Robert BuddanA STUDY for the World Bank, conducted in 2001, lays the basis for the Doing Business in Jamaica (and 84 other countries) report discussed widely since publication.
The study concentrates on the rules that govern the regulation of entry (setting up new businesses) in a sample of 85 countries. It compares the number of procedures involved, the time taken and the start-up costs for doing business. It finds that countries with heavier regulations of entry have higher levels of corruption and larger unofficial economies but not better quality of public or private services. In contrast, countries with more democratic and limited governments have lighter regulations of entry.
It found that Jamaica ranked in the same company of countries like Canada, Denmark, Hong Kong, the Netherlands, New Zealand, Singapore, Sweden and the United Kingdom for regulating entry the least.
Regulations have been justified as necessary to prevent market failure and achieve social efficiency in the public interest. This is called public interest theory. Public choice theory says differently. Regulations are strong because either influential businesses 'capture' regulations and use them to limit competition and access privileges; or, because politicians and bureaucrats wish to extract 'rents' for themselves and protect their own businesses.
The findings are that:
The number of regulations needed to start up a new business ranges from two in Canada to 21 in the Dominican Republic, with the world average being 10. Jamaica had about the same number as the developed (OECD) countries and less than the regional (mostly Latin American) countries.
The official time needed to start up a new business ranges from two days in Australia and Canada to 152 days in Madagascar with the world average being 47 days. Again Jamaica had about the same as the OECD countries and less for the region.
The official costs for following these procedures range from 0.5 per cent of GDP per capita in the US to 4.6 times in the DR, with the world average being 47 per cent. Jamaica's cost was above the OECD average but much less than the regional and world averages.
Jamaica scored better than the region in flexibility of hiring and firing and employment conditions; enforcing contracts and the time it takes for closing a business.
The report says, "For an entrepreneur, legal entry is extremely cumbersome, time-consuming, and expensive in most countries in the world."
REGULATION AND
POLITICAL SYSTEMS
Public choice theory says that regulation is necessary for ensuring higher quality products, better health standards, lower levels of pollution, and keener competition. The evidence shows that stricter regulation is more strongly associated with sharply higher levels of corruption and a greater relative size of the unofficial economy.
Countries with more access to political rights, greater constraints on executive power, and more access to political power have less burdensome regulations of entry compared to those which are less representative, less limited, and less free.
Countries with more limited governments, governments more open to competition, and greater political rights, have lighter regulation of entry. This is consistent with public choice theory that sees regulation as a mechanism to create rents for politicians and the firms they support.
In other words, regulation is greatest where corruption is widespread, governments are unlimited and property rights are insecure (Bolivia, Mozambique, Vietnam).
Heavier regulation is associated with a larger informal economy and higher corruption, but not with a better quality of public or private goods or services. Countries with less limited, less democratic, and more interventionist governments regulate entry more heavily.
Regulation is light in such democratic countries as Australia, New Zealand, Canada and the United States. One finding has been that economic freedoms (but not necessarily political freedoms) are highly correlated with countries with an English legal system which stresses independence of the judiciary and government accountable to the rule of law.
Measures of good government are uniformly higher in rich countries. Market failure is more likely in poor countries where consumers are more exposed to larger risks from bad firms. The planner needs more regulations to screen firms.
SOME SPECIFIC RESULTS
The countries studied included all major developed countries and samples from other regions. In the Caribbean, Jamaica and the Dominican Republic were the examples. Measures of procedures involving company registration, labour, health, environmental and tax compliance were studied.
Jamaica ranked 15 out of 85, led by 10 western developed states and others such as Mongolia, Israel, Hong Kong and Zimbabwe. Jamaica was ahead of countries like Belgium, the Netherlands, Spain, Portugal, France, Italy and the 10 Latin American and one other Caribbean country in the sample.
All of this point to the fact that governance reforms are working. The report will broaden the areas to be covered in 2005 to include registering property, dealing with licenses and inspections, protecting investors; and in 2006, it will cover trading access across borders, improving law and order and paying taxes. These are areas that the government has to prepare itself in if it is to maintain its ranking.
The private sector's complaint about bureaucracy is not substantiated. The report is not as exhaustive as it will be and does not claim to have covered all aspects of those areas that it has so far studied. But it does raise questions about the extent to which complaints about Government bureaucracy are justified. These complaints are usually not made with evidence nor are they made to compare experiences now with before.
The findings are not consistent with Transparency International's measurement of corruption. Corruption is not measured directly in the study and the study uses the rankings of Transparency International. But what it shows is that the speed by which entry is allowed reduces the opportunities for 'rents' that is, corruption. This means that TI's measurements, which have been criticised in the past, must take in some of the considerations of this report.
REFORMS WORK
The report is a victory for reformers over those who simply believe that what we need is a good economic manager. Good economic management can only take place when institutions can respond through arrangements that are responsive. This is why the social partnership is a part of good management and public sector reforms are too. These reforms bring direct economic benefits as the plan for huge bauxite investments show.
The World Bank findings will boost Jamaica's attraction as an investment site exposing the limited assessment used by international credit agencies.
Since the mid-1990s, the government has embarked on public sector modernisation. This report is the best validation of the success of those reforms to date. These reforms are continuing. Ministry Paper No. 6 of September 2002 outlines the vision and strategy of the public sector modernisation programme for 2002 to 2012. It promises a decade of excellence. Government and specifically the Public Sector Reform Unit of the Cabinet Office must take credit. But it is also a victory for consultation through the National Consultation on public sector reform at the National Conference Centre in 2002, in which a wide range of groups participated.
The report provides a basis for continued support of reformed governance. While it is important to track government's responsiveness to the private sector, the World Bank must also show an interest in Government's responsiveness to the public as well. If it does, it will find improvements in services such as land and titling, passport and birth, marriage and death certificates, and indeed the areas covered by the eight executive agencies.
The World Bank must also monitor the private sector. After all, public investment in private sector ventures should demand standards of efficiency, effectiveness, transparency, accountability, democracy and social responsibility in that sector too. The whole point about regulation and market failure is that markets need to be governed by rules of behaviour. Taxpayers need value for money when their dollars are used to support market and private sector ventures. Public money cannot be provided to families to operate family - owned business for family profit with no accountability to the public, and no democracy for the workers.
Robert Buddan lectures in the Department of Government, UWI, Mona. E-Mail: Robert.Buddan@uwimona.edu.jm
