Small countries are big reformers on the World Bank's Doing Business index

Small countries are big reformers on the World Bank's Doing Business index
By bne IntelliNews November 1, 2017

Aside from their reforming zeal, the top performers from the CEE/CIS region on the World Bank’s latest Doing Business index have another thing in common: they all have populations of under 4mn. 

Georgia (population 3.7mn), leads the region taking ninth place globally, and is the only lower-middle-income country to rank among the top 10 countries in the world for ease of doing business, according to the influential ranking released by the World Bank on October 31. 

In the last 14 years, Tbilisi has made more business regulation reforms — 47 in total — than any of the top 20 ranked countries, which include much wealthier economies like Sweden, Finland, Canada, France or Australia. The pace of reform continued through 2017, with Georgia rising seven places on the 2018 ranking. 

Next among the CEE/CIS countries is Macedonia (population 2mn), last year’s regional champion, which fell one place to a still very commendable 11th. 

Macedonia has soared up the ranking in recent years as the conservative VMRO-DPMNE government launched reform after reform with the aim of attracting export-oriented investment to boost the local economy and bring down the high unemployment rate. 

Now that VMRO-DPMNE has been dramatically ousted, following two years of unrest culminating in an invasion of the parliament by angry protesters, the new government led by the Social Democratic Union of Macedonia (SDSM) has pledged to further improve the business climate in the country.

Prime Minister Zoran Zaev recently said that the government will implement a plan guided by six principles, which will include boosting transparency and freeing the private sector from political influence and clientelism. Skopje also wants to treat foreign investors — which benefitted from generous and often untransparent subsidies under VMRO-DPMNE — the same as domestic investors. 

The other top performers from the region are the three Baltic states, all of which have populations under 3mn. This year Estonia came in at 12th position, unchanged from the previous year, while neighbouring Latvia jumped two positions to the 19th spot, and Lithuania dropped two places to the 16th.

Not only that, but the top reformer on the 2018 ranking was the small Balkan economy of Kosovo (population 1.8mn), which just beat fellow reformer Uzbekistan, as it advanced by 20 places. “Kosovo recorded three reforms making it easier to do business, including adopting a new law that establishes clear priority rules inside bankruptcy for secured creditors and clear grounds for relief from a stay for secured creditors during reorganisation procedures,” the World Bank report said. 

While the top three states, New Zealand, Singapore and Denmark, in the Doing Business index all have populations of under 6mn, not all small states are effective reformers and not all larger countries are lagging behind. This is also true of countries in the CEE/CIS region. Bosnia & Herzegovina (population 3.5mn) dropped to 86th place making it one of the worst ranked in the CEE/CIS region, while both Poland (population 38mn) and Russia (population 144mn) score relatively well. 

A 2014 Credit Suisse report describes the rise of new small states as one of the key geo-economic megatrends of the past 30 years, which saw the breakup of the Soviet Union, Yugoslavia and Czechoslovakia; all the top performers from CEE/CIS on the 2018 Doing Business index were born from the breakup of those countries. 

The report, titled “The Success of Small Countries” finds a negative correlation between size and GDP per capita which, Credit Suisse analysts say, is particularly true for high income countries.

Part of this, the report says, is because small countries are more homogeneous. “[H]omogeneity plays an important role in determining the success of a country,” it says. 

“We also found that small countries are more open to international trade or have embraced globalisation to a higher extent than larger countries,” the report says, although the flip side is that small countries tend to experience higher volatility in economic growth.

The Credit Suisse report also disputes the theory that large countries should benefit from economies of scale. “We found that there is a weak correlation between government spending as a percentage of GDP and size,” it says. “The only area where large countries appear to benefit from economies of scale is in public sector salaries, which are probably a good proxy for the relative size of the government. Smaller countries spend more on education and healthcare as a percentage of GDP … key factors for the long-term success of a country.”