Sunday, September 30, 2007

Africa Leads the World in the Creation of Red Tape

The World Bank just released its "Doing Business 2008" report, an annual study that tracks a set of regulatory indicators related to business startup, operation, getting credit, trade, payment of taxes and closing a business, by measuring the time and cost associated with various government requirements in 178 countries.

The top 10 and bottom 10 countries are displayed above (click to enlarge) for the "Ease of Doing Business Index," along with the GDP per capita of those countries. As expected, the more favorable the overall business climate, the higher the income per capital. Poor countries are poor and remain poor because they stifle private businesses, especially in Africa, which has 9 of the bottom 10 countries, and 19 of the bottom 20. Here are the complete rankings.

From the FT Times: "The U.S. may be the economic superpower, and China the new manufacturing powerhouse, but there is one industry in which Africa still leads the world: the manufacture of red tape. This year’s edition of “Doing Business" is a depressing but important reminder of what we already knew: poor countries tend to stifle their economies with impossibly burdensome regulations, while most rich countries let entrepreneurs start businesses, buy and sell property, and ship goods through customs.

Read a Business Week report here, and an article from Financial Express in India here.

Bottom Line: Wealth, income, jobs and prosperity are created by businesses that start and operate in the private sector of the economy. Business-friendly countries create wealth, income, jobs and prosperity, and business-unfriendly countries don't.


At 9/30/2007 12:52 PM, Blogger happyjuggler0 said...

Why is the chart not in PPP? Using highly variable exchange rates to compare something like per capita GDP is shoddy economics.

PPP may not be perfect, but it is much closer to "the truth" than exchange rates. The US dollar doubled against the British Pound from mid 1980 to early 1985. Did domesticly denominated, inflation adjusted per capita GDP comparably outperform the UK during this time period? No, of course not. But if you used exchange rates to compare GDP with then you would get that very wrong impression. So why do it today instead, where it is equally misleading?

That said, your chart does nothing to detract from the correct thesis you have outlined in your post. But I can easily see how an uninitiated reader might wrongly think that Denmark has a higher standard of living than the US does for example, leading them to other wrong policy conclusions.

At 9/30/2007 2:22 PM, Blogger Mark J. Perry said...

I can certainly re-do the chart with PPP GDP per capita, but the main point would be unaffected, as you point out. Even when adjusting for PPP, the African countries are still at the bottom of the list for per-capita income, which is the main point.

Using PPP GDP per capita, the average for the top 10 countries in the list is $36,500 (vs. $39,950), and the average for the bottom 10 is $1628 vs. $1,110).

For those interested, you'll find nominal GDP per capita here:

and GDP (PPP) per capita here:

Sorry, Blogger wouldn't allow me to make those links active.

At 9/30/2007 5:23 PM, Blogger happyjuggler0 said...

M J Perry,

I thoroughly enjoy this blog, it is a useful resource. I especially enjoy when you comment directly or indirectly on matters regarding how Michigan got to have such a ridiculous unemployment rate. It is almost as high as the EU's! I have major issues with those (e.g. union yes types, high tax-high spend-high regulate government politicos, the anti-universal school voucher folks) people who intend, or cannily claim such intention, to use the power of government coercion to help "the little guy" or "the needy", but who wind up hurting those very people via their actions putatively on their behalf. Nowhere in the US is this more visible than in Michigan and Detroit (the city, not the euphemism for the auto industry), and you have front row seats to the game, so please continue sharing.

I'm not going to ask you to redo the chart, it serves enough to make your important point, and I am sorry if I came off harsh. It is only that it is perhaps my biggest pet peeve in economics, the lack of use of PPP at any time, and the lack of understanding of it amongst the general public and the press in particular. Economics is about scarcity and the tradeoffs we make regarding those scarce resources. It is essentially impossible to judge what those tradeoffs are (e.g. efficiency vs equality of results to name one possible such tradeoff) with misleading data as one's starting point, which was my point about Denmark.

Keep up the good work. Some day when I am perfect I might start my own blog, in the meantime I'll free ride a lot, and add my devalued two cents worth here and there over the free market blogosphere. Hopefully my comments en toto wind up as a positive externality.


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