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Red Tape Stifles Third World

September 13, 2004

Many of the world's poorest countries are kept afloat only through massive amounts of foreign aid and debt relief. But outsiders can't do it alone; governments in these poor nations must be willing to be friendlier to domestic businesses.

A report issued last week by the World Bank suggests that these countries start by reducing the thicket of regulations that keeps citizens from founding and growing new businesses. Without regulatory reform, the World Bank predicts, poorer countries will fall even further behind as richer rivals make it easier for existing businesses to grow and for entrepreneurs to create start-ups.

The report makes for sobering reading. It costs more in poorer countries to fire workers, enforce contracts and gain access to capital than it does in richer countries. When regulations are simplified, the number of new businesses swells. In Ethiopia, for example, new businesses rose by about 50% after regulations were streamlined.

The World Bank isn't advocating the abandonment of regulations that protect the environment and the rights of workers. It instead focuses on bureaucracies that make it difficult for new businesses to spring to life. The organization's second-annual review of red tape around the world suggests that richer countries have found an appropriate balance: "All the top countries regulate, but they do so in less costly and burdensome ways." And American business leaders who moan that this is an increasingly unfriendly place to do business should note that the U.S. sits near the top of the World Bank's list of countries where it's comparatively easier and less costly to clear regulatory hurdles.

Many countries already are moving toward more sensible regulations, particularly in Europe, home to eight of the 10 countries worldwide identified as having made the greatest progress during 2003. Established European economies are being pushed by former Eastern Bloc countries and new offshoots from these nations -- including Slovakia, which topped the World Bank's most-improved list -- that are striving to take business away from their better-off neighbors.

But the sad reality remains that most reforms are occurring in richer countries. Less than a third of the 58 countries that the World Bank identified as having improved regulatory environments last year were identified as poor and lower-middle-income nations. And some of the world's most troubled economies -- including most of sub-Saharan Africa -- failed to register any improvements.

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