Eurasian frontier markets are top reformers in World Bank ranking

Graham Stack for business new europe

Azerbaijan is today celebrating its meteoric rise in the World Bank’s authoritative annual “Ease of Doing Business” ranking, released September 11. The Caucasian oil oasis shot up from last year’s place 97 to this year place 33, just one below Israel, making it the world’s top reformer. And it is not alone at the top: placed two, three and four among the world’s swiftest regulatory streamliners were fellow Eurasian frontier markets Albania, Kyrgyzstan and Belarus respectively.

The World Bank ranking, that surveys legislation and regulation and includes feedback from companies on registration and tax matters, is the recognized global benchmark for business environment and market entry conditions, in particular for small and midsize business.

And, according to the results of the new survey, Eurasian countries are proving to be the World Bank’s most diligent students: 34% of all reforms improving the business environment across the world 2007-2008 were enacted in Eastern Europe and Central Asia.

The surprise is, however, which countries within this regions were responsible for the lion’s share of reforms. Not the heartland of Poland, Russia and Ukraine, but a splurge of frontier markets, led by Azerbaijan.

Azerbaijan notched up improvements on seven out of 10 indicators of regulatory reform, according to the World Bank. Azerbaijan started operating a one-stop shop in January 2008 that halved the time, cost, and number of procedures to start a business. Business registrations increased by 40% in the first 6 months. Azerbaijan also eliminated the minimum loan cutoff of $1,100, more than doubling the number of borrowers covered at the credit registry, and set up an e-government system allowing taxpayers to file and pay taxes online.

Belarus, aka ‘Europe’s last dictatorship’ and where the state still owns most industry, this year shot up to place 85 from a lowly 110 in 2008.

This was the result of a year’s concerted reforms that won it the number 4th top reformer spot in the ranking. Starting a business became a whole lot easier thanks to a unified registry database, a time limit for registration, and halving of the minimum capital requirement. In addition, a one-stop shop for property registration caused time required to register property to fall from 231 days to 21.

As mountainous as Belarus is flat, and as politically turbulent as Belarus is authoritarian, Kyrgyzstan came in one place below Belarus in the overall ranking, but third place globally as reformer, with one-stop shops for registration and streamlining of construction permission.

Follow my leader

The trailblazer among Eurasian countries, however, remains Georgia. Previous years’ star reformer is this year’s star performer. Georgia takes place 15 in the world for ease of doing business, making it number 1 among the post-Soviet states, far ahead even of the Baltic states, and only one place behind business paradise Finland.

This has made it an example to follow in countries across the region. For as the World Bank’s Doing Business team explains, “if there is any advantage to starting late in anything, it’s that you can learn from others.”

This copycat effect could lead to further sudden leaps towards liberalization in states that seem to be suffocating in red tape. Belarus reformers for one often refer to the Georgian example when arguing that their goal to reach the ranking’s top 25 is feasible.

One example no one is following is Russia’s. Russia languishes at place 120, a drop of eight places over last year. The World Bank comment on Russia is brief and sad: “In the Russian Federation no major reforms were recorded.”

The only silver lining for Russia might be that newly-elected President Dmitry Medvedev has named improving the regulatory environment for small business and tackling corruption priorities for his presidency.

But even that may not help much: Ukraine for all its four years of Orange liberal rhetoric, fares even worse than Russia in the ranking. It came in at place 145, between Surinam and Madagascar.

Cosmetic surgery

However, there are question marks about the report’s findings.

One problem is that the ranking could become a victim of its own success. Governments actively boost their Doing Business ranking by initiating reforms on paper that lack follow-through in enforcement – and thus remain largely cosmetic.

World Bank representative in Belarus Martin Raiser sounded a cautionary note in comments made to bne in July.

“The Belarus authorities have set themselves ambitious goals to improve their rankings in international rankings on the costs of doing business,” Raiser said. “While we welcome the ambition to tackle these challenges broadly, we recognize that the authorities are aiming at efficiency improvements rather than wholehearted institutional change.”

Indeed, the Belarus government’s commitment to moving up the ranking in did not stop hundreds of individual entrepreneurs taking to the streets to demonstrate against the government in early 2008, a bold undertaking in Aleksandr Lukashenko’s Belarus. They were protesting against new government regulations forbidding individual entrepreneurs to hire additional workers, demanding they re-register as firms. The new regulations forced many individual entrepreneurs to quit their business.

“There were demonstrations on the part of individual entrepreneurs in the centre of Minsk, but nothing appeared about them on TV, it was all hushed up and then they were dispersed by force,” a former stall owner forced to turn taxi driver told bne in Minsk in June.

So, before rushing off to set up a bar in Azerbaijan – placed higher than Israel in the Word Bank ranking – listen to what people on the ground are saying as well.

A high-placed foreign advisor in Azerbaidzhan recently made the following comments to the bne blog:

“Petty corruption has indeed been reduced here – you don’t really see policemen hassling people for bribes anymore. But this is not the kind of corruption that anyone is worried about. We’re talking about massive corruption on a scale that is unimaginable by Western standards.”

“Take for example a well-known international oil and gas company which has been working in Azerbaijan for many years. When they have to import a small, specialized part such as a pump, say, that is only worth some $500, they end up paying around $10,000 to get it across the border,” claims the source.

“In the West, when people consider Azerbaijan, they expect corruption but they have no idea about the level it has reached. If someone were to say: ‘give me 100% of the value of the goods’, people would be like ‘are you crazy?’ But here 100% is nothing – 500%, 600% or 700% is completely normal. It’s ridiculous, but that’s the reality.”

“It’s human habit, you push things as far as they’ll go. No one has done anything to stamp out corruption, so it’s gone completely out of control and is killing the country.”