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Does business-friendly mean unfriendly to graft? 

The International Finance Corporation and the World Bank released their new Doing Business Index this week. It's the 11th annual report measuring business regulations for local firms -- how easy or hard it is to do business in the countries surveyed. It focuses on small and medium-size companies operating in the largest business city of an economy.

Is that relevant to corruption and compliance? Sure. If it's hard to do business somewhere, that means there's too much red tape. Red tape leads to graft, and usually graft leads to more red tape. As economist Vito Tanzi put it, when rules can be used to extract bribes, more rules will be created. And when more rules appear, more bribes will be needed to bargain down the red tape, and so on.

We've argued before that if the U.S. government wants a level playing field for American business overseas, it should be encouraging a global war on red tape. Linking foreign aid, trade, military support, and other forms of cooperation to programs for reducing unnecessary regulations would be a start. The IFC, World Bank, IMF, and OECD should be doing the same thing.

This year’s Doing Business Index covers 189 economies. Measured are regulations for starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. The index also measures regulations on employing workers. It doesn't measure corruption.

Most countries that try to make it easy to do business also protect the businesses against graft. So you'd expect countries where it's easiest to do business to rank high on TI's corruption perceptions index. And that's generally true. The top twenty countries on the Doing Business Index have an average CPI rank of 24. There's plenty of correlation at the top of both lists and some outliers too. Thailand and Malaysia make the Doing Business top 20 but rank 54 and 88 on the CPI, for example.

So the correlation isn't perfect. And since corruption isn't factored into the Doing Business Index, there are some strange results. For example, the ten 'most improved' countries on the latest Doing Business Index are Ukraine, Russia, Rwanda, Philippines, Kosovo, Côte d'Ivoire, Djibouti, Burundi, Macedonia, and Guatemala. They have an average CPI rank of 100. Wouldn't it make sense for any index that purports to measure how hard it might be to do business to include graft as a factor?

Here are the top 20 countries on the 2014 Doing Business Index, with their CPI rank in parentheses:

  1. Singapore (5)
  2. Hong Kong (14)
  3. New Zealand (1)
  4. United States (19)
  5. Denmark (1)
  6. Malaysia (54)
  7. South Korea (45)
  8. Georgia (51)
  9. Norway (7)
  10. United Kingdom (17)
  11. Australia (7)
  12. Finland (1)
  13. Iceland (11)
  14. Sweden (4)
  15. Ireland (25)
  16. Taiwan (37)
  17. Lithuania (48)
  18. Thailand (88)
  19. Canada (9)
  20. Mauritius (43)

The 2014 Doing Business Index is here.


Richard L. Cassin is the Publisher and Editor of the FCPA Blog. He can be contacted here.