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S. Venkitaramanan

Businessmen around the world face — and complain about — the different policy regimes, especially when it comes to questions of starting a business. But doing business in poor countries, which score poorly in regulation, credit delivery and infrastructure compared to richer countries, is particularly arduous, says a World Bank report based on business confidence surveys.

An assembly line at a perfume factory... The costs and the time for permitting an entrepreneur to start a business seem too high in the poorer countries, especially India. Our effort should be to reduce them.

INDUSTRIAL policy has been the bugbear of reformers, particularly in poorer countries, who are concerned that more powerful entrepreneurs should not subvert the operation of the free market system. Workers' rights should be safeguarded and potential danger to environment reduced.

Reformers have been used to doing a balancing act, between protecting the consumer, the worker and the business. Public interest has to be served only by various regulations — which necessitates a hurdle race for the entrepreneur. Businesses necessarily involve getting permissions at every stage, particularly in developing countries. It is in this context that one has to view the continuing intrusive role of governments in relation to businesses.

Different countries have dealt with problems of regulating business in different ways. Some have done it intrusively. Some others have adopted a more sophisticated process of leaving it to market forces and competition.

Businessmen around the world face — and complain about — the different policy regimes, especially when it comes to questions of starting, running and or exiting a business. Different surveys of business confidence are published by established consultancies and economic advisory groups, which assess business perceptions about country risk and business climate.

This bouquet of surveys of business confidence stands further embellished by the latest offering on Doing Business 2004 — a publication issued by the World Bank. This report has not received widespread attention in India, although it has been cited in some international media. It, however, deserves careful study and consideration at the highest levels by our policy-makers, especially as it brings out many possible chinks in our industrial policy armour.

The World Bank has been advocating economic reforms for more than a decade. Economic reforms without ensuring appropriate public governance will not, however, do the trick.

Poor countries score poorly in the structure of regulation, credit delivery and infrastructure, when compared to the richer countries. Doing business in the less-developed countries is more arduous than in the affluent half of the globe.

The World Bank has done a signal service to the cause of development by bringing out the report, which lays out a list of indicators on the degrees of difficulties in doing business. Doing Business in 2004 discloses the wide differences in the business climate in different countries and indicates the possible directions of reform.

The report quotes the seminal work by Mr Hernando de Soto of Peru, The Other Path, which shows that the

"prohibitively high cost of establishing a business in Peru denies economic opportunity to the poor. In 1983, de Sato's research team followed all the bureaucratic procedures in setting up a one-employee garment factory on the outskirts of Lima.

Two hundred and eighty nine days and $1,231 later, the factory could legally start operation. The cost amounted to three years' wages — not the kind of money the average Peruvian entrepreneur has at his or her disposal."

First and foremost, it deals with the question of how many procedures and costs are involved at the very start of a business — which is critical.

The Table is revealing. Why should it take so long and so many procedures to allow a person to start a business in India, compared to much fewer procedures and days in the US, the UK and Thailand? Registry at the start is for eliciting information. We can combine different sources, all of which seek data from intending entrepreneurs.

We can then have a single registry, combining tax registry, for instance, with registry for Companies Act purposes. With the increasing use of IT, this should be easy. Anyway, the costs and the time for permitting an entrepreneur to start a business seem too high in the poorer countries, especially India. Our effort should be to reduce them.

Much of the requirements for regulation of business commencement and closure derives from the earlier colonial legacy. India derives its practices from England's legal practice. But, whereas the earlier colonial powers, such as the UK and France, have updated and liberalised their legal structure dealing with business, the ex-colonies are still persevering with a "hurdle" race.

Doing business in poorer countries is a painful process. This needs to change.

The need to reform practices of industrial approval has been recognised by our political leaders, who speak about ending the "inspector raj". "Inspector raj" is, however, an inevitable accompaniment of the current system of regulation, which governs labour laws, health regulation and safety, besides environment.

While some of this is unavoidable and socially necessary, we have to recognise the need to simplify it. The World Bank's report Doing Business 2004 makes important suggestions about the extent and nature of regulation and its scope in various countries.

In its view, the countries that regulate the most happen to be the poorer countries, which have the least enforcement capacity and fewer checks and balances to ensure that regulatory discretion is not used to abuse businesses and extract "rents".

Regulation, the report says, has often a perverse effect on the people it is meant to protect. Faced with a large regulatory burden and few incentives to become part of the "formal" sector, entrepreneurs in developing countries tend to migrate to the informal sectors.

Thus, bad institution, "which involves cumbersome entry procedures, rigid employment laws, weak creditor rights, inefficient courts and overly complex bankruptcy laws ends up by simply not getting used." Instead, businesses use informal mechanisms to settle their problems — often a poor substitute for good practice regulation.

The conclusions of the report on what should define good regulations are very relevant in the current context of regulatory reform in India. The report pithily advises: "Regulate only when private "ordering" or litigation is not sufficient to produce good conduct.

Regulate only if there is capacity to enforce." The report outlines certain essential elements in business regulation as below.

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