It Is Early to Beat the Drums

Sergey Zelepukhin

In late October, the World Bank and the International Finance Corporation published an annual report “Doing Business 2014" (DB 2014). According to this study, Kazakhstan again improved its position, succeeding in entering the top 50 countries with the best conditions for doing business. The study also showed that to climb to an even higher position, the country should eliminate unresolved problems in the area of regulation of trade and construction.

DB 2014 Innovation

The 2014 review, called "Understanding Regulations for Small and Medium-Size Enterprises" is the eleventh in a row. Traditionally, the emphasis in this review is made on the finding out and exclusion from the national laws of the countries under study of so-called excessive requirements in the field of entrepreneurship. This implies that the regulatory reforms to regulate a business environment should be conducted without considerable financial investment. The review preparation is carried out in two stages: first the analysis of statutory and regulatory acts is carried out, including amendments that have been made since the previous review, and then entrepreneurs are polled.

The methodology of the review is constantly being improved, and at the moment, it applies 10 indicators. They reflect the conditions for running entrepreneurship and the state of protection of property rights in 189 economies (185 in the previous year). This year, the report for the first time includes information on four new economies: Libya, Myanmar, San Marino, and South Sudan.

Among the indicators analyzed in the review, these three should be distinguished: the conditions for starting a business, resolving problems with the insolvency of companies, and implementation of foreign trade. It is worthy emphasizing here that the indicators applied measure only formal aspects of the business environment regulation. Although, according to independent experts, for Kazakhstan, more important are the indicators of safety of doing business in the country, the level of corruption, the skilled labor force, and the strength of the financial system.

The current report takes into account the regulatory rules that had been in operation from June 2012 to May 2013. For the first time, it includes a separate chapter, which discusses the analysis of the results of business regulation.

Eastern Europe and Central Asia are favorites

Speaking of the rankings of individual groups of countries, at the top of the rankings are, as usual, the OECD member economies with high income. As for the countries of Eastern Europe and Central Asia, this year, the same as in the last year, they are ahead of countries of the Middle East and the Pacific region in terms of "most favored by raising the regulatory framework conditions of doing business." The authors of the report noted that their efforts "to strengthen law institutions, facilitate regulation procedures, and reduce associated financial costs have already borne fruit to local entrepreneurs." These fruits are as follows: over the period since 2009, 92% of these countries have simplified business entities registration procedures, which is the highest indicator compared to countries in other regions.

With this, the rankings developers emphasize that during the said period 73% of countries in Europe and Central Asia have made changes "in solving problems of insolvency of enterprises, responding to the challenges followed by the financial crisis." Moreover, 85% of countries of the said region have simplified taxation process. As a result of the actions taken, to start-up a business today has become "much easier even than in OECD high-income countries."

Augusto López-Claros, Director of Global Indicators and Analysis with the World Bank Group, said that of the twenty countries, which have narrowed the distance to frontier the most, compared with the best international practices in the past four years, nine countries are in Eastern Europe and the Caucasus. These are Armenia, Belarus, Macedonia, Georgia, Kosovo, Moldova, Poland, Russia, and Ukraine.

In general, since the time the first ranking was published in 2003, the regulatory environment for business was "improving steadily in all countries of the region covered by the study." This allowed them to significantly reduce lagging behind in "global best practices."

Leaders are still the same

In 2012–2013, as indicated in the review, 114 economies have simplified the business environment, having implemented 238 reforms, in aggregate. This is 18% more than the number of reforms conducted in the previous reporting period. Ukraine, Rwanda, Russia, the Philippines, Kosovo, Djibouti, Cote d'Ivoire, Burundi, Guatemala and Macedonia demonstrated the most progress.

Like in the last year, Singapore topped the world rankings. On second place in the list is Hong Kong, followed by New Zealand and the United States. Denmark ranks the fifth, followed by Malaysia, South Korea, Georgia, Norway and the UK (see Table 1).

Among the post-Soviet countries, in terms of the ease of doing business, the leading five today are the already mentioned Georgia, then Lithuania (17^th), Estonia (22^nd), Latvia (24^th), and Armenia, the latter ranks 37^th.

Kazakhstan’s ranking this year is an achievement for us. Kazakhstan in the list is 3 points up from 53^rd to 50^th, placed between Slovakia and Tunisia. It is worthy of noting that the country showed the same progress in the previous rankings, when it changed her position up from 56^th to 53^rd.

In general, over the past three years, we have been 21 points up, leaving behind not only the other Central Asian countries, but the Customs Union member countries and the partner countries on the Common Economic Space. So, today Belarus ranks 63^rd (4 points up, compared with the previous year), and Russia is 92^nd (+5). In its turn, Ukraine, which Russia today is trying so hard to involve into processes of integration in the Eurasian Union, ranks far back, at 112^th, although it has managed to gain 8 points since the last year.

Our neighbors in Central Asia – Kyrgyzstan, Uzbekistan and Tajikistan, rank 68^th, 143^rd and 146^th, respectively. The data on Turkmenistan is not given in the review.

If we consider the particular indicators that allowed Kazakhstan to improve their position in the rankings, they are only these three. Kazakhstan showed the best result in “Registering Property”. Here, the country is 9 points up, reaching 18^th. In terms of "Dealing with Construction Permits", the increase is 4 points to 145^th. Just one point up our country is in "Resolving Insolvency" to 54^th place.

However, the result on the indicator "Paying Taxes" has remained unchanged. This year, the same as in the past year, Kazakhstan is ranking 18^th in the world. There is a lack of progress in "Trading Across Borders", which is the weakest indicator of ours – 186^th.

The Minister of Economy and Budget Planning Erbolat Dossaev explained the reason for such a low position of Kazakhstan on this indicator as early back as at a meeting of the government in January 2013. "We are talking about two aspects of the World Bank’s methodology, affecting our low positions in the rankings. The first aspect is the geographical position of the country and the use of this criterion in the estimate. We want to work with the World Bank and experts so that they will take into account for comparison the countries which have no access to the sea. The second aspect is the transport component. Here the question is not in the business environment, but the country itself."

The minister promised that during the current year his agency will work out those questions at issue with analysts of the World Bank and try to change the estimate. However, judging from the current 186^th place, he did not manage to convince them to estimate the other way.

According to experts, the sanctity of the WB’s position stems from the fact that in the analysis of foreign trade relations, the focus is made on the ease of implementation of the export and import operations. As you know, following the establishment of the Customs Union, the imports of products to Kazakhstan from the countries outside the CU, turned out to be difficult.

Problems remain

However, even more disturbing is the fact that this year Kazakhstan has improved its results only on three indicators. On the five other the Kazakhstan’s position has been down. This time on the "Starting a Business" indicator we took 30^th place, rolling 3 positions. Deterioration of our positions is also on the indicator "Getting Electricity" from 85^th to 87^th.

Kazakhstan is one point down on "Protecting Investors" and "Enforcing Contracts" – 22^nd and 27^th places, respectively. But the worst results are on the indicator "Getting Credit" – 4 points down to 86^th.

The overall results in the rankings are quite good, but the results on particular indicators are worrying. Moreover, there are other problems associated with doing business in Kazakhstan. As noted by independent experts, the development of small- and medium-sized businesses is carried out mainly in the field of mediation and the sectors which do not require significant capital investment: trade, catering, construction of civil facilities, minor repair of equipment and machinery, as well as agriculture. Meanwhile, the scientific and technological innovation and information as a promising market are merely not used by small and medium-sized businesses.