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This project is part of the U.S. Government's global hunger and food security initiative.

2.2.3. Benefits of BEE Reform

Growth

Inappropriate regulation imposes costs on both the private sector and the government, reducing productivity and slowing growth. Reforming the business enabling environment allows businesses to spend less time and money dealing with regulations, instead focusing their energies on producing and marketing their goods. Government can spend fewer resources regulating and more resources on public investment and providing social services.

A hypothetical improvement on all aspects of the Doing Business indicators to reach the level of the top quartile of countries is associated with an estimated 1.4 to 2.2 percentage points in annual economic growth.[1] This is after controlling for other factors, such as income, government expenditure, investment, education, inflation, conflict and geographic regions. In contrast, improving to the level of the top quartile of countries on macroeconomic and education indicators is associated with 0.4 to 1.0 additional percentage points in growth.[2]

Business Enabling Environment Reforms Can Have Dramatic Results
  • Colombia generated 300,000 formal sector jobs after reforming employment and business start-up regulations.
  • Romania increased the volume of commercial credit by 50 percent and tripled the number of borrowers after improving collateral and bankruptcy laws and creating an online registry.
  • Rwanda enhanced its business environment by improving company and labor laws, simplifying judicial procedures, reforming land-titling, strengthening credit registries and streamlining customs procedures. Following reforms, the country's growth rate was 4.8 percent per year.
  • After Vietnam reduced the time and cost to register businesses, new registrations increased by 28 percent.

Source: Doing Business in 2006: Creating Jobs

Employment

Regulation of labor markets is usually intended to help workers, but can also be a significant constraint on firms. Ill-considered regulations can discourage firms from creating more jobs and can contribute to a swelling of the informal economy. When this is the case, some workers may benefit, but the unemployed, the low-skilled and those in the informal economy will not be among them. In many developing countries, labor regulation provides a high standard of protection to a few workers but limited or no protection for most of those in the informal economy. Regulatory strategies need to be crafted to reflect this wider range of interests, and to ensure a good fit with local circumstances.[3]

Trade

Internal trade-related regulations can hinder trade and off-set geographic advantages. According to World Bank research, each additional day that a product is delayed prior to being shipped reduces trade by at least 1 percent. Put differently, each day is equivalent to a country distancing itself from its trade partners by 70 km on average. Delays have an even greater impact on developing country exports and exports of time-sensitive goods, such as perishable agricultural products. In particular, a day’s delay reduces a country’s relative exports of time-sensitive to time-insensitive agricultural goods by 6 percent.[4]

Poverty reduction

More productive firms, nurtured by a good investment climate, can pay higher wages and invest more in training their workers. The expansion of firms can also have knock-on effects, raising the wages of those in smaller firms as the pool of available workers shrinks. Similar patterns are found in rural areas, where rising nonfarm employment lifts agricultural wages—with significant impacts on poverty reduction. Improving the investment climate does more than create jobs and improve living standards today. It also encourages people to invest more in their own education and skills to take advantage of better jobs in the future. There is thus a two-way link between skills and jobs, with an improved investment climate complementing efforts to improve human development.[5] Improving the investment climate reduces the costs of producing and distributing goods, and stronger competition helps to ensure these benefits flow on to consumers. Poor people benefit from the lower prices of the goods they consume, including staples.[6]

Benefits of the New Tax Code in Georgia

Following the Rose Revolution in Georgia, the new government reduced the number of taxes, simplified tax procedures and decreased bureaucratic barriers. The reduction of taxes and tax rates as well as the decrease of the minimum amount needed for business start-up helped motivate the creation of new businesses: the number of active, registered businesses increased by 119 percent from 2003 to 2006. Similarly, revenue from value-added taxes increased by 190 percent over the same time period. Cutting payroll taxes from 51 percent to 32 percent also motivated more businesses to legalize paid salaries. As a consequence, the amount of social tax collected increased by 126 percent and income tax by 152 percent between 2003 and 2006.[8]

Less corruption

Corruption can be reduced by eliminating unnecessary government inventions and increasing the transparency of government-firm transactions. Limiting the scope for bureaucratic discretion by reducing unnecessary ambiguity and promptly publishing regulatory changes can also have a positive effect on decreasing opportunities for bribe-seeking.

Lower deficits

Streamlining regulatory bureaucracy frees up funds that can be spent on more productive uses such as infrastructure and social services. Generally, reducing red tape by 15 percent can result in cost savings for the government of 1.2 percent to 1.8 percent.[7]

Resources

Footnotes

  1. Simeon Djankov, Caralee McLiesh, Rita Maria Ramalho, Regulation and Growth, 2006
  2. Source: World Bank, Doing Business in 2005: Removing Obstacles to Growth
  3. Source: World Bank, Doing Business in 2006: Creating Jobs
  4. Source: Simeon Djankov, Caroline Freund, and Cong S. Pham, Trading on Time, 2007
  5. Source: World Bank Group, World Development Report 2005: A Better Investment Climate for Everyone
  6. Ibid
  7. World Bank, Doing Business in 2005: Removing Obstacles to Growth
  8. Source: USAID, Tax Simplification: Lessons from Georgia, May 2006