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Private Sector Is the Locomotive of An Economy

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By Demet Cabbar

It is now widely accepted that small and medium-sized enterprises are key drivers of competition, growth and job creation, particularly in developing countries.  According to the World Bank’s Financial and Private Sector Development’s Vice Presidency:
• Productive jobs tend to be created in private markets and competition tends to drive upgrading of skills and productivity growth
• Rules-based markets that allow entry of new firms promote success on the basis of rules, not on the basis of personal connections; this stimulates movement from the informal to the formal sector including access to finance for underserved small firms and households
• Better regulation and governance reduces opportunities for corruption
• Wealth creation and entry of new parties into the market tend to create demand for better governance

Yet, until recently there were no globally available indicator sets to measure and compare the ease of doing business across countries.  For instance, the macroeconomic indicators in national accounts are standard in every country.  However, for governments that are committed to improving daily economic activities of their country and job opportunities for its citizens, and for international investors who are looking into investment opportunities in other countries, there were no standard indicators.     

The Doing Business project, launched 7 years ago, looks at domestic small and medium-sized companies and measures the regulations applying to them through their life cycle. Although there have been earlier attempts to measure economic and policy conditions for the private sector, the Doing Business project is the first that has come close to creating a global standard in this field.    

The first Doing Business report, published in 2003, covered 5 indicator sets in 133 economies. The 2009 report covers 10 indicator sets in 181 economies. The project has benefited from feedback from governments, academics, practitioners and reviewers.  The initial goal remains: to provide an objective basis for understanding and improving the regulatory environment for business.  

Doing Business provides a quantitative measure of regulations for starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business—as they apply to domestic small and medium-sized enterprises. A fundamental premise of Doing Business is that economic activity requires good rules. These include rules that establish and clarify property rights and reduce the costs of resolving disputes, rules that increase the predictability of economic interactions and rules that provide contractual partners with core protections against abuse.

239 reforms in 113 economies were introduced between April 2007 and June 2008. Reformers simplified business regulations, strengthened property rights, eased tax burdens, increased access to credit, and reduced the cost of exporting and importing. The pace of reform varied across regions, with Eastern Europe and Central Asia reforming the most.  According to the report, during this period only one business reform took place in Turkey.  A new law requiring that an independent auditor assess transactions between interested parties before the transactions are approved was introduced in order to strengthen investor protections.

According to the report, Turkey is ranked 59 out of 181 economies in 2008. Singapore is the top ranked economy in the Ease of Doing Business category, followed by New Zealand, the United States, Hong Kong – China, and the Western European countries, something which does not come as surprise.  Although Turkey jumped from a ranking of 91 in 2006 to 60 in 2007, in 2008 it only moved up by 1, reaching 59 in the overall ease of doing business ranking.  

STARTING A BUSINESS
In terms of the sub-components of doing business, in 2008, for instance, in starting a business, Turkey is ranked 43 overall.  It requires 6 procedures, takes 6 days, and costs 14.91 % GNI per capita to start a business in Turkey.  Turkey is ranked 68 overall for Paying Taxes.  This indicator takes into account three criteria: (i) number of tax payments, which takes into account the method of payment, the frequency of payments and the number of agencies involved; (ii) time, which measures the number of hours per year necessary to prepare and file tax returns and to pay the corporate income tax, value added tax, sales tax or goods and service tax and labor taxes and mandatory contributions; and (iii) total tax rate, which measures the amount of taxes and mandatory contributions payable by the company during the second year of operation.  Efficient tax systems tend to have less complex tax arrangements, comprised of straightforward compliance procedures and clear laws. Taxpayers in such economies often get more from their taxes. Simple, moderate taxes and fast, cheap administration mean less hassle for businesses, and also more revenue collected and better public services.

CONSTRUCTION PERMITS
Turkey is ranked 131 overall for Dealing with Construction Permits.  Where the regulatory burden is large, entrepreneurs move their activity into the informal economy.  There they operate with less concern for safety, leaving everyone worse off.   Another striking finding is that Turkey is ranked 138 overall for Employing Workers. 

Employment regulations are needed to allow efficient contracting between employers and workers and to protect workers from discriminatory or unfair treatment by employers. In its indicators on employing workers, Doing Business measures flexibility in the regulation of hiring, working hours and dismissal in a manner consistent with the conventions of the International Labor Organization (ILO). 

Governments all over the world face the challenge of finding the right balance between worker protection and labor market flexibility. But in developing countries especially, regulations often lean to one extreme, pushing employers and workers into the informal sector. Analysis across economies shows that while employment regulation generally increases the tenure and wages of incumbent workers, overly rigid regulations may have undesirable side effects. 

These include less job creation, smaller company size, less investment in research and development, and longer spells of unemployment and thus the obsolescence of skills, all of which may reduce productivity growth.   

As the entire world watches the global financial system being transformed, inefficient production systems forced to reform, and economic power being reshuffled towards a more evenly distributed paradigm, this may be the right time for Turkey to reform its business regulations to catch up with its competitors in Asia, Europe and Latin America and to get ahead in the new economic era by removing the constraints that prevent the private sector from flourishing.  With Turkey’s comparative advantages in location and educated work force, there is no reason why Turkey should not be a heaven of entrepreneurship and investments. The time is ripe to put the private sector in the driver’s seat.   

For more information on Doing Business Country Report for Turkey, visit:
http://www.doingbusiness.org/Documents/CountryProfiles/TUR.pdf

STARTING A BUSINESS – GLOBAL RANK
Country                              Rank
New Zeland                         1
Azerbaijan                            13
Romania                              26
Turkey                                   43
Russian Federation           65
Armenia                                66
Bulgaria                                81

DOING BUSINESS IN TURKEY
Ease of...                                 Doing Business 2009 rank         Doing Business 2008 rank               Change
Doing Business                                           59                                        60                                                      +1
Starting a Business                                    43                                         43                                                        0
Dealing with Construction Permits        131                                       129                                                      -2
Employing Workers                                   138                                       142                                                     +4
Registering Property                                    34                                         31                                                      -3
Getting Credit                                                68                                         61                                                      -7    
Protecting Investors                                     53                                         66                                                    +13
Paying Taxes                                                68                                          58                                                    -10
Trading Across Borders                             59                                          59                                                        0
Enforcing Contracts                                    27                                          30                                                      +3
Closing a Business                                 118                                        115                                                       -3    

Note: Doing Business 2008 rankings have been recalculated to reflect changes to the methodology and the addition of three new countries.

* This article is a compilation of summaries of the findings of Doing Business 2009, Doing Business Country Report for Turkey, and www.doingbusiness.org, and author’s own views shaped by working at the World Bank’s Financial and Private Sector Development Vice Presidency.
Last modified onSaturday, 06 May 2017 10:07

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