Despite globalization, it's still difficult to do business in the Philippines

Last Monday I came across the latest “Doing Business Index” report preparred by the International Finance Corporation ranking countries worldwide on the ease of doing business. Sad to say, the Philippines did not do well in this report, ranking only 113 out of 155 countries. Now we know why the Philippine economy is not growing that fast. Below is my story that appeared as banner article of the BusinessMirror (18 January 2006).

THE Philippines remains to be among the world's most difficult countries to do business in, ranking a poor 113 out of 155 countries worldwide in the recent International Finance Corporation's 2006 global ranking on the "ease of doing business." With such rank, the Philippines is just a notch higher than Iraq.

The most business-friendly countries, the International Finance Corporation (IFC) said, is New Zealand—ranked number 1—followed by Singapore, United States, Canada, Norway, Australia, Hong Kong, Denmark, United Kingdom, and Japan. Among Asian countries, Thailand, Malaysia and Korea belong to the top 20.

The International Finance Corporation, the investment arm of the World Bank that celebrated its 50th anniversary Tuesday, provides loans, risk management services and structured finance products to developing countries worldwide.

In ranking countries, the IFC and the World Bank used 10 variables: the ease of starting a business, ease of dealing with licenses, ease of hiring and firing, ease of registering property, ease of getting credit, ease of protecting investors, ease of paying taxes, ease of trading, ease of enforcing contracts and ease of closing a business.

"[A] high ranking on the ease of doing business does mean that the government has created a regulatory environment conducive to the operation of business," said IFC and the World Bank in its report titled "Doing Business in 2006: Creating Jobs."

The report said: "Often, improvements on the Doing Business indicators proxy for broader reforms to laws and institutions which affect more than the administrative procedures and time and cost of complying with business regulations."

For ranking 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).
The WB-IFC report clarified that a high ranking in the Doing Business Index does not mean that countries like New Zealand, Singapore, United States, Canada and Norway have little or no regulation.

"All the top-ranking countries regulate businesses, but they do so in less costly and burdensome ways," said the WB-IFC report.

Nordic countries like Norway (ranked 5), Denmark (8), Iceland (12), Finland (13) and Sweden (14) do have regulations, but these regulations are simple, thus allowing businesses to be productive by focusing government intervention where it counts-protecting property rights and providing social services.
The IFC-WB report complains of the Philippines 's tangle of bureaucratic requirements as a major barrier to entrepreneurship.

"Entrepreneurs can expect to go through 11 steps to launch a business over 48 days on average, at a cost equal to 20.3 percent of gross national income (GNI) per capita," said the report. "They must deposit at least 2.0 percent of GNI per capita in a bank to obtain a business registration number."

The same report said that in Thailand (ranked 20) it just takes eight steps to launch a business over 33 days, at a much cheaper cost equal to 6 percent of the GNI per capita and without any required deposit.

Undoing these bureaucratic tangles and unreasonable regulations, the IFC-WB report said, is necessary for the economy to grow faster and create more jobs.

"An increasing number of those jobs will be in the formal economy because of the benefits of being formal (such as easier access to credit and better utility services) often outweigh the costs (such as taxes)," the report said. "And more formal jobs will mean that more workers are protected by pensions, safety regulations, and health benefits."

The report has noted that in complying with licensing and permit requirements alone would take 23 steps and 197 days to complete the process at a cost equivalent to 121 percent of income per capita. For the same activity in Thailand, an entrepreneur there would need nine steps and 147 days to complete the process at a cost of only 17 percent of income per capita.

"In Thailand, it takes two steps and two days to register a property. The cost to register property is 6.3 percent of overall property value," the WB-IFC report said. "In the Philippines, it takes eight steps and 33 days to register property, [at a cost of] 5.7 percent of overall property value."

Even the procedures involved in simply paying taxes—where people give money to the government—have been described as more difficult in the Philippines.

"The effective tax that a medium size company in the Philippines must pay or withhold within a year... Entrepreneurs there must make 62 payments, spend 94 hours, and pay 46.4 percent of gross profit in taxes," said the WB-IFC report. "Entrepreneurs there [Thailand] must make 44 payments, spend 52 hours and pay 29.2 percent of gross profit in taxes."