Wednesday, May 5, 2010

Doing Business in OECD

Some of the issues that careful investor would consider when chosing the best country for doing business are the flexibility of the labor market, the nature of the tax system, the cost of starting a business, the protection of investors, contract enforcement, getting credit, etc. To investigate the issue, I collected data on doing business in 27 OECD countries from World Bank's Doing Business.

In the graph you can see the ranking of countries according to the ease of doing business. The best performing OECD country is New Zealand. New Zealand's business environment is known for low corruption perception, strong contract enforcement, low tax rates on labor and capital, not to mention flexible and non-distortionary business legislation. The second best performer is the US followed by Denmark and the UK. In spite of one of the highest fax rates in the world, Danish business environment is a benchmark for the rest of the world in two major policy fields. First, a flexible labor market and second, a robust sistem of legal protection of investors. Among the best performing countries are Anglo-Saxon countries and Nordic countries. These countries are known for relatively free business environment although Nordic countries are characterised by high tax burden and high government spending.

Countries of Continental Europe are ranked in the middle. Their business environment is unfortunately known for high tax burden, high government spending, rigid labor market and, nevertheless, strong governmant intervention. For example, the collective bargaining coverage of labor contracts in Austria and Germany is close to 100 percent which is a measure of strong union power.

The Ease of Doing Business in 27 OECD countries
Source: World Bank

The worst performers in the OECD are Mediterranean and Vishegrad countries (Czech Republic, Slovakia, Poland, Hungary). In addition to high taxes, big government and rigid labor market, Mediterranean countries suffer from a weak rule of law and costly contract enforcement which hinders investor protection and diverts investment from productive into shadow sector of the economy. It is not surprising that in these countries union strikes and shadow economy are widespread.

Days to start business in 27 OECD countries
Source: World Bank

In the upper graph, you can see the number of days necessary to start a business. The findings reflect the pattern of the ease of doing business. Countries with higher administrative burden have the longest procedures in starting a business. Spain and Continental European countries were ranked on top with the highest number of days in starting a business while Anglo-Saxon countries are admired for quick and flexible administrative procedures in starting a business.

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