Doing Business in Asia: Why Competitiveness Depends on Regulatory Reforms
November 12, 2014
This year’s new Doing Business Report, the World Bank’s annual ranking of economies in 10 business regulatory areas, has garnered plenty of headlines in the media. Chief among these in Asia is the Philippines’ significant drop in ranking, despite the global business community celebrating the country’s strong economic performance in recent years, and gains in other indices such as the World Economic Forum’s Global Competitiveness Index. The drop is explained in part by the nature of the Doing Business publication, as well as by recent changes in the calculation of country scores by the World Bank.
The Doing Business indicator is limited in its capacity to fully assess an economy’s performance. Until recently, the indicator only captured the regulatory environment in a country’s largest business city. This year, for 11 large economies with populations larger than 100 million, an additional data set was introduced measuring regulations in the country’s second largest business city. Under this definition, in the Philippines, because it is not larger than 100 million, the single city captured in the index is Quezon City, the country’s largest business city. The ranking also omits other important indicators of business activity: those small and medium-sized enterprises (SMEs) that operate outside the regulated formal sector, a city’s security, market size, macroeconomic stability, or propensity for corrupt practices.
The World Bank’s Chief Economist Kaushik Basu also addresses in the report’s foreword the use of a ranking methodology: “when economies are very densely packed [in a ranking], a small improvement can lead to a vast jump in ranking and a small worsening can lead to a large drop in ranking.”
One of the biggest changes to the Doing Business Report is the construction of a “Distance to Frontier” (DTF) score that measures an economy’s absolute progress against the best practice “frontier” of each of the 10 regulatory areas. Although the Philippines dropped seven spots in the overall ranking this year, in DTF terms it has held steady, with a score of 62.1 (out of 100). In the last year, the government has made trading across borders (one of the indicator groupings of Doing Business) more difficult due to a new city ordinance restricting truck traffic in Manila. This new regulation justifies in part the country’s relative drop in ranking and unchanged absolute score.
Looking at other reforms throughout Asia reveals some striking findings. Below is an overview of two regulatory reform areas covered in the index.
Starting a business
The report finds that it is faster and cheaper to start a business in South Asia than it is in East and Southeast Asia (the latter includes the ASEAN countries as well as China, Mongolia, Timor-Leste, Taiwan, and Hong Kong). Afghanistan is the top performer in this area (ranking 24th worldwide), thanks to its low number of procedures, time requirements, and startup costs. Despite this solid performance, the country has a low overall Doing Business score (41.16 out of 100), due to regulatory weaknesses in resolving insolvency and trading across borders. The lowest ranked economy in starting a business is Myanmar, which has struggled to make meaningful business startup reforms in the past few years despite significant achievements in other reform areas. Startup costs in Myanmar remain prohibitive, measured at 156 percent of the country’s income per capita (compared to an average of 25 percent across East and Southeast Asia).
The most improved economy over the last year for starting a business is Timor-Leste. The report attributes this improvement to 45 new reforms, including the creation of a business “one-stop shop” regrouping multiple startup services in one place. Meanwhile, some economies implemented reforms making it more difficult to do business. For example, India introduced a requirement to file a declaration before the commencement of business operations, and Cambodia started requiring a company name check and increasing the costs for getting registration documents approved and for completing incorporation procedures.
Trading across borders
On average, it is less costly and timely for businesses to export and import in East and Southeast Asia than in South Asia. To illustrate, Nepal requires 11 documents to export goods, versus an average of six in East & Southeast Asia. But some South Asian countries display robust performance in trade. While it takes 86 days to export a shipment in Afghanistan (a landlocked country), it only takes 16 in Sri Lanka (the best performer in the region). Sri Lanka has made trading easier by implementing an automated system for customs data in 2012-2013 and an electronic payment system for port services in 2013-2014. Bangladesh and Pakistan also introduced automated, computerized systems for export and import processing.
The star this year in this category is Myanmar, which made the biggest improvement worldwide in the ease of trading across borders. The country’s Ministry of Commerce abolished export license requirement for 166 types of goods and import license requirement for 152. Exporting now takes 20 percent less time and importing 19 percent less time than before.
Using analytical tools to catalyze better business reforms
With a full aggregate report, in-depth regulatory case studies, regional analyses, and country-level reports, Doing Business is a valuable tool for any economic policymaker. However the strongest use will be in combination with other research that fills in important gaps. For example, the ASEAN SME Policy Index published by the OECD looks at supply-side government policies, and The Asia Foundation’s own provincial-level governance indices go beyond formal regulations to analyze aspects of transparency, quality of governance, and prevalence of informal charges.
A final change to this year’s Doing Business report is the introduction of quality measures (i.e., strength of legal text and professional expertise of regulatory staff) to three indicator areas. No longer is the number or efficiency of regulations the only mark of progress. This is a step in the right direction. Ultimately, it is not the blind signing of regulations that determines an economy’s business environment, but rather the inclusive nature of the regulation and the quality of its legal inception and sustainable integration into a local city context.
Nicolas Picard is a program associate for The Asia Foundation’s Economic Development Programs based in San Francisco. He can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not necessarily those of The Asia Foundation.
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