The investment climate: (Part II) Doing business survey

Published by rudy Date posted on April 13, 2011

Among the recent international business indicators, the World Bank’s annual Doing Business survey is likely to be the most influential. The survey represents information from responses of investors, public officials, and knowledgeable people concerning how countries permit business to operate and to grow. It grew out of work from that development institution’s private sector arm, the International Finance Corporation (IFC).

The survey represents in a nutshell how the various laws, regulatory processes and other economic practices of different countries affect their ability to foster businesss operations and growth.

The countries that do well under this survey are those whose business processes are speedy, efficient, and substantial in terms of the reduction of time and cost of the regulatory approval of business demands. Those countries that do badly have slow administrative procedures that hamper business growth.

“Philippine ranking.” The Philippine score in country ranking is very disappointing. Under this ranking system where the higher the rank the worse is the performance, our country comes out as a very poor performer. Yet in the context of all the nations included in the survey, our business record is not as dismal as the ranking would indicate.

In 2011, the Philippines came out ranked 148 (!) out of the total 185 countries that were surveyed. Singapore (1) and Hong Kong (2) led all the countries which include the industrial and developed countries. Thailand (19) and Malaysia (21), among our ASEAN neighbors, score very high in the survey. And important neighbors are all ahead of us: Japan (18), South Korea (16); China (79), Taiwan (33); Indonesia (121); Vietnam (78).

Even much poorer countries have scored higher such as Bangladesh (107) and Cambodia (147).

This is a wake up call for the government. The country comes last among its important neighbors in East Asia. The ranking seems to show that we do not belong in their company!

If Martians of high intelligence were to visit and make a quick report on all these 185 countries, they would report back to Mars that the Philippines is among the better performing developing countries in planet Earth. They would see this from a visit to our hotels, business malls, export processing zones, public facilities. They would get that feel from a comparison of our industrial, commercial and general level of development with the others.

If these Martians however were made to live with us for a slightly extended period of time, they would begin to empathize with the scrutiny that we exercise of ourselves as a shortcoming rather than as sign of strength. They would see our open criticisms and reporting of events in our country as a high index of hopelessness.

Foreigners like Martians could get the wrong notion and see our self criticisms as constituting weakness and helplessness. They will therefore evaluate us with lower marks.

“What’s right and wrong with the Doing business survey?” The World Bank-IFC data for the most part especially among the developing country measures is a survey based on national data. This often means that the information gathered would tend to come from the assessment of commercial and industrial centers of the national economy. The business climate is generally more efficient and faster in these centers than the rest of the country.

On the other hand, the Philippine data is uniquely a survey undertaken over a wide network of regions and cities. The local basis of the doing business survey is for the purpose of eliciting data on how local governments compare in doing business. These local surveys are a joint exercise of the Asian Institute of Management and the Ateneo University School of Government funded from development assistance to raise local government reform.

For this reason, it could be that the Philippine Doing business survey provides the most disaggregated local government level information on doing business. Since local governments lag in business and administrative practices from the national government the further away they are from the metropolis, the lower are the measurements that they yield. There is a bias for lower scores compared to the national average.

Thus, the World Bank data have a tendency to have a bias for higher performance when rated from national surveys. Philippine data though would have a bias for a lower score the farther the rated regions are vis a vis the metropolitan regions.

To what extent this bias brings down the Philippine rating among countries is a black box. I would not be surprised though if some ranking adjustment would make the country climb over 25 other countries in these rankings. That moves up the country but is still quite unsatisfactory.

“Structural problem of Doing business in the country.” Sadly, there is a great element of truth in the Philippine low ranking in the World Bank Doing business surveys.

In parts of the economy where true economic reform has been undertaken to improve government approval systems for business actions, high standards of accomplishments have been achieved. Firms that operate in our export processing zones (EPZs) have efficient and fast moving logistical support. Here, the government has introduced time-sensitive approval systems of business demands. Their constant monitoring of the system of actions has reduced red tape for doing business along efficient world class standards.

The rest of the economy suffers from a malaise that needs reform in doing business. This is truly the problem of the investment climate. The lesson should be clearly borne in mind. Stress government reforms – like the anti-corruption fight the government is waging – will not work however without attention toward dealing with the structural problems of business regulations.

The structural problem is difficult to read. In the final analysis, the mother of all mothers of the stifling administrative and regulatory procedures is rooted in the restrictive economic provisions of the Philippine constitution. All the good things that were sought in order to regulate the economy could be traced to the efforts to conform to the perceived requirements of these restrictive provisions.

If we remove these provisions and make them part of the ordinary laws of the land (an agenda that the current government does not appear to want to deal with), many of the bad regulatory practices can and will lose their reason for existence. Not to touch these provisions – or just to have business as usual in their regard – means not to make any changes in these rules. Offshoots of practices derived from the restrictive economic provisions stick to our body politic like leeches.

“The second problem: old habits die hard.” The bad administrative and regulatory practices that try to preserve the restrictive economic provisions have spawned a lot of rent-seeking (or unproductive activities that stall the speed of our business processes). Old habits die hard.

The main problem then is how to kill old bad habits of the bureaucracy. It is like smoking. It takes willpower to break it. Can the president have that will power to change the nation’s business thrust? A lot of work is cut out for the government and it begins with addressing its structural problem. –Gerardo P. Sicat (The Philippine Star)

Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat.

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