Page last updated at 00:10 GMT, Wednesday, 10 September 2008 01:10 UK

Poor states back economic reform

By Steve Schifferes
Economics reporter, BBC News

Kabul street children
Tackling global poverty requires both public and private investment

The climate for small business is getting easier around the world, according to a new report by the World Bank and its private sector arm, the International Finance Corporation.

The report, Doing Business 2009, which measures how easy it is to do business in 181 countries, says that regulatory reform has gathered pace in the past five years, particularly in Eastern Europe and Central Asia.

EASE OF DOING BUSINESS
1. Singapore
2. New Zealand
3. USA
4. Hong Kong
5. Denmark
6. UK
Source: World Bank/IFC

African countries are also increasing the pace of reform, with 28 countries initiating a reform process, including some post-conflict countries such as Liberia and Sierra Leone.

The majority of the top-ranking countries for doing business, however, are still in developed countries, with the US third and the UK sixth in the world rankings.

Georgia, the former Soviet republic, is ranked 15th in the world, with one of the most business-friendly regimes in the world.

Bahrain and Mauritius also joined the ranks of the top 25 most liberal countries.

Different strokes

The developments are striking, particularly given the worldwide credit crunch and economic slowdown.

According to Penelope Brook, a World Bank director for financial and private sector development, we should not be too surprised by these findings.

She told the BBC that many smaller developing countries realised they had to mobilise their domestic resources and create a more business-friendly climate.

And she argued that the more difficult economic climate worldwide, which has raised questions about how much globalisation benefits all, has intensified efforts by these countries to modernize their economies and attract investment.

Business and poverty

According to Ms Brook, helping small and medium-sized enterprises in developing countries is one of the keys to eliminating poverty, especially in urban areas.

She cites survey research that shows that most people in poor countries want to either start their own business or get a job in the formal sector to improve their condition.

But, she adds, the lack of clear regulations, such as enforceable contract rights in courts, means that many small companies in developing countries are in the informal sector, where they lack any legal rights.

This makes it hard for them to expand or get access to bank loans, and that in turn limits the number of workers they could hire.

And those workers lack both job security and legal rights.

And the poor make up one quarter of the world's population.

In its latest estimate, the World Bank says that 1.4 billion people live in poverty, based on a new poverty measure of $1.25 per day.

Ms Brook says that their lives will be helped by an expansion of small companies.

But she agrees that the area of labour laws is contentious. The report argues that flexible labour markets generate more employment and so help the poor.

But Ms Brook concedes that this is a "sensitive area" for countries, and their policies need to balance the need for protection and the need to ensure business-friendly conditions.

In previous years, trade unions have criticised the Doing Business report for ignoring the rights of workers, particularly the right to join trade unions.

Limits of reform

It is clear that a liberal climate for businesses is only one part of the story of economic development.

Many of the biggest emerging market countries, such as India and China, come well down in the World Bank report ratings.

Ms Brook said that growth in countries like China and India was driven more by macro-economic considerations and increasing foreign investment.

But she pointed out that there had been significant reforms, particularly in China, giving more legal rights to business owners and establishing a system of credit ratings for individuals.

In addition, many of the developing countries that have a liberal economic regime do not have a liberal political regime.

Whether economic reform will ultimately encourage political reform, or whether political repression will in the end inhibit economic development, is still an open question.




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