The Doing Business Report is a product of the World Bank. It is an authoritative, scientifically-driven publication that is generally accepted as a uniform platform upon which to analyze the legal and regulatory climate for business around the world. Countries are rated based on the favorability of their business environment as a result of domestic policy elements. The first Doing Business Report was published in 2003 with assessment of 133 economies. It has since expanded to cover 189 countries in the 2014 edition.
The Doing Business project is conducted by the International Finance Corporation (IFC), a member of the World Bank Group. IFC collects annual data from countries on a range of indicators. The report is developed by using information collected from approximately 10 000 respondents worldwide. What makes the Doing Business report unique is that the data reflects a practical approach to analyzing the business environment; it is designed to reflect the perspective of the business operator, not the policy maker.
Doing Business provides a qualitative and relative assessment of each country’s business climate on internationally comparable basis. By assessing each country individually and yet comparatively to other countries, Doing Business encourages responsive governments to put more efforts into developing a better business environment. It creates a competition in a way, as businesses look to the Doing Business rankings when making decision on foreign direct investment, among other things. In fact, because of Doing Business’ influence on foreign investment, governments are not always very happy about their rankings. For example, in 2006 the Croatian Prime Minister issued a formal diplomatic protest against the Doing Business report for giving the Croatian government a poor review.[i] However, the Croatian business community cheered the 2006 Doing Business results for confirming in a public and non-partisan manner how poorly the government was handling business climate reforms.
Doing Business prepares its ratings based on 10 different indicators of business regulation that take into account the time and costs incurred by entrepreneurs when satisfying state requirements for registration of a new enterprise, running of the enterprise, trading operations, taxation, and closure of the enterprise. The methodology of the Doing Business report places a hypothetical company in various business-relevant situations, based on the data collected. The result of this methodology creates the “Ease of Doing Business Index” and is subdivided into the following areas: [ii]
- Starting a Business: measures the procedures, time, cost and minimum capital required to start a new business.
- Dealing with Construction Permits: measure of the procedures, time and cost required to build a warehouse.
- Getting Electricity: is a measure of the procedures, time and cost required for a business to obtain a permanent electricity connection for a newly constructed warehouse.
- Registering Property: is a measure of the procedures, time and cost required to register commercial real estate.
- Getting Credit: assesses the strength of the Legal Rights index, which measures the degree to which collateral and bankruptcy laws protect the rights of borrowers and lenders, and the depth of the Credit Information index, which measures the sharing of credit information.
- Protecting Investors: measures the extent of disclosure and director liability, and the ease of shareholder lawsuits.
- Paying Taxes: measures the number of taxes paid, hours per year spent preparing tax returns and the total tax payable as a share of gross profit.
- Trading Across Borders: is a measure of the number of documents, cost and time required to export and import goods.
- Enforcing Contracts: is a measure of the procedures, time and cost required to enforce a debt contract.
- Resolving Insolvency: is a measure of the time, cost and percentage recovery rate involved with bankruptcy proceedings.
How does Tajikistan Rank?
Tajikistan’s overall ranking in the 2014 edition of the Doing Business Report is 143 out of 189 countries in the world (down 2 positions from 2013, but up 10 positions from 2008). However the overall ranking hides many nuances about the business environment in Tajikistan.
Tajikistan has made reforms in certain sectors, and when viewed on a topical basis, one can see some good results from such reforms. For example, Tajikistan strengthened investor protections by making it easier to sue directors in cases of prejudicial related-party transactions. As a result, Tajikistan ranked 22nd in the Protecting Investors area. In addition Tajikistan ranks 39th in the area of Enforcing Contracts. On one hand the country rank may seem pretty good but if the indicator is compared with the 2009 data when Tajikistan was ranked 23rd worldwide it is becoming clear that country’s climate on enforcing contracts is even getting more difficult. One reason for this is increased the average duration of different stages of dispute resolution i.e. 430 days needed to complete the lawsuit in 2014 versus just 295 days in 2009. At any rate, Tajikistan is generally a good location when it comes to enforcing contracts.
Tajikistan improved access to credit information by establishing a private credit bureau. Here, the effect was felt quite rapidly as Tajikistan went from 182 in the 2013 Doing Business ranking to 159 in 2014. However, in other areas, it may be too soon to see the positive effects of Tajik reforms. For example, Doing Business ranked Tajikistan 178 in the area of business-friendly taxation even though Tajikistan has made some reforms to this area, including reforms that made paying taxes easier and less costly for companies by reducing the corporate income tax rate, merging the minimal income tax with the corporate income tax and abolishing the retail sales tax. However, Tajikistan also increased land and vehicle tax rates.
It can be difficult to make progress in all areas simultaneously, and policy makers must sometimes choose improvements that will help the long-term economy of Tajikistan even if there are short-term negative effects. For example, in efforts to raise revenue more effectively, Tajikistan required preliminary notification to the tax authority when starting a business. This might help taxes in the long run, but caused Tajikistan’s rating for Starting a Business to fall from 77 in 2013 to 87 in 2014.
In other areas, Tajikistan rates somewhere in the middle of the rankings, which given its economy and level of development, should be viewed as good progress. For example, Tajikistan is ranked 81 under Resolving Insolvency indicator.[iii] Even here Tajikistan is making efforts to reform, and in 2010 Tajikistan passed an amendment to its insolvency law aiming to reduce statutory times and the cost of the proceedings. However, when it comes to Registering Property (where Tajikistan ranks 79), short-term rankings have been upset by a four-fold increase in the duty for the property transfer since 2010, increasing the cost to register property in Tajikistan by 4.5% of the property value. Although increased fees are usually not favorable for business, in this case the fee might be well spent if it increases accuracy and efficiency in the property registration system.
Yet in other areas assessed by Doing Business, Tajikistan remains close to the bottom. For example, Tajikistan ranked 188th in the Trading Across Borders; 186th in Getting Electricity and 184th in Dealing with Construction Permits. In a strange way, this provides Tajikistan with the opportunity to raise the perception of its business environment by making a few basic reforms to these areas. (see below on Trade Facilitation Reforms).
Implementation of WTO provisions and its impact on Doing Business indicators
The Doing Business methodology looks at the business environment in a similar manner to how a doctor diagnoses a patient’s health: it looks to symptoms to indicate areas where a problem exists, but does not always identify the exact cause. In addition, Doing Business doesn’t necessarily provide the methods or forms solving the existing problems. In fact, Doing Business admits that there are often a number of ways to improve the business climate within a country.
One of the best methods to improve the domestic business environment for developing countries is to focus on exports. The reason for this is that exports must compete against products from other countries. This creates a pressure on inefficient producers – and their governments — to pay incredible attention to the business climate, continuously working to make conditions more favorable and supportive of private sector.
Moreover, one of the most effective tools to increase exports and foreign direct investment is to implement the principles in the WTO Covered Agreements. The perception is that the WTO is an institution that seeks to regulate international trade. The reality is that the WTO provides a forum and a mechanism for countries to regulate their own policies so as to make reforms to their business environment, and to communicate those reforms to international business community through compliance with WTO obligations.
Implementing WTO obligations will bring Tajikistan business owners more competitively priced goods and services, which the Tajik owners can then use to grow their own business, and make more competitive products for exportation. For example, if Tajikistan wants to develop a textile sector, WTO reforms will help keep down the trade barriers (and thus prices) for certain inputs such as machinery, intermediate and/or raw materials, etc.
In addition, although International business owners might not know Tajikistan law, if Tajikistan makes and implements commitments to the WTO, those businesses can assume that Tajikistan is has an improving business environment and will be more inclined to build factories and locate business operations in Tajikistan, providing jobs and investment into the local economy.
The recently adopted WTO Trade Facilitation Agreement provides a great example of this process. Through the TFA, the Tajik government made binding commitments to improve its trading and customs infrastructure, with help from international donors. The TFA requires WTO Members to reform procedures related to goods clearance in the border as well as uninterrupted movement of goods which are in transit between two countries according to a national standard. The fact that these commitments are open and transparent means that businesses know what to expect from Tajikistan after implementation. The Agreements foresee immediate implementation of series reforms including: Access to trade information; Implementation of rsk management; introduction of post clearance audit; establishment and publication of average release time; encouraging border agencies to cooperate and implementation of “one stop shop” principle; simplification of formalities and documentation requirements; the use of international standards; and the freedom of transit etc. All of these reforms will help business run smoother and more efficiently.
For example in New Zealand, because of proper risk management system in customs only less than 5% of import transactions are subject to further compliance checks or inspection and 99% of compliant transactions are now processed by Customs within 30 minutes of completion. In the border post between Kenya and Uganda ‘one-stop border posts’ is introduced and over 1,000 trucks cross each day. The Mozambique’s Single Window was launched in 2011 and today, the system is able to handle up to 400,000 customs declarations per year, or about 1,500 per day. According to International Chamber of Commerce trade facilitation measures will reduce total trade costs by 10% in advanced economies and by 13-15.5% in developing economies.
These TFA reforms are not only beneficial to goods coming into Tajikistan, but will also help raise the ability of Tajiki producers to several economies have reported positive results from the implementation of single-window systems. The Korea Customs Service estimates that the introduction of its single-window system brought some $18 million in benefits in 2010. Document preparation in Korea takes 3 days only whereas in Tajikistan it takes 20 days[iv].
Slowly and steadily, by implementing WTO and other pro-business reforms, Tajikistan can increase its business-enabling environment and move up in the Doing Business rankings. As these pro-business reforms take place and are communicated to the international business community, Tajikistan will be more able to grow its domestic business sector while at the same time attracting foreign investment.
[i] Uses and Abuses of Doing Business Indicators By Wade Channell, Esq
[iii] Doing Business Report 2014. Regional Profile: Europe and Central Asia