Wednesday, January 18, 2006

Cutting Red tape means hitting several birds with one stone

WE thought all along that the forces of globalization have slowly transformed the Philippines into a better place for business. Since 1995, policymakers have reduced tariff, removed most of the nontariff barriers and aligned many of our domestic economic policies with the World Trade Organization. We thought all along that we have started to allow the "invisible hand" of the market to guide economic decisions. The recent report of the International Finance Corporation (IFC), the investment arm of the World Bank, simply blew away those illusions. We are actually one of the most difficult places on earth to do business.

The IFC-World Bank Report says that in 2006, the Philippines ranked 113 out of 155 countries in the world in terms of "ease of doing business," just a notch higher than Iraq (ranked 114). This ranking means that in the Philippines it requires Herculean efforts just to do the basic thing like setting up a business, complying with licenses and permits, hiring and firing of employees, registering a property, getting credit, enforcing contracts, paying taxes or closing the business.

This status is not flattering at all. For ranking at 113, the Philippines shares the poor status with Mozambique (ranked 110), Bolivia (111), Honduras (112), Iraq (114), Indonesia (115), India (116), and Albania (117), Croatia (118), Brazil (119) and Venezuela (120).

Now we know the real reason why the country does not grow as fast as the roaring economies in the Asia-Pacific region. Many used to blame the "political noise" or the irrational exuberance of democracy for our failure to catch to progress. They have a point there. But that's really a peripheral issue; the real culprits are the dead and calloused hands of the State that are sapping the country's entrepreneurial energy.

How could we attract more investments when even in just opening a simple business store the government requires one to go through 11 steps within 48 days to complete the process costing 20 percent of one's gross per capita income? Consider this: when an entrepreneur wants to start a business he or she needs to obtain the following requirements: proof of funds or capital, registration with the Securities and Exchange Commission, barangay clearance, mayor's permit, purchase of books of account, registration for the value-added tax, a tax identification number, payment of documentary stamp taxes, authority to print invoices, printing of receipts and invoices, registration of those receipts and invoices, and filings for social security and medicare.

Why should foreign investors come when they would have an easier time setting up businesses in New Zealand , Singapore , United States , Canada , Norway , Australia , Hong Kong , Denmark , United Kingdom and Japan . Among Asian countries, Thailand , Malaysia and Korea ?

We want to solve the fiscal crisis? Then let's remove all these barriers to investments. One of the main reasons why the Philippines has a low tax base is because more than half of the country's economy is accounted for by the informal sector. This sector is largely composed of small unregistered family-operated businesses that do not pay taxes. Because of the high cost of registering business both in terms of money and time, they would rather stay underground thus depriving the government of much-needed revenue. But once the barriers to entry are brought down, the government would have a larger tax base as micro, small, and medium enterprises would find that the benefits of formalizing the business, such as greater access to credit and better utilities, far outweigh the amount that the entrepreneur pays the government in terms of taxes and fees.

We want to create more jobs and reduce poverty in this country? The shortest path is removing all these regulatory and bureaucratic tangles. With many entrepreneurs setting up businesses we create more jobs and more economic activities that even create more jobs. The bonus to this is that, as more firms go formal, there would be more quality jobs that are protected by social security, health insurance, work safety regulations, and nonmonetary benefits like vacation leaves.

We want to lick graft and corruption in the bureaucracy? Again, removing all these messy and unnecessary regulations is the key. The more complex the regulations, the more that bureaucrats would have opportunities to extort bribes from those trying to make an honest living through entrepreneurship. By reforming the country's business and economic regulatory system, the government therefore will hit several stones with just one shot. And the government should do it now with greater urgency and zeal because the future of the country's economy rests on this reform initiative.

In the recent IFC-WB report, countries like Serbia and Montenegro , Georgia , Vietnam , Slovakia , Egypt , Romania , Finland , Pakistan and Rwanda are reforming their regulatory systems hard and fast. These facts simply mean that the competition for foreign direct investments is getting keener by the day. If the government continues to procrastinate, the Philippines—like Rip Van Winkle—will wake up one day to a totally different world where most of those reformers are wining and dining in an exclusive rich man's club while Filipinos are wallowing in self-pity and misery.

No comments: