Cutting through the red tape

10 September 2004
Any study that compares such vastly different countries as Singapore, Sweden and Syria is bound to raise some questions about the limits of its usefulness. The World Bank's annual report on the global investment climate - Doing Business in 2005: Removing Obstacles to Growth - restricts itself to a handful of criteria on which to judge the regulatory performance of 145 nations. The overall ease of business start-up for each country is a simple average of the ranking of the number of procedures, the associated time and cost and the capital required at the start of business.

While this approach may seem overly reductive, the report does provide sufficient detail to highlight some of the biggest obstacles to foreign investors in particular countries, as well as tracking some notable reform successes. Between 2003 and 2004, for example, Morocco saw a jump of 21 per cent in new business registrations after simplifying its entry procedures. In general, however, most Middle East countries do not come out well from the report. 'Of the 58 countries that reformed business regulation or strengthened the protection of property rights in the last year, only seven were in the Middle East,' it says. There are some positive indicators, however. Algeria, Morocco and Yemen have all been successful in reducing the number of days necessary to start a business, while the report notes with approval Saudi Arabia's reform of its public credit registry.


Jordan made the most progress among regional states in improving its investment climate in 2003 (see Special Report, pages 28-29), but still maintains with its regional peers some of the largest capital requirements for new businesses in the world. 'In all but 42 countries entrepreneurs need to deposit minimum capital into a (usually frozen) account to establish a limited liability company. But not all countries require paying the money up front. High capital requirements are the norm in the Middle East and North Africa-more than eight times income per capita. [By comparison,] more than half of Latin American and East Asian countries and all South Asian countries require no paid minimum capital.'

Of the 10 countries with the world's highest minimum capital requirements, seven of them - Egypt, Jordan, Mauritania, Morocco, Saudi Arabia, Syria and Yemen - are located in the region. This can be partly attributed to the role that large, state-owned organisations have traditionally played in the corporate cultures of the Middle East, and the slow transition to private ownership in many Arab countries. However, it should also be noted that the World Bank rankings are calculated as a percentage of per capita gross domestic product (GDP). This puts poorer nations - such as Mauritania and Yemen - and those with large populations - such as Egypt - at a disadvantage in terms of the methodology used.

Nevertheless, it is clear that considerable obstacles to private investorsexist in many of the countries in question. The stringent capital requirements in actual dollar terms of countries such as Saudi Arabia and Syria would certainly seem to be a strong disincentive to newcomers (see table).

Painful steps

The World Bank report acknowledges that reducing capital requirements often requires painstaking legislative changes. However, the underlying assumption here is that there is a blanket prescription for reform. The bank says that many Middle East countries enjoyed liberal business regimes prior to nationalisation in the 20th century - inferring that 'this suggests that reform is feasible' - but fails to address the question of why these protectionist policies are in place. In the financial sector, for example, a number of Middle East countries such as Egypt have been required recently to introduce stiffer capital adequacy laws to encourage consolidation in an illiquid market - effectively bolstering competition

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