Eastern Europe, Central Asia still top business regulation reformers

By bne IntelliNews October 25, 2011

Tim Gosling in Prague -

For the ninth consecutive year, the IFC and World Bank found that Eastern Europe and Central Asia led the world in improving regulations for entrepreneurs in 2011. However, notable trends can be seen differentiating Europe and Central Asia's emerging economies along regional lines.

While the countries of the Commonwealth of Independent States (CIS) continue to make steady headway, albeit from a fairly low base, certain economies in Southeast Europe - Moldova and Macedonia in particular - are coming on leaps and bounds. At the same time, Central European states, now safely within the 27-member bloc, are mostly going backwards.

Released on October 20, the survey "Doing Business 2012: Doing Business in a More Transparent World" assesses regulations affecting domestic firms in 183 economies. The report ranks the economies in 10 areas of business regulation, such as starting a business, resolving insolvency, and trading across borders. The study's methodology expanded this year to include indicators on getting electricity connections.

Two countries from Emerging Europe and Central Asia powered into the global top three for improving business regulations. Moldova claimed the number two spot, moving up 18 places from 99 to 81 in the overall rankings, whilst Macedonia came in third number three, moving up 12 places from 34 to 22.

However, following the dramatic reforms it has implemented over the last few years, Georgia continues to lead the region overall, coming in 16th. Since 2005, Tbilisi has introduced new company and customs codes, a revamped property registry, broad judicial reform, and a credit bureau. The reform programme continued in 2010-11 with simplification of business start-up, and expanding access to credit, the report says.

Steady progress in CIS

Russia's rank improved this year from 124th to 120th, with the report highlighting that the procedure for registering companies has become easier and foreign trade operations simpler. In addition, it is now possible to submit paperwork to the courts in electronic form and there has been a reduction in the cost of connecting to the power grid (although of all the countries in question, that cost remains the highest in Russia).

Analysts at VTB Capital welcomed the progress: "This is an independent and authoritative demonstration that, even if Russia is some distance from getting to the top third of the roster, and many problems remain, contrary to popular perceptions the interim momentum on the structural reform side has been tangibly positive over the past 12 months."

Kazakhstan was particularly pleased to enter the top 50 in the rankings for the first time, gaining 11 places to stand at 47, with strong progress made in protecting investors and paying taxes.

Prime Minister Karim Massimov was effusive, commenting: "The World Bank's report shows our ongoing programme of business reform is working. We are more open to foreign investors than ever before. We are also building an environment in which small and medium-sized enterprises will flourish - as they are at the heart of our drive to build a diverse, resilient and sustainable future economy. Kazakhstan has had 20 years of economic success, but in today's tough financial times, it is the Government's responsibility to continually improve the business environment and maintain the march up the rankings."

Other Central Asian states were a mixed bag, however, with Uzbekistan coming bottom of the regional rankings by dropping two places to 164, with Tajikistan not far ahead. Although it fell by three places, Kyrgyzstan's grip in mid-table can probably be considered a positive considering the political problems it has endured.

Ukraine was the disappointment out of the European former Soviet states, sliding three spots to 152nd, and coming in the bottom three in the world for the ease of obtaining a construction permit and paying taxes. "Ukraine lost the most points in the trading across borders area: Ukraine made trading across borders more difficult by introducing additional inspections for customs clearance of imports," say analysts at Concorde Capital.

The drop left the country firmly at the bottom of the CIS rankings, a stark contrast to international pariah Belarus, which gained an impressive 22 places to rise to 69th, with protection of investors and paying taxes offering the biggest improvements in the last twelve months.

EU key

However, the most striking contrast in performance is noted between the Central and Southeast European regions, with EU membership appearing a key driver. States to the south pushing for accession not only showed greater progress in 2010-11, but are ranked well above their peers in the centre of the continent in the overall table.

Reporting on Macedonia's impressive performance as most improved in the region, and second most improved in the world, the report says: "Regional integration efforts such as the accession process of the European Union can help drive reforms in business regulation. This has been the case in FYR Macedonia, which launched a comprehensive reform agenda after applying for EU membership ... Its reform agenda has been driven largely by requirements to ensure that the country's laws are in line with the EU legal framework and to fulfil certain macroeconomic criteria.

Things have moved in the opposite direction further north, however, with all the Central European and Baltic states bar two in reverse. That suggests a certain level of complacency to continue reform could be at play without the EU accession driver, although of course a certain degree of protectionism is not surprising given the sovereign debt crisis stalking Europe.

At the same time, the Baltics at least can all boast of being amongst the 30 easiest states in the world in which to do business, and Latvia put in the best performance in CEE by moving up 10 spots to 21st, mostly driven by improving insolvency, property and power issues.

The Czech Republic was the only other state in the region to join it, with reform on taxes and property pushing it six places higher, although it remains the laggard of the whole of CEE in 64th position. Hungary and Poland, meanwhile, dropped further away from the top 50, with access to credit doing the damage in the former, and Slovakia just managed to avoid tumbling out of that group, halting a five-place slide at 48th as indicators dropped across the board.

The Slovak finance ministry claimed that future performance should be boosted, with the 2012 reading coming when "multiple government reforms were not yet adopted or implemented." However, with the current political chaos that reigns in Bratislava, there is plenty of doubt over that reform programme.

A long way to go

The overall rankings in the survey were once more led by Singapore, followed by Hong Kong SAR, China, New Zealand, the US and Denmark. The Republic of Korea was a new entrant to the top 10.

The report focuses on the quality of the regulatory framework, but warns it is not all-inclusive. It does not, for example, measure security, corruption, market size, macroeconomic stability, the state of the financial system, the labour skills of the population or all aspects of the quality of infrastructure. Nor does it focus on regulations specific to foreign investment.

However, a new measure that looks at how economies changed their business regulations over the past six years shows that all economies in Eastern Europe and Central Asia have made their regulatory environments more business-friendly, the report says. Augusto Lopez-Claros, Director, Global Indicators and Analysis, World Bank Group said: "By simplifying regulations and expanding access to credit, countries in Eastern Europe and Central Asia continue to enhance opportunities for entrepreneurs."

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