Assessing the State of Doing Business in Latin America

Ben Raderstorf / The Inter-American Dialogue

Creating a better business climate in Latin America was the focus of the Dialogue’s November 28th event which served as the launch of the World Bank’s report on Doing Business 2017: Equal Opportunity for All. This report is the 14th in a series of annual reports that investigate regulations that enhance or constrain business, with quantitative indicators across a total of 90 economies over time. Specific issues that were discussed include taxes and financing, energy credits, methodologies used in the report, as well as whether or not regulatory reforms are keeping pace with changing developments. Augosto López Claros, director of the World Bank Indicators Group gave an overview of the report while Inés Bustillo, director of the Washington Office of the United Nations Commission for Latin America and the Caribbean (ECLAC), and Richard Newfarmer, country director for the International Growth Centre provided commentary.

Michael Shifter, president of the Inter-American Dialogue, gave opening remarks about current economic conditions in Latin America. The region is expected to contract by one percent in 2016. Mr. Shifter noted that these are challenging times for the region. He also noted, however, that many Latin American governments are more open and friendly to business due to the new economic realities. One of the benefits of the report that Mr. Shifter highlighted was the indicators that quantify programs over time and how Latin America fares globally.

Mr. Claros noted that there are 11 indicators of doing business in the report. He highlighted that 90 percent of job creation comes from the private sector and that some countries make conducting businesses difficult through rent seeking of the private sector. It is procedurally difficult to start a business with high poverty and corruption rates, as well as increased economic informality. Mr. Claros noted the enforcing contracts indicator and that the more time it takes to go through the enforcement process in a given country, the more costly it is for businesses. An example of a country with timely enforcement regulations is Singapore, where it only takes 120 days to enforce contracts or disputes, usually with a high rate of success. With regard to taxes, Mr. Claros mentioned that some countries make paying taxes difficult and that this discourages business activity.

The new report includes methodological changes and new research for doing business for 2017. One change is the focus on gender bias and the fact that countries often use the law to restrict women from starting their own businesses. Various countries have responded and are changing their constitutions to protect women. Women often have to go through more procedures to start a business and in many countries, they have restrictions on where they can work or travel. Furthermore, data collection on women in some countries is difficult to obtain. In Latin America, the most restrictions for women were in Chile, Haiti, and Suriname.
The issue of public procurement was also discussed by Mr. Claros. It was noted that the report looked at indicators that capture the process of procurement and issues such as how transparent public procurement systems are, and the length of time it takes to resolve payment disputes.

Another aspect of the report was in looking at measuring how countries fare in how friendly they are for businesses. Mr. Claros noted that countries are ranked globally and that the rankings are relative. For example, countries that move faster in developing a more friendly business environment move ahead in the rankings. The World Bank looked at the entire data set and best practices in making their determinations. As noted earlier, it only takes 120 days to enforce contracts in Singapore, which places it at number one on the list. Likewise, in New Zealand, it only takes half a day to set up a business. For some countries, it can take up to 60 days to set up a business.
Mr. Claros mentioned that the rankings are relative but that countries that seem to fall behind may still be improving (albeit not as fast as other countries) and that most countries have improved their score over the years. Worldwide, 137 countries have implemented 283 reforms in 2015/2016. For Latin America, 22 countries have implemented 32 reforms.

Trends in the data show that it is getting easier to set up a business. For Latin America, in 19 countries, it takes less than 20 days to set up a business.
Another of the report’s highlights was that higher levels of regulatory efficiency and quality are associated with lower levels of corruption. Economies with more business-friendly regulations tend to have lower levels of inequality. It was noted that low-income countries are growing much faster than high-income countries. Finally, Mr. Claros highlighted that despite the advances made by the developing countries, full convergence with them will take hundreds of years at the current rate.

Ms. Bustillo noted some of the new items in the report, specifically gender issues and tax issues. Regarding gender, Ms. Bustillo highlighted that countries need to take gender into account when developing regulations. In Latin America, Chile, Ecuador, Haiti, and Suriname, women face more hurdles than men regarding opening and operating businesses. There is discrimination in some countries based on gender, but Ms. Bustillo mentioned that most of the problem lies with the fact that women disproportionately are low-income, do not own property, do not have savings, and are engaged in the informal economy. This hampers women’s access to credit to start businesses. They are often seen as a risk for investors and creditors. One question that Ms. Bustillo asked is why the report does not capture the economic informality disparity of women. Ms. Bustillo also mentioned that just eight percent of women are members of corporate boards. In Latin America, there are no quotas or other mechanisms to help mitigate this disparity for women.

Regarding the issue of taxes, Ms. Bustillo noted that paying taxes in Latin America is a challenge, but that tax reforms in the region have occurred. Even so, the tax system needs to be fairer and tax evasion needs to be reduced. There is also a regressive tax bias. Ms. Bustillo asked how the report is addressing these issues. She did note that Uruguay was an exception.

Finally, Ms. Bustillo discussed the issue of regulations and economic growth. She noted that human capital and state institutions need to be further developed and that structural changes need to occur. She also highlighted that less government intervention may not lead to growth. She did note, however, that if markets are not working well, the economy will not grow.

Mr. Newfarmer mentioned how the report gives a catalog of policy change from year to year and how the World Bank is striving to improve how the report is developed. Mr. Newfarmer highlighted how the report focuses on regulations without looking at the potential benefits of regulations. He also noted that the report may be seen as biased regarding corporate policies related to vacations and sick leave and that these issues should not necessarily be seen as a negative. Mr. Newfarmer also noted that only including gender seems unsystematic given that other disadvantaged groups could also be included. He also highlighted that there are physical barriers to economic growth for some countries. One example was of Rwanda and Singapore. Rwanda does not have easy access to waterways and has poor infrastructure, whereas Singapore has easy access to ports and modern infrastructure. Mr. Newfarmer also highlighted that the sample size in the report is too small and needs to be larger.

Regarding the overall rankings, Mr. Newfarmer mentioned that all items should not be weighed equally when looking at regulations. For example, the report indicates that it is easier to do business in Russia than Chile, but is that really true? Mr. Newfarmer also questioned how Russia went from 92 to 40 in the rankings from 2014-2016.

Mr. Newfarmer gave some analysis on the rankings changes over time. He noted that the report looks at rules and regulations but not if those rules and regulations are enforced.

There were some concerns with those using the report. Economies have to be careful with looking at the report over time. Mr. Newfarmer did note that the subsections of the report were very useful. Donors have to be cautious, however, about utilizing the report as indicators from the report may not be the most important policy problem a country faces. In addition, it was mentioned that some indices are more powerful than others, such as looking at taxes. Finally, Mr. Newfarmer mentioned that the report is not convincing regarding the issue of income distribution.

Mr. Claros ended the event by discussing some of the criticisms highlighted by Mr. Newfarmer. He mentioned that the indicators in the report were weighed equally and that there was no empirical justification for weighing them differently. Additionally, he noted that it is better to focus on individual data points rather than aggregate rankings. Finally, Mr. Claros admitted that regarding tax rates, it was fair to presume that the report could be seen as advocating lower taxes.