Who is reforming?

Thirty-one countries eased business entry in 2004. Nine of these – Bolivia, Côte d'Ivoire, Hungary, Lithuania, Romania, Russia, Slovakia, Spain and Vietnam – reformed for the second year in a row. On average the top 10 reformers cut the cost by 25%, the minimum capital requirement by a third and the time by half. The most popular reform in 2004 was to create a single access point for entrepreneurs. Seven countries did this. Other reforms were also popular. Kazakhstan, Romania, Serbia and Montenegro and Slovakia made company registration an administrative (not judicial) process. Cambodia, Germany, Honduras, Ireland and Latvia cut the cost of starting a business. Ecuador, El Salvador, Germany, Romania, Serbia and Montenegro and Slovakia made the process quicker. Cambodia, Serbia and Montenegro and Tunisia lowered the minimum capital requirement.

Serbia and Montenegro, the second-ranked reformer, transferred registration from the court to a new administrative registry. Entrepreneurs can register online, and a “silence is consent” rule ensures approval in 5 days. If the entrepreneur hasn't heard from the registry in this time, the business can start operation. The country also set up a unified electronic database, linking the courts, the statistics bureau, the customs office, the national bank and the municipalities. And it cut the minimum capital requirement from 5,000 euro to 500. A company can now start operating in 15 days rather than 51.

Slovakia imposed time limits on issuing trade licenses. And it simplified tax registration by introducing a unified tax number for income and value added taxes. Starting a business now takes 25 days, nearly 80 days fewer than in 2003. In Romania registration takes only 11 days. Managers sign a form taking responsibility for the company's compliance with regulations rather than obtaining business permits during registration.

Reforms across the European Union were inspired by competition, with entrepreneurs in an EU member country able to incorporate their company in any other one. Fifteen thousand German businesses have saved on notary and other expenses by registering in London, where the required capital is only £1. Compare that with the minimum required capital of 25,000 euro in Germany. The German government has already proposed legislation to cut the capital requirement to 10,000 euro. The Netherlands plans to scrap it altogether. Reforms have also taken place in Bulgaria, the Czech Republic, Denmark, Estonia, Greece, Hungary, Ireland, Norway and Spain.

Reform in Latin America and the Caribbean is gathering speed. In El Salvador business start-up now takes 75 days fewer than in 2003. Ecuador cut the time by a quarter. Honduras cut registration fees in half, although the total cost of start-up fell by only 12% because notary fees account for the bulk of expenses. A more daring reform is necessary. Jamaica introduced a new company law and streamlined social security and tax registration. Its reforms cut the time by 22 days. Bolivia cut 2 weeks off its lengthy process. Mexico and Paraguay are reforming as well. In Brazil the pressure for easing entry is so great that several thousand entrepreneurs marched to the president's offi ce in June 2005 demanding change. Argentina bucked the trend by imposing a requirement for notary approval of the registration notice.

In the Middle East and North Africa, Tunisia reduced the minimum capital requirement to a tenth of what it had been. Egypt centralized start-up in a single building, where company charters, now submitted electronically, are preapproved by the registry on the spot. Registration is done in a day—but registration fees increased by 80%. Saudi Arabia has started ambitious reforms. Approvals by different ministries are now centralized to speed registration. Time has already fallen by a week, with more improvements expected by the end of 2005. Yemen made it more difficult for new businesses, by doubling the required capital to more than $15,000. With annual incomes averaging $570, there are few takers.

Africa largely didn't reform. Only Côte d'Ivoire made entry easier. Social security registration is now issued on the spot, and the time for business start-up has been cut by a fifth. The Democratic Republic of Congo created a single access point. But hardly anyone knows about it, and the registration center is empty. Other countries went backwards. Kenya added a separate procedure for paying stamp duty. Madagascar increased the minimum capital requirement to $ 6,474, 22 times the average annual income. This reform is easily the worst of the year. For the second year in a row the start-up gap between rich and poor countries widened. Since 2003 rich countries have made business start-up 33% faster on average, cutting the time from 29 days to 19. They have cut the average cost by 26%, from 9% of income per capita to 7%. Meanwhile, poor countries have reduced the time required by only 10%, from 62 days to 56. The cost remains a staggering 113% of income per capita, and the minimum paid-up capital 299% of income per capita – 10 times the level in OECD countries.

Why reform?

If it is easy to set up a business, more businesses are set up. Entrepreneurs registered nearly 1,500 more firms in Serbia and Montenegro in the first half of 2005 than in the fi rst half of 2004 – a 42 % jump. This is not an aberration. Following reform, new entry jumped by 28% in Vietnam, 22 % in Romania and 16% in Belgium.

There are other benefi ts. One is the associated increase in investment. Analysis in one study suggests that if Algeria brought its entry regulation to the level in Turkey, it could boost business investment by up to 30%.

Other studies show that another benefit is new jobs. In Afghanistan the entry of new companies in 2004 brought 120,000 formal sector jobs. Cumbersome entry procedures push entrepreneurs into the informal economy, where businesses pay no taxes and many of the benefits that regulation is supposed to provide are missing. Workers lack health insurance and pension benefits. Products are not subject to quality standards. Businesses cannot obtain bank credit or use courts to resolve disputes. Women are disproportionately hurt, since they make up 75% of informal employees. Corruption is rampant, as bureaucrats have many opportunities to extract bribes These effects were reported in depth in Doing Business in 2004. Enticing enterprises into the formal economy through easier start-up procedures has 2 economic benefits. First, formally registered enterprises, because they have less need to hide from government inspectors and the police, grow to more efficient sizes. On average formal enterprises produce 40% more than informal enterprises in the same sectors, as reported in Doing Business in 2005. Second, formal enterprises pay taxes, increasing the tax base for government revenue. As more companies move into the formal economy, governments can lower the corporate tax burden. This gives every business more incentive to