When the regulations make doing business impossible, the only shortcut is to bribe the officials enforcing the law and since most of the bureaucrats have an economic interest in an inefficient law, it remains in place
Law is simple: A series of yeses and nos; permits and prohibitions; injunctions and authorizations. The justification for most of these rules and regulations is the health, safety, and welfare of the public. Through the rules, the state can create faster, easier, and more efficient ways to settle disputes, protect property and pay taxes. Without the transparency of the law investors and businesses lack an important tool to gauge risk. In failed states absence of law leads to chaos. But what happens when law itself is the problem? The answer to this question is vital in determining the potential for long-term economic growth of any country and any industry.
One of the best metrics for determining the efficiency of the law is the World Bank’s International Finance Corporation’s report “Doing Business 2013” which was published at the end of October. Although it is easy to question some of the methodologies of this report, comparing laws of one jurisdiction to another may be apples to oranges, it is still an extraordinary report that should be required reading for international investors.
To start there are the BRIC countries. These countries have experienced exceptional growth for most of the past decade. Many markets assume that the combinations of resources and demographics will continue to propel this growth for years to come. But there is one thing that is sure to stop this growth in its tracks—the law. The regulatory environment for all BRICs is so bad that only China makes it into the top half by one position, and that assumes that the Chinese actually enforce their own laws, which they don’t. Only India gets near the top quarter in investor protection. This regulatory drag is beginning to have an effect as each country’s growth meets regulatory bottlenecks and distortions.
It is less surprising that some of the poorest countries in the world had the worst rankings. Enforcing a contract in oil-rich Angola takes 2.7 years and costs 44% of the claim. In Korea it takes less than eight months and costs 10% of the claim. Of course the Angolan court system looks swift compared to India where a contract action takes almost 4 years and costs 39% of the claim.
The only exceptions in Africa are Ghana and Namibia. They both score in the top half with scores of 64 and 87 respectively. They are also two of the only six countries in sub-Saharan Africa where civil rights are protected.
Also on the bottom of the list are Afghanistan, Iraq, Iran, Syria and Venezuela. The problem of doing business in these countries is correlated with the level of corruption. Afghanistan and Iraq are the most corrupt countries in the world followed closely by Venezuela with Iran and Syria not far behind. The connection is not hard to fathom. When the regulations make doing business impossible, the only shortcut is to bribe the officials enforcing the law. Since these bureaucrats now have an economic interest in an inefficient law, it remains in place.
Changing these systems is exceptionally difficult. Greece is a democracy, but it has institutionalized a corrupt patronage system dominated by two parties that have been virtual family fiefs. To keep the system going required a bloated civil service and plenty of red tape, and the lowest ranking of the OECD countries. But with the demands of austerity came change. With reforms Greece jumped 11 places.
The odd thing about institutional reform is that it can be so easy. Laws and regulations are not made of steel and cement, just pieces of paper. Transportation infrastructure and electrical grids can take years of planning and billions of dollars. Regulatory reform can occur with the stroke of a pen. Poland was able to jump 19 places from 74 to 55 by improving its contract enforcement and insolvency procedures. Tiny Georgia with a population of only four and half million has made a concerted effort to become an investment destination. It streamlined its laws and now ranks at number 9 with a growth rate above 7%.
Still the process is fraught with difficulty. The United States is usually considered the bastion of the free market. In the past election the Republicans bitterly attacked the Obama administration for needless regulation. But in Texas and Florida, the two Republican strongholds, the list of licensing regulation is absurd. In Florida licenses are required for 20 occupations, including hair-braiding, interior design and teaching ballroom dancing. An interior design license requires a university degree, two-year apprenticeship and a two-day examination. When the conservative Florida legislature tried to pass a bill to remove these restrictions they were met with howls from the incumbent license holders. Why? Licensed professions receive 15% higher income, but unregulated trades had 20% higher growth. With money on the line, the bill failed.
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(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)