Neil Gregory is adviser to the vice-president of the World Bank Group's Financial and Private Sector Development. He was speaking to Frédéric Simon .
To read a shortened version of this interview, please click here.
In this year's 'Doing Business' report, the World Bank mentions that OECD countries are the easiest in the world in which to set up a business, which is unsurprising. But, I see you have a category which groups Eastern Europe with Central Asia. Do you make a distinction between Eastern European countries which are members of the EU and those which are not?
What we have seen this year is a very broad based reform effort across the countries of Eastern Europe and Central Asia. 26 of the 27 economies in that region that we track have reformed their business regulations in at least one area this year.
We see a lot of activity in the EU accession countries, of course. In previous years, they accounted for around 60% of the reforms in the region, but this year we've started to see the reform effort move further east beyond the accession countries. We think the reason for this is that countries are looking at what their neighbours are doing and learning from the experience of others.
So, whereas initially the impetus for reform was somewhat driven by EU accession, we now think that the power of benchmarking exercises are encouraging countries even beyond the EU fringes to really push ahead with reform.
How has the economic and financial crisis played in Eastern Europe? Have the reforms slowed down or have they accelerated?
Well, we were concerned that the crisis might lead to a slowdown in reforms, so we were pleased to see that when the results came in this year they actually showed an increase in the rate of reform in this region.
More countries are reforming and those countries which are reforming are going beyond some of the simpler reforms, like just reforming business registration, and moving into more complex areas such as insolvency regimes and access to credit.
Now, we think this is very important for this region. Clearly it has been one of the worst hit by the financial crisis, and so there's a big challenge to create jobs and get the economic recovery going in this region. The kind of reforms we are seeing – in getting access to credit, making it easier for business to go into insolvency and to open businesses – all of that is going to make it easier for new businesses to form and for jobs to be created by SMEs.
How would you describe the situation in Eastern Europe compared to Western Europe?
What we are seeing in Western Europe is that we have very highly rated countries on the 'Doing Business' indicators, that is, the EU countries towards the top end of the ranking. I think that you see that the more developed countries in the EU tend to have the better ratings, whereas the newer members tend to not have such high ratings, but in general all of the countries in the EU have either maintained or improved their performance.
So, we don't see that rapid reform that we see in Eastern Europe, but we see continued reform, even in some of the top countries. For example the UK has reformed this year, particularly in construction permits. It has improved its performance, even though it was already at number six, and now it is at number five. Even the top reformers are continuing to reform, but obviously the change in ranking is not as dramatic as it is for lower performing countries.
What about access to credit? Surely, this must have worsened in your report compared to previous years…
What our report measures is not the credit conditions, the kind of thing you see measured in central banking reports. What we measure are the hoops that companies have to jump through, if they are a small company, to get a loan from the bank. It is things like how you register your collateral, what kind of credit information you have to provide, how easy it is for the lender to get information on the credit worthiness of the borrower. It is through the mechanics of getting credit that we measure, as opposed to the actual volume of credit.
But, we think this is an important complement to the financial sector, measures which look at how easily credit is available, because what you find often is that, at a macro level, there may be efforts to increase the availability of credit, but it never reaches the small businesses that really need it because of these kinds of obstacles.
Do you come out with a general feeling that the regulatory environment has been helping or rather hampering reforms, with a view to speeding up recovery in the region?
I think it is too soon to say how fast the recovery will be. What we can say is that in other countries in the world that have made similar reforms, such as reforms in registering a business, you see a measurable pick up in the number of firms registered, and the number of people employed.
If I can just give you one example: a study in Mexico which compared states in Mexico which eased business legislation with states that did not. The states which reformed saw a 6% increase in small businesses registering in the next year and a 2.4% increase in employment.
So we have data points like this from around the world, which suggests the kind of reforms which are now going on in Eastern Europe will have a measurable impact on business creation and job creation in the years ahead, so that will be something we will be looking for, going forward.
I see from your report here that Luxembourg, Portugal and Romania are listed among the countries which have taken measures that are making business conditions more difficult. Could you elaborate?
We will always have instances where countries make changes to regulations which are disadvantageous in some ways. Luxembourg made redundancy regulations less flexible and more costly, because they combined the rules that were previously in place for blue collar and white collar workers. It was a technical change they made which has actually made changes more difficult. We think the advantage of these benchmarking exercises is that they bring the policymaker's attention to these kinds of inadvertent impacts, which may not have been realised when they made the changes.
In Romania, to give the other example you asked about, they introduced a new fee which has to be paid on new construction when you get a construction permit, which is something we see as being an additional obstacle to small businesses. So we are picking up things where the policy changes may have been made for good reasons, but the policymakers may have not taken into account the impact on small businesses. We highlight them in this report and obviously hope to see changes made which will minimise the negative impact of changes in future years.
I also noticed that Macedonia, Belarus and Kyrgyzstan have been performing well. Can you elaborate on Macedonia for example?
Yes. I think those countries have been doing reforms for several years and I think we are seeing that pay off. Macedonia has reformed in several areas this year. They reformed in the area of starting a business, they made it easier to get construction permits, to register property and to get credit information. Really across the board and in seven out of the ten areas that we track, Macedonia had reformed this year and as a result its ranking improved from 69 to 32. We can see that most of these are really quite low cost activities for governments to do, so it shows how some quite simple changes, when you add them together in all these different areas, can really make a big difference.
Do you see the EU accession process as a fundamental driver behind this?
I think it has been a driver for those countries hoping to join the EU. It has given additional focus for these countries to get up to EU standards. But, as I say, I think the countries further east in Eastern Europe have seen the value of these reforms in their own right, even if they are not immediately accession countries.
Have you witnessed tendencies to over-regulate because of the crisis?
Again, this is something we were concerned might happen, and we haven't seen it: partly because governments have been focusing on regulating the financial sector and perhaps international trade.
What we are really focused on here is the small businesses, which are the real engine of growth and job creation. And this year, we've not only seen policymakers leaving them alone but we have actually seen quite a number of positive reforms. Our explanation for that is I think that policymakers understand the importance of small businesses for job creation, that it is really critical on the policymakers' agenda as they try and recover from the financial crisis, and so we have actually seen increased momentum for this kind of deregulation.
So as I understand it, your outlook for 2010 is rather positive?
I think it is positive in that we see a lot of momentum behind the reforms, and each year we do this we see a lot more reforms than in previous years. So we think that it is something that is cumulative, as governments build on what they have done the previous year and on the experiences of other countries.
We are also positive from the studies we have done, as we expect to see these reforms having an impact, with more jobs being created, more firms being created and the cost of doing business going down.
Are there any major trends in the report worth noting outside Europe?
I just want to mention one headline, which is that for the first time ever the top reformer in the world is an African country. The top reformer is Rwanda, which I think is quite a surprise. It is not a place that people immediately think of as a good place to do business. They actually reformed in seven out of the 10 areas we study in 'Doing Business' and jumped 76 places in the rankings. We think that this is a real 'good news' story coming out of Africa that Rwanda is in the top place this year.
