that regulatory reform will result in an economic boom? First, the fairly small fixed costs created by red tape are almost certainly irrelevant to the medium and large businesses that drive aggregate investment and output in most countries. Second, countries with less versus more regulatory burdens are different from each other in many ways--these differences could well drive levels of investment and growth. Third, regulations are often unenforced or ignored in many low-income countries.
My research on Africa based on door-to-door surveys of enterprises, suggests that unreliable and poor quality infrastructure is a far greater constraint than red tape for much of the private sector: businesses in many African countries experience power outages of 5 to 8 hours per day for much of the year. Medium and large businesses spend enormous sums of money on generators and fuel, which in turn reduces their profitability. Most African businesses also suffer from lack of access to good roads, which in turn restricts the size of their markets. Telecommunications, access to credit, and the availability of ports are also problematic in several countries.
We should be optimistic about efforts to reduce red tape, but we cannot expect African countries which show improvement on the Doing Business indicators to experience sudden or large changes in their rates of growth. Nor should we expect, as Dani Rodrik so eloquently points out, that a standardized set of reforms will work everywhere in the same way. The interaction, sequencing, and implementation of reforms is often difficult to understand, with success rates that vary greatly by country and region. In sum, the world is often more complicated than we would like it to be.