Jewish World Review Sept. 18, 2000 / 17 Elul, 5760
A new study suggests that treatment of business start-ups closely parallels economic progress
http://www.jewishworldreview.com -- WHY DO PEOPLE in China and Poland have a better chance of achieving a high standard of living than those in Russia? What is that puts France and Ireland on opposite sides of the interest-rate struggle in Europe? If Sweden and Finland have such "socialist" economies, then why are they such big high-tech successes?
Because of the way those countries regulate business start-ups, according to an illuminating study published this week by Andrei Shleifer, Rafael La Porta and Florencio Lopez-de-Silanes of Harvard and Simeon Djankov of the World Bank.*
The authors find that the more obstacles that governments place before entrepreneurs, the more prevalent corruption and the bigger the grey markets in their national economies are likely to be. Lower start-up regulation, for its part, correlates with greater democracy and higher GDP per head, the latter being a crude measure of standard of living.
Any number of other studies have, of course, looked at the trouble associated with bureaucratic red tape and too much government. The achievement of this one is to show how even a very narrow-seeming and specific sort of regulation - procedures required for start ups - can have widespread economic consequences.
To reach these conclusions, Messrs Shleifer, La Porta, Lopez-de-Silanes and Djankov sifted through business rules and regulation (including taxation) for 75 countries. They found a wide variety in both the number and kind of obstacles to start-ups. Some countries impose numerous taxes, others make firms wait half a year before getting to work. In Austria, it takes 12 procedures, 154 days, and the equivalent of $11,612 in fees to start a legal business. In Canada, by contrast, budding entrepreneurs need work their way through only two procedures, taking only two days, and spend US$280 to open shop.
A chart ranking countries by the number of procedures they require - the measure the authors deem crucial - yields a few surprises. Canada comes out the best of the lot, with Australia, New Zealand, the US, Sweden and Ireland close behind. Israel comes in ninth - good news for its information technology boom - and the UK ranks 14.
The bottom quartile contains some predictable names, including Brazil and Russia. Bolivia, with 20 procedures required, is the worst of the lot. But Mexico is also in the group, as is an apparently still dirigiste France. France comes in just below Vietnam, an embarrassment for the old Empire.
As Canada's recent troubles have indicated, the freedom to start a firm does not alone an economy make. Fiscal and monetary problems can hurt progress. Still, the wide range of "start-up rankings" among the various Euro-zone countries help to explain the challenges currently facing the ECB.
Two aspects to this study are particularly exciting. The first is the authors' news that they "did not find that stricter regulation of entry is associated with higher quality products, better pollution records or health outcomes". In other words, drawing the "lesson of Firestone" and slapping new regulations on future start-up tyre makers is not necessarily likely to yield safer autos or fewer overturned Ford Explorers.
The second bit of received wisdom that the authors challenge is the notion, particularly popular in regard to the Third World, that well-regulated corruption can sometimes be efficient ("there may be a troll at the bridge, but he is a reliable local troll"). Rather, the authors find that corruption almost always mean economic distortions.
The consequences, described in a World Bank report quoted by the authors, are devastating: "When someone has finally made the decision to invest, he then is subjected to some of the worst treatment imaginable" (World Bank 1999, Administrative Barriers to Investment in Africa).
All this goes a good way to explaining the spring in Ireland's step, and to offering some insight into France's troubles. Perhaps the best chance for the revival of the Euro, we might extrapolate here, would be converting the Hexagon into one big Enterprise Zone.
*'The Regulation of Entry', National Bureau of Economic Research Working Paper 7892, Sept
JWR contributor Amity Shlaes is a columnist for Financial Times
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