absconds, leaving his workers, the bank, and the tax agency with nothing.”
If you want to know why two decades of macroeconomic reform wholesale at the top have not slowed the spread of poverty and produced enough new jobs in key countries of Latin America, Africa, the Arab world, and the former Soviet Empire, it is because there has been too little reform retail. According to the IFC report, if you want to create productive jobs (the kind that lead to rising standards of living), and if you want to stimulate the growth of new businesses (the kind that innovate, compete, and create wealth), you need a regulatory environment that makes it easy to start a business, easy to adjust a business to changing market circumstances and opportunities, and easy to close a business that goes bankrupt, so that the capital can be freed up for more productive uses.
“It takes two days to start a business in Australia, but 203 days in Haiti and 215 days in the Democratic Republic of Congo,” the IFC study found. “There are no monetary costs to start a new business in Denmark, but it costs more than five times income per capita in Cambodia and over thirteen times in Sierra Leone. Hong Kong, Singapore, Thailand and more than three dozen other economies require no minimum capital from start-ups. In contrast, in Syria the capital requirement is equivalent to fifty-six times income per capita... Businesses in the Czech Republic and Denmark can hire workers on part-time or fixed-term contracts for any job, without specifying maximum duration of the contract. In contrast, employment laws in El Salvador allow fixed-term contracts only for specific jobs, and set their duration to be at most one year... A simple commercial contract is enforced in seven days in Tunisia and thirty-nine days in the Netherlands, but takes almost 1,500 days in Guatemala. The cost of enforcement is less than 1 percent of the disputed amount in Austria, Canada and the United Kingdom, but more than 100 percent in Burkina Faso, the Dominican Republic, Indonesia... and the Philippines. Credit bureaus contain credit histories on almost every adult in New Zealand, Norway and the United States. But the credit registries in Cameroon, Ghana, Pakistan, Nigeria and Serbia and Montenegro have credit histories for less than 1 percent of adults. In the United Kingdom, laws on collateral and bankruptcy give creditors strong powers to recover their money if a debtor defaults. In Colombia, the Republic of Congo, Mexico, Oman and Tunisia, a creditor has no such rights. It takes less than six months to go through bankruptcy proceedings in Ireland and Japan, but more than ten years in Brazil and India. It costs less than 1 percent of the value of the estate to resolve insolvency in Finland, the Netherlands, Norway and Singapore-and nearly half the estate value in Chad, Panama, Macedonia, Venezuela, Serbia and Montenegro, and Sierra Leone.”
As the IFC report notes, excessive regulation also tends to hurt most the very people it is supposed to protect. The rich and the well connected just buy or hustle their way around onerous regulations. In countries that have very regulated labor markets where it is difficult to hire and fire people, women, especially, have a hard time finding employment.
“Good regulation does not mean zero regulation,” concludes the IFC study. “The optimal level of regulation is not none, but may be less than what is currently found in most countries, and especially poor ones.” It offers what I call a five-step checklist for reform retail. One, simplify and deregulate wherever possible in competitive markets, because competition for consumers and workers can be the best source of pressure for best practices, and overregulation just opens the door for corrupt bureaucrats to demand bribes. “There is no reason for Angola to have one of the most rigid employment laws if Portugal, whose laws Angola adapted, has already revised them twice to make the labor market more flexible,” says the IFC study. Two, focus on enhancing property rights. Under de Soto's initiative, the Peruvian government in the last decade has issued property titles to 1.2 million urban squatter households. “Secure property rights have enabled parents to leave their homes and find jobs instead of staying in to protect the property,” says the IFC study. “The main beneficiaries are their children, who can now go to school.” Three, expand the use of the Internet for regulation fulfillment. It makes it faster, more transparent, and far less open to bribery. Four, reduce court involvement in business matters. And last but certainly not least, advises the IFC study, “Make reform a continuous process... Countries that consistently perform well across the Doing Business indicators do so because of continuous reform.”
In addition to the IFC's criteria, reform retail obviously has to include expanding the opportunities for your population to get an education at all levels and investing in the logistical infrastructure-roads, ports, telecommunications, and airports-without which no reform retail can take off and collaboration with others is impossible. Many countries today still have telecommunications systems dominated by state monopolies that make it either too expensive or too slow to get highspeed Internet access and wireless access, and to make cheap longdistance and overseas phone calls. Without reform retail in your telecom sector, reform retail in the other five areas, while necessary, will not be sufficient. What is striking about the IFC's criteria is that a lot of people think they are relevant only for Peru and Argentina, but in fact some of the countries that score worst are places like Germany and Italy. (Indeed, the German government protested some of the findings.)
“When you and I were born,” said Luis de la Calle, “our competition [was] our next-door neighbors. Today our competition is a Japanese or a Frenchman or a Chinese. You know where you rank very quickly in a flat world... You are now competing with everyone else.” The best talent in a flat world will earn more, he added, “and if you don't measure up, someone will replace you-and it will not be the guy across the street.”
If you don't agree, just ask some of the major players. Craig Barrett, the chairman of Intel, said to me, “With very few exceptions, when you would think about where to site a manufacturing plant, you would think about the cost of labor, transportation, and availability of utilities-that sort of stuff. The discussion has been expanded today, and so it is no longer where you put your plant but now where do you put your engineering resources, your research and development-where are the most efficient intellectual and other resources relative to cost? You now have the freedom to make that choice... Today we can be anywhere. Anywhere could be part of my supply chain now-Brazil, Vietnam, the Czech Republic, Ukraine. Many of us are limiting our scope today to a couple of countries for a very simple reason: Some can combine the availability of talent and a market-that is, India, Russia, and China.” But for every country Intel considers going into, added Barrett, he asks himself the same question: “What inherent strength does [the] country bring to the party? India, Russia-crummy infrastructure, good educational level, you have a bunch of smart folks. China has a little bit of everything. China has good infrastructure, better than Russia or India. So if you go to Egypt, what unique capability [does that country have to offer]? Exceedingly low labor rates, but what is [the] infrastructure and education base? The Philippines or Malaysia have good literacy rates-you get to employ college grads in your manufacturing line. They did not have infrastructure, but they had a pool of educated people. You have got to have something to build on. When we go to India and are asked about opening plants, we say, 'You don't have infrastructure. Your electricity goes off four times a day.'”
Added John Chambers, the CEO of Cisco Systems, which uses a global supply chain to build the routers that run the Internet and is constantly being wooed to invest in one country or another, “The jobs are going to go where the best-educated workforce is with the most competitive infrastructure and environment for creativity and supportive government. It is inevitable. And by definition those people will have the best standard of living. This may or may not be the countries who led the Industrial Revolution.”
But while the stakes in reform retail today are higher than ever, and countries know it, one need only look around the world to notice that not every country can pull it off. Unlike reform wholesale, which could be done by a handful of people using administrative orders or just authoritarian dictates, reform retail requires a much wider base of public and parliamentary buy-in if it is going to overcome vested economic and political interests.
In Mexico, “we did the first stages of structural reform from the top down,” said Guillermo Ortiz. “The next stage is much more difficult. You have to work from the bottom up. You have to create the wider consensus to push the reforms in a democratic context.” And once that happens, noted Moises Nairn, a former Economy Minister of Venezuela and now editor of Foreign Policy magazine, you have a much larger number of actors participating, making the internal logic and technical consistency of the reform policies much more vulnerable to the impact of political compromises, contradictions, and institutional failures. “Bypassing or ignoring the entrenched and defensive
