PSD Blog - The World Bank Group

Belarusian Business Reform: Less Time with the Taxman

Has the regulatory burden for Belarusian businesses decreased?  According to a new World Bank Country Note on Running a Business in Belarus, progress has indeed been made over time. For example, the number of visits or required meetings with tax officials has significantly decreased from 2005 to 2008: from 3.2 to just 1 visit per year. Also, the percentage of firms reporting incidence of bribes with these tax officials decreased as well.

Comparing the firm-level data obtained in Belarus to similar Enterprise Survey data in 28 other Eastern Europe and Central Asia (ECA) countries yields two interesting statistics as discussed in the Note:

1. Belarusian firms have the highest proportion of government or state ownership in private firms, on average 10 percent.
2. Belarus stands out in the region as having high percentages of female participation in both firm ownership (53%) and in the labor force

Privatization: Soft budgets vs. soft price regulations

Public sector firms face a “soft budget” constraint in the sense that the government can bail them out for the losses they incur. Hence, managers can follow their own interest or favor special interest groups without worrying much about the costs of such actions. In short, soft budgets tend to promote corruption.

One solution to this soft budget driven corruption is privatization with a firm pre-commitment on the part of the government to not bail out the firm in the future. So, we should expect greater satisfaction with privatization among consumers in countries that are more corrupt. According to a recent study by Martimort and Straub (2009), quite the opposite is happening in Latin America. Consumer dissatisfaction with privatization efforts over the last two decades has increased, and especially so in countries that are more corrupt or where corruption has increased over time (see figure below the jump).

Michela Wrong's turn at the World Bank

Michela Wrong, the author of It's Our Turn to Eat: The Story of a Kenyan Whistle-Blower and a former journalist at the Financial Times, has been making the rounds promoting her new book. It's Our Turn to Eat tells the story of John Githongo, a Kenyan anti-corruption crusader who was eventually forced into exile. Wrong has kindly to agreed to give a talk on June 29 at the World Bank, and I think this is an event not to be missed. 

For useful reviews of the book, check out Chris Blattman, the Financial Times, and the Economist. Also check out this recent interview with Wrong on NPR.   

Stocks vs. flows, or why governance reform is still on the agenda

I seem to have Dani Rodrik on my mind lately. In a new post yesterday he argues that the governance reform agenda is dead. Here is his logic:

There was a time when economists believed that institutional reform--improving governance--was a key ingredient in improving living standards in the developing world.  "Good governance" is surely a good thing in its own right.  But a lot of recent academic and policy research has focused of late on its instrumental value for growth. 

The argument is simple and appealing. Rich countries are those characterized by democracy, rule of law, political competition, and low levels of corruption.  So poor countries have to emulate them in all these respects if they want to get rich too.

Oddly, some of the most vociferous advocates of this view have apparently given up on it in the aftermath of the financial crisis. Not consciously, perhaps.  But a repudiation is implicit in the arguments that they now make about the central role of governance failures in the current crisis in the U.S.

A collective need to rebuild public trust

The global economic crisis revealed large scale fraud in the financial sector (witness the Madoff scandal, among others). Unsurprisingly, it  has prompted widespread decline in public trust in companies. The Financial Times / Harris Poll released last month suggests three-quarters of people in the US and Europe now have a worse opinion of business.

It is practically impossible for a single stakeholder on their own to effectively address the problems that contributed to this crisis: corruption, greed, a lack of transparency and leadership. Hence there is a case for collective action that enables companies to collaborate with competitors and/or stakeholders from the public and civil society sector to create and maintain fair market conditions. Recognizing this, the World Bank Institute is organizing an Executive Development Program Fighting Corruption through Collective Action in Today’s Competitive Marketplaces precisely on such joint approaches.

Dutch Disease vs. Nigerian Disease

Prior to the 1980s, it was believed that natural resource abundance would enable developing countries to make the transition from underdevelopment to industrial “take off”, just as it had done for countries such as Australia and the U.S (Rostow, 1961; Stages of Economic Growth). This view now stands challenged by a number of studies that demonstrate the existence of a “resource curse” – slower growth and poorer economic performance in natural resource rich countries.

The traditional explanation for the resource curse is the Dutch Disease or “deindustrialization”. That is, revenue from natural resources hurts traditional manufacturing through an increase in the exchange rate; also, resources such as labor and capital need to be moved from manufacturing to natural resource production. Most studies on the Dutch Disease stop here although the argument is far from complete.

Fighting corruption, one good idea at a time

Got a good idea about how the private sector can fight corruption? Now's your chance to share it. The World Bank Institute and friends are sponsoring two essay competitions on the topic, one for students and young professionals, and the other for practitioners. The title of the competition is Fighting Corruption through Collective Action in Today’s Competitive Marketplaces, and the deadline of April 30 is fast approaching, so get busy writing! The winners will be feted at a conference on the topic in June held by the World Bank Institute's Executive Development Program.

The other dirty secret on the banks' balance sheets

On 28 May 2005, Denis Christel Sassou Nguesso, son of the president of Republic of Congo, went shopping in Paris. He spent €2,375 in Dolce & Gabbana, followed by €6,700 in Aubercy Bottier, a high-end bootmaker. Less than three weeks later, on 14 June, he was back: another €4,250 on shoes at Aubercy and €1,450 at a designer handbag shop. A month later, on 15 July, he burned another €2,000 at Aubercy, apparently his favourite shoe shop at the time.

According to a new report from the NGO Global Witness, Nguesso managed to pay for all of this using Congo's oil funds, along with some help from the Bank of East Asia and a front company in Anguilla. In Undue Diligence: How banks do business with corrupt regimes, Global Witness takes a close look at the dark underbelly of international finance, pointing fingers at giants like Barclays, HSBC, Citibank, and Deutsche Bank. All of these banks stand accused of helping venal politicians steal wealth from their citizens. Given that the idea of self-regulation of the financial industry is now in tatters, it is perhaps an opportune moment to push for greater transparency in the management of the natural resource wealth of the world's poorest countries. 

Corruption and the private sector

I once did an internship at Transparency International (TI-USA, to be exact), so I was pleased to see that their next Global Corruption Report will be on Corruption and the Private Sector. Unfortunately, we'll have to wait until mid-2009 to find out more, since that's when it's slated to be published.   

Disclosure by Politicians

After 3 years in the making, the results of the research project that started as part of Doing Business and looks at transparency in government are out. The working paper, Disclosure by Politicians, a joint effort with Rafael La Porta (Dartmouth), Florencio Lopez-de-Silanes (EDHEC Business School) and Andrei Shleifer (Harvard), is the first to look at what disclosures are required by law, which of these are made public, in which countries someone actually checks whether the disclosures are made or not, and what penalties exist in the event of faulty or incomplete disclosures.

The findings can be summarized as follows: 1. public availability (when practiced) matters, while disclosure requirements that don't require public availability are of little consequence; 2 disclosure of income sources is more important than disclosure of magnitudes of assets, income, gifts, etc.; and 3. these impacts are greater in more democratic countries than in less democratic countries.