Posted by on October 26, 2019 10:00 am
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Categories: Taxes

 


By Mihailo Gajic, TES Contributor

 

The World Bank recently issued the new version of its regulatory index, Doing Business 2020. Central and Eastern European countries continue to show signs of good business regulation quality: Georgia (ranked 7th), Lithuania (11th) and Northern Macedonia (17th) top the list of transition economies, while Serbia is ranked 44th, with incremental reforms in the Paying Taxes and Getting Electricity areas. But to be frank Serbia’s good result needs to be taken with a grain of salt.

 

Since its inception in 2003, the DB has become one of the major tools in evaluating regulatory burden in countries around the globe. But there are several issues which make these results significantly less persuasive than they might appear at first glance.

 

For example, can it really be the case that that regulatory environment is more business-friendly in Georgia (ranked 7th in the DB) than in the UK (8th) or Sweden (10th)? Or that business in Macedonia (17th) is less burdened than in Estonia (18th) or Germany (22nd); or that Azerbaijan (34th) is a better business destination than Switzerland (36th)? Therefore, one must be very careful when trying to access the business regulation in CEE countries and rely on more than one source. While improvement in the DB is laudable, we need to take this into consideration. There are three important issues with the DB which I will explore in this article in regard to the Serbian ranking.

 

1) DB implies full and impartial implemented of rules and regulations

 

In an environment with weak rule of law and high corruption, a law can remain just ink on paper, while other often informal guidelines are critical when conducting a business. In countries that operate on loose patronage networks, such as Serbia, inconsistent application of regulations is at the core of the functioning of this system: if you are a part of the network, your regulatory burden might be waived, while your competition will have to bear it fully. This creates strong incentives to become a part of the network, which leads to the phenomenon of state capture, in which patronage networks are able to dismantle the existing weak institutional checks and balances. This is a widespread phenomenon in Serbia, where the ruling SNS party can completely disregard the rules due to their control over the judiciary and prosecution office.

 

The most relevant example is the 2016 Savamala incident in which, on parliamentary election night, a group of masked men razed to the ground an entire city block in the centre of Belgrade to make room for a controversial real estate development project supported by the SNS government. This move was abetted by the national and city police, who failed to respond to the calls of the people detained in the area, stating this was out of their jurisdiction, while city services helped the perpetrators by cutting the electricity. This incident sparked wide protests by Belgrade citizens, and a full resolution of the European Parliament demanding a quick and decisive resolution of the affair by identifying and arresting the perpetrators. Three years later, nothing has happened.

 

2) DB is rather narrow in scope: you can’t see the forest for the trees

 

Doing Business relies exclusively on objective parameters. This means that it restricts its coverage of the regulatory environment, in order not to lose itself in too many details, which may not be relevant for the overall character of regulatory framework at hand. However this narrow view leaves out a lot of regulatory areas which may also be important, since the regulatory framework in most modern countries is measured in the tens of thousands of pages. For example, the “acquis communautaire” or common EU legislation is nearing 170,000 pages[1], while a recent survey in Serbia conducted by Libek estimated national business regulations to be more than 80,000 pages long. Therefore, the areas not covered by the DB might be very burdesome, but it will not make a difference in the ranking.

 

3) Gaming the DB score: if it’s measured, reform it – if it isn’t, play dead

 

Since DB is both narrow and transparent, it is easier to implement regulatory reforms that would boost a country’s score and improve its ranking, compared to other international indices that also measure business regulation. Furthermore, DB does not have the ideological flair that some other benchmarks do, so it is politically more appealing to use it as a policy measure. But this also means that there is a danger of focusing solely on the DB indicators, to the detriment of other (also important) measures of regulatory quality.

 

A clear example of this is the names of several government working groups active in the field of regulation improvements: instead of calling them working groups for the improvement of business regulation, they are often named working groups for the improvement of DB ranking, as was the case in Serbia.

 

These DB characteristics could explain why some countries have had a significant improvement in their DB score or rankings, but not so stellar results in other regulatory benchmarks. One of these countries is Serbia, which has in recent years significantly improved its DB position. Since 2014, the country has substantially increased its DB rank, but at the same time its score in the Burden of Government Regulation measure from the Global Competitiveness Report has increased only slightly, as the table shows. Furthermore, the data from the US Business Enabling Project which quantified administrative burden as a percentage of GDP drag on the economy by using the Standard Cost Model, showed that there was also only an incremental decrease in the overall administrative burden in 2016 compared to 2014, even though this was the time in which Serbia made an unprecedented leap in the DB rankings.

 

 

The fact that this is not something unique to Serbia, but is to a certain extent present in other transition economies as well, can be discerned from the following graphs, which show the correlation between DB data and other important benchmarks. Transition economies show a significantly weaker rule of law and higher corruption than would be expected from their DB scores.

 

 

Doing Business as a victim of its own success

 

Improvement in the Doing Business ranking is a good thing for any country, especially for Serbia, since it means that at least some regulatory areas have improved. However, this must not serve as a figleaf for the neglect of deeper and more comprehensive reforms: Serbia faces serious challenges in the rule of law and its fair implementation in practice, which are most important and more difficult to solve than the DB ranking. The rigging of the DB ranking can also be attested (by the graphs above) in other countries in the region, so we might conclude that the DB has been the victim of its own success. It seems that, at least in transition countries, one must evaluate the business environment very carefully and from different sources in order to get the full picture.

 

[1] Association of Accredited Public Policy Advocates to the European Union, http://www.aalep.eu/just-how-big-acquis-communautaire Last visit: 09.02.2019.

 

 


Mihailo Gajic is an economic researcher with Libek, a Serbia-based think tank.