“Productivity growth and, hence, the way out of poverty, is not simply a matter of throwing resources at the problem,” say Klein and Hadjimichael. “More important, it is a matter of using resources well.” In other words, countries grow out of poverty not only when they manage their fiscal and monetary policies responsibly from above, i.e., reform wholesale. They grow out of poverty when they also create an environment below that makes it very easy for their people to start businesses, raise capital, and become entrepreneurs, and when they subject their people to at least some competition from beyond-because companies and countries with competitors always innovate more and faster.
The IFC drove home this point with a comprehensive study of more than 130 countries, called Doing Business in 2004. The IFC asked five basic questions about doing business in each of these countries, questions about how easy or difficult it is to 1) start a business in terms of local rules, regulations, and license fees, 2) hire and fire workers, 3) enforce a contract, 4) get credit, and 5) close a business that goes bankrupt or is failing. To translate it into my own lexicon, those countries that make all these things relatively simple and friction-free have undertaken reform retail, and those that have not are stalled in reform wholesale and are not likely to thrive in a flat world. The IFC's criteria were inspired by the brilliant and innovative work of Hernando de Soto, who has demonstrated in Peru and other developing nations that if you change the regulatory and business environment for the poor, and give them the tools to collaborate, they will do the rest.
Doing Business in 2004 tries to explain each of its points with a few colorful examples: “Teuku, an entreprenuer in Jakarta, wants to open a textile factory. He has customers lined up, imported machinery, and a promising business plan. Teuku's first encounter with the government is when registering his business. He gets the standard forms from the Ministry of Justice, and completes and notarizes them. Teuku proves that he is a local resident and does not have a criminal record. He obtains a tax number, applies for a business license, and deposits the minimum capital (three times national income per capita) in the bank. He then publishes the articles of association in the official gazette, pays a stamp fee, registers at the Ministry of Justice, and waits 90 days before filing for social security. One hundred sixty-eight days after he commences the process, Teuku can legally start operations. In the meantime, his customers have contracted with another business.
“In Panama, another entrepreneur, Ina, registers her construction company in only 19 days. Business is booming and Ina wants to hire someone for a two-year appointment. But the employment law only allows fixed-term appointments for specific tasks, and even then requires a maximum term of one year. At the same time, one of her current workers often leaves early, with no excuse, and makes costly mistakes. To replace him, Ina needs to notify and get approval from the union, and pay five months' severance pay. Ina rejects the more qualified applicant she would like to hire and keeps the underperforming worker on staff.
“Ali, a trader in the United Arab Emirates, can hire and fire with ease. But one of his customers refuses to pay for equipment delivered three months earlier. It takes 27 procedures and more than 550 days to resolve the payment dispute in court. Almost all procedures must be made in writing, and require extensive legal justification and the use of lawyers. After this experience, Ali decides to deal only with customers he knows well.
“Timnit, a young entrepreneur in Ethiopia, wants to expand her successful consulting business by taking a loan. But she has no proof of good credit history because there are no credit information registries. Although her business has substantial assets in accounts receivable, laws restrict her bank from using these as collateral. The bank knows it cannot recover the debt if Timnit defaults, because courts are inefficient and laws give creditors few powers. Credit is denied. The business stays small.
“Having registered, hired workers, enforced contracts, and obtained credit, Avik, a businessman in India, cannot make a profit and goes out of business. Faced with a 10-year-long process of going through bankruptcy, Avik absconds, leaving his workers, the bank, and the tax agency with nothing.”