Monday, November 9, 2009

IFC/World Bank Group "Doing Business in the Arab World 2010"

Today the IFC/World Bank Group officially released its annual report on regulations in the Arab World  "Doing Business in the Arab World -2010".  Those watching the GCC press have been aware of the report for a couple of days as it was discussed in several of the UAE papers under headlines calling for reforms of UAE insolvency law.  Here's one link.

This report is part of a larger project undertaken by the World Bank Group to measure regulations affecting the 10 stages in the life of a company - from birth (registration) to death (closure) in 183 countries.   The goal is not only descriptive.  It is as well prescriptive - to encourage reform.

Like many such efforts, it reduces very complex matters to a single number for ease of comparison.  The report ranks countries not only at a macro level (overall ease of doing business) but  at various sub levels (the ten regulations, e.g. starting a business, dealing with construction permits, etc).

Because the ease of doing business is not directly observable or measurable like the amount of rainfall during a year or average daily temperature, one measures it indirectly by using proxy variables.  The WBG has chosen 10 regulatory issues mentioned above.  These are also measured for ease of accomplishment.  That leads to the choice of a second level of proxies.  One then has to specify the relationship and relative weights of the proxy variables (write the equation).  Once the equation is specified, one needs data.

This is a difficult process.  How does one choose the proxies - both at the first and the second levels?  How does one determine the equation and the relative weights of the proxies?  How does one ensure that data across 183 countries is consistent - both in terms of definition and standards for reporting?  For example, if the measure is days to get a license  for a new business, how does the local MOIC  track dates?  From the date of a properly completed application?  But what if there are numerous rejections of an application as incomplete?  Are  those days counted?  Does the clock start ticking from the date the applicant drops off the completed application?  Or the date the MOIC enters it into its records?  What is the quality of the record keeping?  I posted a comment to a blog about Yemen LNG with articles raising doubts about the GDP calculation for the USA and Japan, two countries whose statistical accuracy might be assumed above reproach.

All in all a daunting task.  Because it is difficult does not mean it should not be done.  Because it involves interpretation (there is no single right answer) does not mean it should not be attempted.

Efforts like this are to be applauded and encouraged. That being said, the issues involved should not be overlooked.  The results should be recognized for what they are:  interpretations not facts.

And that gets to perhaps the central issue here:  the report is designed as prescriptive.   A country can reform by using the WB specified equation.  But what if it is mis-specified either with the wrong proxies or the wrong weights?  Reform will be mis-directed. 

There is another issue.  I am a bit uneasy about  the  individual numerical rankings.  Singapore is rated #1 for ease of doing business.  Hong Kong #3.  As a businessman, would I really notice a perceptible difference between the two in the running of my business?  If I could, would it really matter?

I think that such studies should be directional rather than locational.

Instead of individual rankings, determined with apparent Cartesian precision,  countries should be grouped into bands chosen where there is a very perceptible break in "ease".  The difference between Hong Kong and Singapore may be too minor to notice.  That between Singapore and Yemen is probably not. 

Anyways to the report, first the overall rankings for the GCC states for ease of doing business:
(Note:  The report rates 183 countries).
  1. Saudi Arabia  (#13 in World Rating) 
  2. Bahrain           (#20)
  3. UAE               (#33)
  4. Qatar              (#39)
  5. Kuwait           (#61)
  6. Oman              (#65)
Drilling a little bit further into the report, here are the rankings for investor protection with world ratings again in parentheses:
  1. Saudi Arabia   (# 16)
  2. Kuwait            (# 27)
  3. Bahrain           (# 57)
  4. Oman /Qatar   (# 93)
  5. UAE                (#119)
Had I been asked to come up with ratings based on personal experience, I would have a different order.  For the record, the rating is determined by equal weights of the following three index proxies: disclosure, director liability, ease of shareholder suits.

Rankings for contract enforcement:
(The report includes details on the average time to settlement and the average cost of enforcement - lawyer's fees, etc. - measured as a percentage of the claim.)
  1. Qatar               (# 95) 
  2. Oman               (#106)
  3. Kuwait             (#113)
  4. Bahrain            (#117)
  5. UAE                 (#134)
  6. Saudi Arabia    (#140)
This ranking is based on three equally weighted variables: number of legal steps, average number of days to a settlement and the cost of enforcement as a percentage of claim.  It seems to me that outcome of the case would be a very important measure. Legal procedures might be very simple (a few steps), get completed quickly (say 60 days), and cost relatively little as a percentage of the claim.  But,  if  the result is unjust,  how is the contract enforced?   That gets back to my comment about the difficulty of measuring abstract qualities.  How does one measure a just decision?  Clearly, the plaintiff and defendant are likely to have quite opposed views.

As one of my lawyer friends says the clearest commentary on the state of GCC legal systems is that both the DIFC and QFC use as a major selling point the fact that  their centers have their own imported law and judges separate from the local on-shore legal system.  That is hardly a ringing endorsement for local justice.  And it is coming from a governmental or quasi-governmental authority in the country!

One might well criticize local courts.  I know that I could easily recite a list of complaints and anecdotes.

That being said, I would not want to bring a lawsuit in Texas.  Texaco could testify more eloquently  (perhaps 10 billion times more!) than I could about the legal system in that state.  Or a bank  I know that tried to foreclose on an office building loan, only to have the judge dismiss their case on the grounds that under Texas law a lender may not take a debtor's primary residence.  Seems the borrower moved a bed into the building  the night before the trial and claimed it as his home!  

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