The Costs of Doing Business

A World Bank report ranks the world's most business-friendly countries

Paul Karl Lukacs | November 7, 2007

Business taxes in Sierra Leone total 233.5 percent of profits. Firing an employee in Nepal will cost a business the equivalent of 90 weeks’ salary, which is better than the situation in Venezuela, where firing most employees is illegal. A contract dispute requires an average of 1,442 days to work its way through the Bangladeshi trial courts.

These curiously precise statistics can mean only one thing: The World Bank has issued its annual Doing Business report on the world’s economies.

Doing Business 2008, the fifth release in the series, summarizes the often surreal difficulty of being a local entrepreneur starting a small or medium-sized corporation. For instance, Tarik, one of the businessmen profiled in the report, is a Yemeni fish exporter who would dearly love to sell fresh tuna to Germany at $5.20 a kilogram. But he has to ship most of his tuna frozen to Pakistan at $1.10 a kilogram, because complying with Yemeni export regulations takes on average a sushi-unfriendly 33 calendar days. And Yemen isn’t close to having the slowest border. Iraq takes that prize, requiring exporters to wait an average of 102 days.

The World Bank and its affiliate and co-author, the private sector-oriented International Finance Corporation, rely heavily upon statistics to tell their tale. In total, almost every nation in the world was analyzed, the principal exceptions being countries with regimes that loathe the free market (e.g., Burma, Cuba, North Korea) and pinpricks like San Marino and Tuvalu. After all the laws are reviewed and every number crunched, each country is quantified and ranked in ten different categories, then given an overall ranking on the general ease of doing business.

The winner was no surprise. For the second year in a row, Singapore is ranked as the easiest country in the world in which to start and operate a business. The Asian city-state is followed in the league tables by, in order, New Zealand, the United States, Hong Kong (which is considered separately from mainland China), and Denmark. Dead last is the Democratic Republic of Congo, edging out the Central African Republic, Guinea-Bissau, the Republic of Congo and Burundi.

The real action is in the individual categories, which read like a gazetteer of finance ministry options, ranging from prudent transparency to contemptuous shake-downs—all spread around the world in unusual combinations. While Afghanistan, Kenya and the United States do not require an entrepreneur to deposit a single penny in start-up capital, Latvia requires a deposit equal to 22 percent of per capita income, South Korea requires a 296% deposit, and Syria wants a whopping 3,673.3 percent. New Zealand, Sweden and Thailand can each register a deed in two days, while Haiti, Kiribati and Slovenia each take more than a year.

Corporate income and payroll taxes are what differentiate economies that are merely misguided from the ravenous kleptocracies. Colombia and Tajikistan aren’t helping themselves with corporate tax burdens that hover around 82 percent, but they're bargains compared to the eight countries in which a business is expected to hand over more than 100 percent of its profits. This Hall of Shame includes likely suspects (D.R. Congo at 229.8 percent and Burundi at 278.7 percent) as well as relatively industrialized countries that should know better (Argentina at 112.9 percent and Belarus at 144.4 percent). Bottom of the barrel is Gambia, which taxes 286.7 percent of corporate profits.

In the past, libertarians have had their differences with the World Bank and its top-down interventions. “The World Bank et al.,” reason noted in 1995 while summarizing the Bank’s critics, “see capital and technology transfer as the key to growth, and fail to appreciate the economic potential of ordinary Third World citizens operating in free markets.”

The Doing Business series helps correct for the Bank’s 62 years of statist drift. By focusing on the minutia of business regulation, the Bank uses its hortatory powers to praise reformers while criticizing holdouts and backsliders. The current edition lauds Georgia (which targeted a spot in the top 25) and Egypt (which reformed in five of the ten categories) while noting that “Venezuela had the largest negative reforms.”

The Bank is employing a clever strategy, because each individual reform grants the entire business class of a country greater economic freedom without directly threatening the elites. A standard-issue military dictator is not going to conduct an open auction of the phosphate concession controlled by his family, but he probably won’t care if foreign diplomats request that he amend the banking code to allow general descriptions of inventory to be pledged as collateral.

Each quotidian reform tracked by the Doing Business report means that someone, somewhere will find it faster and less costly to create jobs and wealth. In that respect, the World Bank, of all unlikely institutions, is doing a better job of converting souls to free market capitalism than the Bush Administration.

Paul Karl Lukacs is a Los Angeles attorney who blogs about foreign affairs and travel at Knife Tricks.

Comments

sv|11.7.07 @ 1:31PM|#

can someone explain the mechanics of a > 100% tax rate on the profits of a business?

|11.7.07 @ 1:38PM|#

can someone explain the mechanics of a > 100% tax rate on the profits of a business?

2 sets of books. Before declaring shit like that stupid, consider this. If every businessman in the nation is cheating on their taxes, you can arrest and jail the ones who piss you off. From a dictator's viewpoint, it's eminently practical.

|11.7.07 @ 1:44PM|#

235% of everything belong to us.

We note you are in arrears....

Danny|11.7.07 @ 2:02PM|#

What a money-making scheme! If my profit turns out to be negative, the government will cover my cost and give me a modest profit from being unprofitable (note the word used was profit, not revenue)! I think I'll start making and selling poop-flavored popsicles in one of those countries... Anybody know where I can get some really expensive feces?

sv|11.7.07 @ 2:03PM|#

J sub D | November 7, 2007, 1:38pm | #

can someone explain the mechanics of a > 100% tax rate on the profits of a business?

2 sets of books. Before declaring shit like that stupid, consider this. If every businessman in the nation is cheating on their taxes, you can arrest and jail the ones who piss you off. From a dictator's viewpoint, it's eminently practical.

that's.... damn.

it sort of reminds me of how property tax rates are high, but the 'assessed value' of the home is usually a fraction of the market value. pretty unrelated, but still.

what are their official justifications for having tax rates which appear so absurd? i imagine that they assume that tax fraud is rampant, people vastly underreport their income and profits, and uniform enforcement is infeasible and attempts at it would extinguish the govt. cash cow of taxable business, and simply keep upping their rates. probably real simple, like an extortive 'pay us $100 a month' deal (in which case, all of these world bank figures become suspect). even more extortive (by far) than normal taxation, that is.

sv|11.7.07 @ 2:04PM|#

expensive feces: from people who eat vitamins?

|11.7.07 @ 2:26PM|#

sv,

They are probably taxes on revenue and not profit (or some other metric), but the net effect is that the assessed taxes are >100% of profit.

As was pointed out above, this is only sustainable with systemic corruption, fraud, and noncompliance.

A more domestic analogy would be artificially low and underenforced speed limits. Basically, a policeman can pull you over at any time. Even if you weren't driving over the limit, any judge or jury with a pulse would side with the officer since driving over the speed limit is so very prevalent. (Of course, there is always the "I saw you not use your turn signal 5 blocks ago" or "You were weaving" that are pretty much uncontestable catch alls.)

|11.7.07 @ 2:33PM|#

Even if you weren't driving over the limit, any judge or jury with a pulse would side with the officer since driving over the speed limit is so very prevalent. (Of course, there is always the "I saw you not use your turn signal 5 blocks ago" or "You were weaving" that are pretty much uncontestable catch alls.)

IOW, It's good to be in the ruling class when everbody else can be prosecuted. But here in America, fortunately, our government officials never abuse that power. If you'll excuse me now, I have to go puke.

|11.7.07 @ 3:25PM|#

American Liberals: Life in America sucks we need more taxes on behaviors that we deem offensive, before we can even fix the problem.

American Conservatives: Life in America is great, but we need more laws regulating morality to what we see as fit and less taxes.

American Libertarians: Life is great, but it could be even greater. We need less government intervention in our lives altogether.

LarryA|11.7.07 @ 3:42PM|#

can someone explain the mechanics of a > 100% tax rate on the profits of a business?

Black market. See: War on Drugs.

|11.7.07 @ 4:39PM|#

So let me get this straight...I suppose hypothetically the most buisness-friendly nation in the world might 1)have no min. wage 2)be able to fire workers for any reason or no reason at all 3) have little or no environmental or labor laws 4)allow corporations to export profits without any tax/regulation or requirement to invest in that nation...What a PARADISE!!

|11.7.07 @ 8:06PM|#

Yes James you have unknowingly admitted how great things can be when you leave emotionalism out of things.

But if we didn't tax so much, why would corporations export profits? Unless of course you mean to tell me that they might outsourse the "jobs" to a part of the world that has more regulation?

|11.7.07 @ 8:09PM|#

Hey James, do you know where I can get a job that has been shipped here from Singapore? Please help I want to work for one that has come over here, because in Singapore there is too little regulation.

Oh, and explain how do you not invest in a nation when you provide an employment oppertunity to the people of that nation.

I suppose you might have also been one of the unfortunate Americans that lost your job at McDonnald's to an illegal immigrant.

|11.7.07 @ 10:05PM|#

James : "I suppose hypothetically the most buisness-friendly nation in the world might 1)have no min. wage 2)be able to fire workers for any reason or no reason at all 3) have little or no environmental or labor laws 4)allow corporations to export profits without any tax/regulation or requirement to invest in that nation...What a PARADISE!!"

Actually James, "paradise" is defined individually. What is paradise to me may be hell to you, or vice versa.

The problem with collectivists and statists is their tendency ( or is it actually a fetish ?) to want to shove all of humanity into a paradigm in which political pressure is the only legitimate institution. This inevitably results in a multitude of rules which are politically useful to special interest groups, but almost always harmful to the general welfare, social peace and prosperity.

This is precisely the trap in which we find ourselves today, both domestically and internationally.

People who truly love freedom and their fellow human beings understand that the correct paradigm for peace and prosperity, both domestically and internationally, rests upon a few broad, non-controversial and easily understood principles - namely private property, contract law, free trade and free association.

Too bad James just doesn't get it.

Brian Sorgatz|11.8.07 @ 4:28PM|#

In that respect, the World Bank, of all unlikely institutions, is doing a better job of converting souls to free market capitalism than the Bush Administration.

Law of Averages.

Dan Clore|11.9.07 @ 8:02AM|#

I've barely looked at the report, but I immediately notice a major problem with it: in almost every category, it specifies traditional capitalist corporations as the only business form considered. Other business forms, such as workers cooperatives, are not considered at all. In the US, many states do not legally recognize workers cooperatives, which makes the US rather unfriendly to this form of business. But that sort of thing is not taken into account. In short, this is really not a report on business friendly these countries are, but how *corporate* friendly.

Any other comments on this subject?

News & Views for Anarchists & Activists:
http://groups.yahoo.com/group/smygo/

|11.9.07 @ 5:43PM|#

"Paradise is defined individually"...

I suppose to some extent this is true...I would prefer a world with a primary value of solidarity which I why I would rather live in a world that guarantees a minimum threshold of quality of life for each citizen with no overall ceiling instead of the world that corporations create in these so-called 'ideal business climates' which guarantee no minimum and concentrate wealth among the elites...If you are a whale(social darwinist) you probably oppose laws that protect minnows. In my point of view this is preferable to the law of the jungle.