Reforming the business start-up processes

Business Start-up Reforms and Increase in Registered Businesses
(Source: Doing Business 2009, 2010; World Bank Group)

FOR many people, it may not be obvious why reformation of the business start-up process is a big deal for us. They may not even know what these processes are or which agencies are involved, or that there exists a government agency called the Registrar of Joint Stock Companies and Firms (RJSC) that registers a business. When it comes to budget allocation, even many government officials of concerned ministries, such as commerce (which is the line ministry of this agency) and finance, do not know that this agency exists, a frustrated ex-registrar told me. "It is one of those dumping agencies in the government," he sighed, "where posting as a registrar is viewed as a punishment."
Yet, this historically neglected agency wrote the illuminating story for Bangladesh in this year's Doing Business Report. This annual publication of the World Bank Group measures the regulatory environment of doing business in some 183 countries. The newly launched online registration system and fast track one-day registration system in RJSC has cut the total time of the business start-up process by a month. This reform, along with the reforms in customs automation in Chittagong and the reduced corporate tax rate, has made Bangladesh one of the most active reformers in South Asia. Thanks to the Digital Bangladesh vision of the new government, new leadership at the line ministry and in RJSC, and the tireless efforts of the RJSC officials.

Reducing poverty
If Bangladesh is to achieve the 8% growth necessary to meet the key Millennium Development Goal of halving the poverty rate by 2015, the business environment must improve. Reformation of business registration and other start-up processes is the critical first step in promoting a healthy private sector.
The easier, faster, and cheaper the business start-up processes are, the more businesses can blossom in an economy. There is now considerable evidence around the world to support this claim. As the figure highlights, business start-up reforms have led to a significant increase in registered businesses around the world. Interestingly, the highest increase, so far, has been observed in Bangladesh. Studies on Mexico, India, Brazil, and the Russian Federation also show that simpler start-up regimes are associated with more new firms being registered.
Creating jobs
What does a greater number of businesses mean for the economy? It means many things. More businesses mean more investments, more jobs, and less poverty. About 10 years ago, Voices of the Poor, a World Bank study, asked 60,000 poor people around the world how they thought they might escape poverty. The unequivocal answer from both men and women was income from their own businesses or wages earned from employment.
At the end of last year, the Bangladesh Investment Climate Fund (BICF), managed by IFC in partnership with DFID and the European Union, conducted a perception survey of a nationally represented sample of 1,000 people, about 500 opinion leaders, 100 public officials, and 350 businesses (including SMEs and women owned businesses). High prices and unemployment appeared to be the nation's top two concern in that survey. In focus group discussions related to the survey, we found that people were not looking for handouts from the government to bear the brunt of the price hike, rather they wanted better job opportunities and decent wages to feed their families.
Easier business start-up processes can provide this opportunity. Indeed, a number of recent studies suggest that simpler start-up processes translate into greater employment opportunities and more productive jobs. A study of 97 countries finds that reducing entry costs for businesses by 80% increases total factor productivity by 22%. Analysing 157 countries, it finds that the same reduction in entry costs raises the output per worker by 29%. And simple economics tells us the higher the productivity, the higher is the wage rate for the workers.
Adaptability in times of crisis
In bad times, such as the financial crisis of the present and the macroeconomic crisis of the past, simpler business entry and exit processes make it easier for the workers and entrepreneurs to rapidly move across sectors to find the best possible use for their skills and capital, as confirmed by a recent study of 28 sectors in 55 countries. Indeed, some of the top business performers of today's world emerged during the crises of the past.
An enabling environment that allows businesses to promptly react to changed market conditions is not only the key to short-term recovery but also to long-term growth. No wonder that Doing Business 2010 finds that during the current financial crisis the highest number of countries since 2004 have undertaken regulatory reforms, and the highest number of those reforms are indeed in the area of business start-up.

Competition -- lower prices and better quality for consumers
Easier start-up processes create more business and more businesses means more competition, ceteris paribus. In Bangladesh, we still struggle with high prices of essentials. Various efforts to monitor or control prices have had mixed results so far. In such an environment, easier start-up can enable new businesses to enter the market and compete against the incumbents. This results in better quality products and/or lower prices. As a recent study in Mexico demonstrates, easing business start-up increased new start-ups by about 4%, and the competition from the new entrants lowered prices by 1% and reduced the income of the incumbent businesses by 3.5%.

Formal economy
Bangladesh has a huge informal economy. Burdensome regulations is one of key causes of informality that leads the firms to operate under the radar of government regulations. The businesses don't want to deal with the cumbersome, unclear and undpredictable regulations, or the predatory public officials who arbitrarily implement them. The end result is a loss-loss for everybody.
A growing informal sector means a narrow tax net and lack of tax revenue for the government. It also means a higher tax burden and unlevel playing field for the firms that operate formally as firms in the informal sector take undue advantage through tax evasion. Tax evasion of the informal firms, however, does not come without a significant cost. Hiding in the informal sector means more uncertainty, lack of longevity of the business, lack of access to credit, lack of market information and other government services, and lack of protections (i.e., no limited liability). Finally, informality means poor quality jobs, lack of protection, and poor pay for the workers employed in the informal firms.
A key element of the business start-up process -- incorporation of the company -- is the gateway to the formal economy. Not surprisingly, our perception survey revealed that the majority of businesses believed that it was better to register and conduct business formally. This gives them greater access to loans, greater security to do business (limited liability), and the ability to grow and be more productive. Despite the desire to be registered, however, many such businesses do not register because of the costly and complicated registration process and harrassment and rent seeking by the government officials. Once again, this makes the case for reforming the business start-up processes to make them simpler, easier, and cheaper so that more firms can become formal, grow, and create more jobs to make poverty history.

Reform quickly
In the global race to improve the investment climate, reform of business start-up processes appears to be the most popular regulatory reform. In 2007/08, 49 countries made it easier to start a business, which grew to 61 countries in 2008/09. Bangladesh made a great start in the race by cutting the time by a month to start a business. But we have miles to go. Our global rank of starting a business has slipped down from 90 to 98. This means that countries which were behind Bangladesh last year are now ahead of it because they reformed the business start-up processes more agressively than we did. If Rwanda can top the list of global reformers, why can't we? After all, running this race is a big deal for all of us.

Aminur Rahman is an economist with the Investment Climate Advisory Services of the World Bank Group.