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Podcast Episode Highlights
Intro. [Recording date: November 7, 2017.]
Russ Roberts: We're recording this episode of EconTalk in front of a live audience in New York City as part of Atlas Network's Liberty Forum. And I have to say, our hotel is on Broadway, and this is probably as close as I'll get to being, performing on Broadway. I did perform off-Broadway as Adam Smith, but in a certain dimension, this is better. Atlas Network encourages and supports free market think tanks around the world with the goal of increasing economic freedom; and we're going to talk more about their specific activities. We have two guests today: Matt Warner and Simeon Djankov. Matt is the Chief Operating Officer of Atlas Network. Simeon Djankov is Director of the Financial Markets Group at the London School of Economics and he's the creator of the Doing Business Report at the World Bank, which has been mentioned on EconTalk as part of the World Bank's assessment of development efforts and economy policy around the world. The Doing Business Report is an attempt to measure the red tape and other barriers to business activity in now 190 countries. And Simeon is also the former Minister of Finance of Bulgaria, which is an unusual experience for a Ph.D. economist. He's actually done things in the real world. Simeon and Matt, welcome to EconTalk....
Russ Roberts: Now, our topic for today is going to be economic development: what we know and don't know about the government's role in the process. As a jumping off point, I want to start with this report I mentioned, the Doing Business Report from the World Bank. Simeon was the founder of that report. It was first published in 2003. There have been 15 annual reports since then, or 15 reports--one year there were two. And here's a quote, to give you an idea of what this report tries to measure:
Doing Business measures regulations affecting 11 areas of the life of a business. Ten of these areas are included in this year's ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Doing Business also measures features of labor market regulation, which is not included in this year's ranking.
And a little bit later we'll talk about why that is. I want to start off, Simeon: How did you come about this whole idea of trying to measure the ease of doing business in countries around the world?
Simeon Djankov: The idea came from learning from [?] economists--two types of economists at the time. One was the experience of Hernando de Soto. You remember his books, The Other Path and the book about The Mystery of Capital where Hernando de Soto makes this point about how in his own country, Peru, people don't have access to formal property registration, formal business registration, because it complicated. And actually he is the first one in his book who makes this life cycle of the firm comment, which is to say, 'Well, let's look at every firm, or every country in the world; and then let's look what is the intent of government towards these companies. Does the government want more companies? Does the government want companies to attain[?] the informal sector because otherwise perhaps it becomes complicated from the perspective of the firms, but the government supports either the activity indirectly?' So, Hernando de Soto was the first inspiration. And the second inspiration came from my region, Eastern Europe, where economists like Václav Klaus, the former president of Czechoslovakia and the Czech Republic, [?] of Poland, asked this very interesting question for our economists, which is: if you start from a situation where there was no private sector at all, how do you go about creating the regulatory environment for the new private sector? What do you do, and maybe what do you not want to do because you've seen the bad examples from abroad? So, these were the two intellectual inspiration points that we took.
Russ Roberts: How do you go about--when you started the survey, I think you started with 145 countries, and it's grown to 190. How do you execute that strategy? You can sit in an armchair, as we're doing today; and you could look through the legislation and regulatory books of a particular country, and you could simulate, essentially, what it would take to, say, start a business: there's 11 factors. Is that what you did? I think that's what Hernando de Soto did in some countries. He actually went from ministry to ministry, collecting the permits; sometimes they had to wait a certain amount of time before the permits came back, and they got some empirical measure. Were you doing something similar, and is that still what's being done with the Doing Business Report?
Simeon Djankov: Very similar to Hernando de Soto's original design, except Hernando de Soto had one think-tank behind him, while we had, I had the World Bank behind me. And the World Bank has offices in 170 countries; it has 16,000 people around the world; so, we followed Hernando de Soto's original design but then we asked our network of offices, if you like, 'Can you please--this is what we think happens by just reading the laws and the regulations of your country and we have every law, every regulation that affects business in these countries around the world. But please can you basically be our [?]--'
Russ Roberts: guinea pig--
Simeon Djankov: 'guinea pig,' yes, 'and go and actually see what happens?' So, we followed exactly this design. And to our surprise it worked, because you think, well, it's one thing to do it one country; it's another thing to do it in 190 countries around the world. But it worked, and it has worked every year for, as you mentioned, the last 15 years.
Russ Roberts: Now, when economists do empirical work, or theoretical work, a lot of times no one pays any attention to it. This report, people pay a lot of attention to--at least, according to the Wikipedia page, or I think it's the number 1 downloaded report; it's cited in about a zillion academic studies; of course, it's a wonderful source of data for running statistical analyses--which of course Development economists like to do. But give me in your words your assessment of how much attention countries around the world are paying to these rankings. And, I should mention: After you've done all of this, you've created an index. You weight all the scores on each dimension. You created an index, and then you rank countries. So, you go from 1, which I think--I don't think--in the new ranking, it's New Zealand; and I think the last, the 190th country in ease of doing business is Somalia. Which--both of those are somewhat intuitive. There are some surprises along the way. But, a country wakes up one day and sees they are 17th or 38th--do they care? Does anybody care?
Simeon Djankov: They do care. At first we have been surprised, actually, at how much they cared. And then we started to meet the mostly irate government officials, they would say, 'We're much better than what you are presenting us as.' And then we'd go to the private sector of that country and they would say, 'Actually, they are much worse than what you present.' So, nobody was happy, early on. And, of course, the World Bank bureaucracy had to face these irate governments on a daily basis; and that was not very pleasant either. But I think the reason that it works is maybe 2-fold. One, as you mention, there is an index. So, every year you are ranked. And many government officials have said, not in a polite way, this is like the World Cup, basically, soccer or Super Bowl in football--basically, in some sense, you compete with everybody else. And, it's great; it's a great feeling if you are ahead: so you start boasting a lot. If you are behind, you first, of course, blame the people who have put together the index. But eventually you figure out, 'Well, we might as well try to change.' And we've seen over this period how the same governments--Russia's government is a good example--the same government has been around for all of these 15 years, went from truly annoyed--well, very irate--truly annoyed, not so annoyed, to 'Well, we might as well do something about it.' And they are in this stage now. And we see other governments, like the government of China, which has been waiting to see how others respond and suddenly decides, 'Yeah, we will also compete.'
Russ Roberts: Do you worry--I mean, I would worry, when I look at it, how accurately it represents what's actually going to the ground. We're going to talk about that in a little more detail. But there's always a problem of what we would call 'teaching to the test'--they'll figure out how the score is created and then they'll do some lip service, we'd worry, to the requirements of the score, but they wouldn't actually change anything on the ground effectively for businesses. Do you have a feel that it's actually making a difference? So, you might want to use Russia as an example. I know they've "improved." So, you could tell us about that. But I guess the question I would have then is: Well, they've improved their score; is it a better environment for starting a business, running a business than before those changes? And, how would you know?
Simeon Djankov: So, the second part of our index, so we do this Hernando de Soto type of study where, on our own we basically go through the process of starting a new company. We actually do that process, to the point of starting the new company, of paying for taxes of this company, and so on. But, in addition to that, which was not done by Hernando de Soto's team, we also ask local law firms, local consulting firms, local think tanks, to basically also answer our questionnaire. And this is not just what's on the book, but is it actually done the way the government is supposed to do it. Because, our methodology is, as you correctly pointed out, to be consistent across countries, it basically assumes that the government is perfect: nobody gets sick, nobody takes bribes. And we actually get often this question: 'Well, we did our own survey and actually firms did start the registration of a business much faster.' Why is that the case? Because everybody paid bribes. And we don't really want to capture the case that in most countries around the world, to get around red tape you just either use your, let's say your contacts, or simply pay bribes. We want to know what is the norm, what the government wants business to be like--to complicate[?] it, not to complicate it, then you see this huge differentiation. You mentioned Somalia. But, you know, one country that has been sliding down the rankings very quickly is Venezuela. Over the last about decade, Venezuela used to be actually among the better countries in Latin America about a decade ago. Now, it's actually 188. So, it's just Somalia, Eritrea, Venezuela. It's going so far down. And, just to finish with one example. So, if you want to start just a very basic company in Venezuela, currently it takes 20 different government agencies: You basically have to go to 20 different government offices; 230 days--if you are perfect. So, you basically have a fleet of cars that drives you around, and so on. And you need to pay the equivalent of 5 times income per capita. So, in the United States this would be something like $200,000 just in government fees.
Russ Roberts: And to give a comparison, in the United States, how long would it take? So, in Venezuela, 230 days; 5 times per-capita income. In the United States, which I think ranks 6th in the recent report--do you know those numbers off the top of your head?
Simeon Djankov: The United States is not the best in the world. New Zealand is--online, you do it now, the two of us can do it literally in 10 minutes in New Zealand. In the United States it takes about 2 days, because you need to go to two different government agencies: one municipal, one central. But actually, one of them you can do online; one you need to visit the local municipality.
Russ Roberts: And the cost?
Simeon Djankov: And the cost is very trivial. It's about $180--
Russ Roberts: In the United States--
Simeon Djankov: In the United States. And actually in New York City, where we are--
Russ Roberts: And just a technical detail: Obviously there are differences across geography within a country. These numbers are typically, I think, for the capital city?
Simeon Djankov: For the largest business city, which most of the time is the capital city. Washington, D.C., however, is not the largest business city, so we follow New York City. But in countries that have above 100 million population--there are 11 such countries--we mention China, India, Mexico, Indonesia, the United States--we actually measure more than one city. So, in the case of the United States, we measure New York City; we measure LA--Los Angeles; we measure Chicago.
Russ Roberts: You should do Biloxi, Mississippi, maybe. You'd get a little more variety. That was a joke. But, I think the more important point is consistency, in some dimension of what you are trying to measure. So, any one score, any one year, is not so meaningful; change, we hope would have more significance. [14:51] I want to go back to Russia for a minute. You told an interesting story off-air about a recent meeting in Russia related to the rankings. Tell that story.
Simeon Djankov: So, the latest report just came out, literally a week ago. And it happened to be the day when the Russian Council of Ministers, the ministers, the cabinet of Russia, was meeting. It looked like it's impromptu, but actually it was quite well-staged, where President Putin, while discussing some other affairs, seemingly casually, as the Minister of Economy: 'So, how do we do on the Doing Business ranking?' And the Minister of Economy, who was very well prepared, said, 'Well, we are improving; we are doing quite well, especially relative to our neighbors. But there are some indicators where we are not doing so well.' And he looks to his neighbor, the Energy Minister. President Putin, who is prepared, so he is reading comment[?]--says, 'We have 144 phone[?] connecting electricity, basically. If you have a business, you also want it to run on electricity, your computers and so on.' So, he turns to the Energy Minister--this is all televised, real TV, cameras rolling, the whole Council of Ministers--and says, 'Why are we doing so badly?' And the Minister of Energy is, you know, a bit befuddled; and he says, 'Well, we are better than our neighbors.' Which is Kazakhstan, Belarus, not the best business environment in the world. President Putin looks at him and says, 'You should also compare to some other countries that are better than that.' He pauses, looks at him, and says, 'And if you don't, I know who can.' This is all on TV. You can see it on YouTube.
Russ Roberts: The more things change, the more they stay the same. A little bit depressing. But, kind of.
Russ Roberts: One point I want to make very clear and get your response--very important. I brought this up in a recent episode, and some listeners, who were not long-time listeners, were confused by it. I said, in a recent episode, being pro-business and pro-capitalist are not the same thing. And some listeners were, like, confused: Well, of course, aren't they the same thing? The answer is: Absolutely not. Being pro-business is favoring one sector of the economy, often at the expense of consumers. I'm generally pro-consumer. The well-being of a country is measured best not by how easy it is to start a business, but how easy it is for someone to start a business and thereby benefit other people. That usually requires competition, in a free market system. In a free market system, it's competition among businesses that restrain the natural self-interest of the participants. And so, one concern I would have, and I would love to get your reaction, is: It's one thing to measure the ease of doing business. I would think you would also want to measure the ease of keeping out competitors: the problems of rent-seeking. The problems that--it might be easy to start a business for certain groups, but not so easy for others. And if barriers can be put up, then they are going to be--the ease of doing business is not going to measure how well the economy runs, but rather how well the business sector can exploit the rest of the economy. Does that problem come up in the decision to design this work? Did it come up? And do you feel that's a problem with the index, now?
Simeon Djankov: It's [?] a very valid problem, especially once you go to one of the emerging markets, let's say. Some regions like the Middle East come to mind, immediately, where a large part of the formal private sector--I'm not talking about the state-owned sector--is one way or another connected to the government. Connected through networks, connected through family, and so on. And, just as you mention, I have actually had experiences, in Morocco for example, where visiting like this with their Minister of Economy, and he'll be saying, 'No, it's much faster. You know, my nephew just established a business and it was, like, it took one day.' And I'll be literally, 'Well, Hello. Yes. Because he is your nephew.' And, 'No, no, it's not because of my nephew.' So, I am literally in that case, 'Would you like us to go, together now, to the company and just try and see how it works?' That was great. We went there. It was around 10 in the morning. There was nobody. So, it was just closed. 'So, okay, so your nephew probably went a different way.'
Russ Roberts: Went through the back door.
Simeon Djankov: That's right. But I can tell you for the average person, it's a lot more difficult. So, but that's where actually our methodology helps, because in some sense, it is a methodology of a known person--one person that is just trying to establish a basic business. So, it is not a complicated business. And it does not at that level challenge even this government's--the arrangement, let's say, they have with private businesses. And with state-owned enterprises. So, that's also important to say that in some countries--Kazakhstan, Tajikistan, and so on--the government is thinking: If we have too many successful private firms, the state-owned companies may go bust, and then we are in trouble.
Russ Roberts: Yeah. A little scary.
Russ Roberts: Now, you've recently looked at the impact of the ratings--that is, whether changes in the ratings are related to poverty rates. Tell us a little about that work.
Simeon Djankov: This work was actually inspired by the Atlas Network. And, they have been, by now in 15 years around 10,000 actual academic articles about who is doing business indicators and related them to outcomes. Informality[?], as Hernando de Soto early on suggested, is very strongly correlated with having a lot of red tape. Makes sense, right? So, if in Venezuela it takes 20 procedures and 230 days to establish a formal business, you don't do it. You just operate in the informal economy. So, there have been a lot of studies by [?] but also by others looking at informality and economic growth. And it's quite robust that economic growth in countries with less red tape is significantly higher. But, the new topic was, 'Well, can you correlate it with poverty rates?' And it's first, [?] you can say, 'There's so many other indicators that poverty depends on.' Wars and civil conflict is very important, you can immediately imagine. Kleptocratic governments is another one. So there are number. Health and education. But, we decided, well, let's just do it. Let's look at all these variables and issues that we know about; but also let's look at our variable. And, somewhat to our surprise, I must admit, there is a very strong correlation so that, basically, you can, every 5% increase in our ranking--so, as you go up just by 5%--you can reduce in the average country over about 1 percentage point. That's significant. You know, the United States currently has about 14.5% of the population under the poverty line for people. Well, if you can reduce 1%, percentage point, of this just by changing some regulations, all the better for you.
Russ Roberts: EconTalk listeners will not be surprised that I'm skeptical of those kind of claims. So, let's dig into that a little bit. So, one argument which I would think about, is the problem of reverse causation. Right? So, you have richer countries with lower poverty rates generally have better governance. We don't know which direction that causation runs. It could be just you get wealthier and there's economies of scale, and there's more transparency in government: there's a more vibrant press. There's a lot of things that correlate with economic wellbeing that might also correlate with governance, regulation, effective regulation, regulation that is not pure red tape for no purpose. And, so, that might be a spurious correlation. In particular, it's hard to believe that the people who are in poverty today in the United States are being held back because somebody in their city can't start a business. It might not be their business. It could be they could benefit--
Simeon Djankov: True--
Russ Roberts: from other people starting businesses. But, as opposed to saying, in a particularly poor country, where literally there are poor people who could rise above poverty levels if they could just be a little more, have a chance to be a little more entrepreneurial. And the government is holding that back, either through the red tape or through the informal constraints that are those bribes that might deter them.
Simeon Djankov: And I would have two answers for you. One is an economic observation: That, precisely because the levels may be affected by many other things, then you look at the change. So, you ask the question, while all these other factors matter, let's look at the change in poverty. So, from last year from this year, where your health and education system hasn't really changed, and hopefully no more new work has started--
Russ Roberts: and your bureaucracy is just as corrupt as it was the year before--
Simeon Djankov: Exactly--
Russ Roberts: Whatever level that is--
Simeon Djankov: And that let's look--whether that change can be affected by the Doing Business Indicator. So, now that we have 15 years, we can look at this change on change. So, poverty rate doesn't change when something good happens, so now indicate and we find very significant importance of this indicator is there. Again, in terms of [?] and many other things that matter. But this one matters as well. My second response is: Even if, even in a country like the United States, you mentioned in the overall indicator, you are right, the United States is currently 6th. But, there are some sub-indicators, like paying taxes, that the United States is not in the 25, actually is not in the not in the top 50.
Russ Roberts: What does 'paying taxes' mean? How do you--what does that mean?
Simeon Djankov: So, what we measure is not just how much taxes you pay--which for the average company in the United States is significantly more than companies in most of the world--that sub-indicated in the United States, just to give you an idea of ranks, 86th in the world. So, it's basically in the second half, if you like, of the distribution, almost in the second half of the distribution. But it also covers not just how much you pay, but how complicated is it to pay. So, can you do it online? Fully online? In many countries, including in my own country, Bulgaria, actually you can pay everything online. You never have to basically write something, sign it, and send it. In the United States, the corporations cannot do that. Some things they can. But some, you still need to actually sign and audit and send them. So, the United States overall in this indicator does quite badly.
Russ Roberts: Now, I wanted to ask--I meant to ask this before about Venezuela. They are 188. Ten years ago, what were they? I think you said, what was it?
Simeon Djankov: They were about Number 70. So in about 10 years, you can slide 100 positions.
Russ Roberts: What happened? Now, we know something of what happened, and we've talked about this in earlier programs, about Venezuela's situation. There's price controls. There's all kinds of changes in policy. It's interesting to me as a non-Venezuelan specialist--and maybe you're not enough of one to answer it, but you are I'd love to hear it. What's happening in their regulations across this diverse set of, this regulatory environment, that is different? That--in other words, it's easy to say, 'Well, boy, things are worse there. Yeah, I think that's about 188th now.' That's obviously not what you do. You are actually trying to measure and with some measure of precision what's actually happened. Do you have a feel for what happened?
Simeon Djankov: Well, we can see what's happening in terms of the intent of government, which is that the government is trying to squeeze more and more out of the small and smaller private sector, because they have so many problems in terms of their fiscal deficit, in terms of what the government actually can get out of the private sector, in terms of taxes. So, they are trying to come up every year with more complicated regulations, essentially to be able to be able to capture the whole private sector. The private sector responds by moving to the more informal economy, just as you would expect. And the result is that these regulations become so ludicrous that--
Russ Roberts: But when you say, 'squeeze'--one way the government will squeeze the private sector is they will raise tax rates.
Simeon Djankov: Which they have.
Russ Roberts: But that's one of your 11 measures. What else is going on there? Has it gotten harder to start a business? You said, it's 20 agencies and 230 days. Was that the case, 11 years, 10 years ago? Or was it better?
Simeon Djankov: Nope. It was significantly easier. It was taking, about a decade ago, it was taking half of the steps and about a third of the time. So, the government, as I suspect, was just trying to control business more and more. How do you control business? By putting more regulations, more agencies. So, a good example. In Venezuela, in order to start your business, you have to have a number of records checked by the police, by the Ministry of Defense. In which other country do you need to have a check by the Ministry of Defense, not the Interior Ministry, that you are fit and proper to run a business? I think this is a way of controlling people, not just businesses. A way of controlling people. And not just in terms of economic well-being, if you like, but also, if you like, politically.
Russ Roberts: Now, there's two reasons that governments might create an environment that's not very friendly toward entrepreneurship--which, interestingly, when you say 'entrepreneurship,' that sounds so much better than 'business,' doesn't it? Crazy. That sounds, 'Well, that's a good thing.' You don't want to be unfriendly to entrepreneurship. Friendly to business: 'Ooh, that's cronyism.' Which it can be. So, we could think of a couple of reasons that firms might, I mean that countries might, and governments might not do a great job in these areas. One would be stupidity, incompetence, just the complexity of the world--they don't realize that there's 20 steps now and there used to be 10. The other is, they are getting something out of it--either the gains of the officials involved, the bribes, rent-seeking by the politicians to attract people paying them those, not-just bribes but donations. I've told the story recently of the St. Louis restaurateur I used to know who would give money to both Democrats and Republicans. I said, 'Why do you do that?' He said, 'Well, you know, I might need to ask a favor of one of them. Because they have all these hoops I have to jump through.' And that makes sense. You have a feeling for the countries that woke up one day and went, 'Oh, my gosh. We're 114th. We've got to do something about it.' Was it just a matter of realizing, 'Oh, we're not doing very well. We've got a more complex system than we wanted'? Or, did they wake up and then realize, 'Eh, too many vested interests here. I've got to keep things the way they are'?
Simeon Djankov: In many countries the system is designed basically to extract bribes. And you extract bribes at the level of the public official that is giving you some sort of small piece of paper. But it also percolates up towards the higher level government official. So, it is a fiefdom system, if you like. And this type of regulation is a way to control the private sector. But that kind of--because of bribes and because of what you take, there is another, let's say, sense of that which you already mentioned which is, in that way, you also control in certain sectors, basically, your competitors. So, if in the Moroccan example the Minister has a nephew who is in the telecomm sector, well, no other firm is going to be created in the telecomm sector for some time. And, finally, and I think this is where the Venezuela example is very important, it's a way to control your opposition. And I mean your political opposition, not your economic opposition, because, who would have an interest in a stable and economically viable society? Well, it's the middle class. But, the middle class, if you seize[?], the politicians don't do what they are supposed to do, may want to rebel and finance an opposition leader or movement. Well, how do you square that? Basically by removing the opportunity of the private sector, by taking them out, so to speak.
Russ Roberts: What's going on in India these days? You had a nice story that again you shared with me before we began recording.
Simeon Djankov: India has been trying for years to improve not just on these indicators, and I should say that these indicators usually are an entry point for discussion with government officials that, 'You know, your economy can be doing a lot better. It can be a lot freer if you look at issues of competition in particular. There was foreign companies [?] what your own entrepreneurs,' so it's an entry point. But the Indian government has been literally for the last 15 years trying to improve. It's always been around Rank 135. Has not changed--
Russ Roberts: Over this period of 2003 to the present.
Simeon Djankov: Fifteen years--
Russ Roberts: Because, I assume that it has changed a lot since, say, 1970.
Simeon Djankov: Yes. From 2003 to now. Three years ago in comes Prime Minister Modi's government, currently in power; and literally within the first month of his leadership, Prime Minister Modi announces that within his term--it's not specified how many terms he would have, but within his term, India will get to number 50. Which, if you are 135 sounds like this is never going to happen. But, okay, it's good to try.
Russ Roberts: It encourages ministers to sabotage other countries' political systems to make it easier to pass them, of course. There's a certain problem with this ordinal ranking.
Simeon Djankov: It's a relative ranking, yes; so if other countries start sinking, like Venezuela, you may be going up. That's true, but you'd need a lot of countries to do that.
Russ Roberts: Yeah; that's a lot of work.
Simeon Djankov: So, over the last 2, 3 years the Indian government and private sector, actually, the business associations, have worked very hard to improve, and this year it actually happened. So, they went from 130th to 100. A big jump.
Russ Roberts: And I assume they also improved in absolute terms. It wasn't just because--
Simeon Djankov: That's correct. In absolutely terms, actually the most significant improver of any country in the world. You are right. This is more important to say. There was a lot of interest in the government on when exactly the Doing Business Report is going to be released. We always hide it until the last moment so that certain governments cannot pressure us. But they timed it so that within the first half an hour of the Report coming out electronically--I should mention it's an electronic report. It's free; you can find it online.
Russ Roberts: And today is November 7th; this episode will come out in a few weeks. But as you are listening to this, we are talking on November 7th; the Report came out on October 31st.
Simeon Djankov: Correct. So, just exactly one week ago. But, I mean, Mr. Modi appears on TV; talks about their big success. The Mumbai stock exchange goes up by 400 points, which is about $30 billion in added wealth, if you like, on the stock exchange. So that's a good measure of how markets react. But more important, we have--
Russ Roberts: And it was a spike, not a--
Simeon Djankov: It was a spike. That's right. So, the market has been quite flat, and just the announcement of the Doing Business improvement in rankings got 397 points up. But we also had a conversation with the Prime Minister, how he views this ranking; and he made, at first a very strange comment. He said, 'Well, it's like trying to lose weight.' I thought: Okay, is he looking at me? 'Trying to lose weight: unless you have scales to measure yourself you never have the interest of really doing it.' So, Doing Business is like the scales of somebody who is trying to lose weight. But, not only that: I know when I am successful when somebody comes and says, 'Oh, you look great. You have really lost lots of weight.' So, that's the competition across other countries for him.
Russ Roberts: But it's also, I would argue, the business people in India who would tell the Prime Minister in informal conversations. The scale is way too precise. He should have said, 'It's like my belt.' My belt, every once in a while if I'm losing weight I can move over one whole notch. But I don't have a lot of notches. So, it's a pretty crude measure. A lot of other things go on in the economy besides these 11 indices.
Simeon Djankov: Correct. Correct.
Russ Roberts: And you'd also want to argue--I wanted to give you a hard time before on the poverty thing--it's a very noisy relationship between the score and poverty. It's a negative relationship--the higher your score, the lower the poverty rate [actually, positive relationship--Econlib Ed.], but it's not precise. There's a lot of variance across countries. Do you have any idea, in this one particular country--India made a leap. Are there any signs that it's actually again translating into better lives for people on the ground?
Simeon Djankov: I think it's too early to tell, frankly, because they have just improved. But there is one way in which literally within a year or two years you can see whether there is an impact or not. If we are right about making it easier, reduce red tape, more businesses are going to develop, you first see in the number of new registrations. And that in India already has just, in a year, this year relative to the previous year, has improved by about 8 percentage points. So, that's significant for a large, large country like India.
Russ Roberts: Was there a trend before going up 8 percentage points, [?] year, before?
Simeon Djankov: About 2, 2.5 percent a year. It was going up; you are right. But now it's like 3 times more than the previous two years. So, that's one. And then, within about 2 years you actually start seeing some benefits in terms of better tax collection. Because, now you have a larger tax base. That, we are yet to see in India.
Russ Roberts: Now, talk about the labor regulations. This came up--I can't remember the episode; my listeners probably pay better attention to this and tell us the answer. But, in a recent episode, meaning in the last 3 or 4 years, somebody mentioned that the labor regulation component of this Report is controversial. And, we know it is, because for whatever reason, this year--in the 2018 Report that just came out on October 31st of 2017, there is no labor regulation index. And I should clarify that you started this Report. You worked on it for 7 Reports. You are not formally involved now. You are tangentially involved; people, I'm sure, they'll talk to you from your old World Bank days and contacts; but for whatever reason, and I suspect you have an idea, what's controversial about the labor regulation report, and why is it not included in these indices? And then, if you want, you can speculate about how, if they had included it, it would have changed some of the rankings.
Simeon Djankov: Well, it was, as you suggest, it was included in the first 9 years, actually, since the Report started, because of course anybody who is in business can tell you how labor is hired, fired, maintained has a lot to do with how successful you are in your business or not. I think what happened--and this is after I had left the team--was that some countries that coincidentally did not rank well on labor, France in particular, was very upset about why is was included. And, being that this is a report of the World Bank, so it has a Board of Directors that has a lot of say on what is happening, these directors managed to convince management that labor is not as important--it's essentially for running a business; other things are more important. So, excluded. So, it was excluded after 9 years of collection. I mentioned France, which was one of the countries. China was another one.
Russ Roberts: Why was China not happy about it?
Simeon Djankov: Because of the relative ranking.
Russ Roberts: And what was--do you have a feel for why China ranked poorly, and why France ranked poorly?
Simeon Djankov: Well, in France, as we know, you don't work that hard. And it's very difficult to get hired. And it's impossible to get fired, basically.
Russ Roberts: Which makes it harder to get hired.
Simeon Djankov: Precisely. Which then makes for a very large informal market and for very large part-time labor force--France's part time labor force is about 40%. So, in other words, 4 out of 10 French workers do not have full-time employment. They only work partially. Why? Because in this way you can avoid--
Russ Roberts: certain regulations--
Simeon Djankov: heavy labor regulation. I mention this because the current President, the very recently-appointed President of France, Emmanuel Macron--
Russ Roberts: Elected. You said "appointed."
Simeon Djankov: Sorry. Elected. Has been part of his success in the campaign was precisely to change labor regulation. And he, in fact, in his government, last month has suggested sweeping regulations to make it more flexible to hire workers, to fire workers--basically to become more like some of the successful countries in Northern Europe.
Russ Roberts: So, he's going to be eager to see that included in future rankings, presumably. And it's a fascinating example of how--any government can have its own measure. What's nice about this measure is that it's external. It's not gathered by your own bureaucrats; it's not gathered by your own political cronies. It's a perhaps-extremely objective--it's certainly more objective than your domestically-gathered data would be. And it's a way to bind yourself to the mast. It's a way to encourage political reform by pleading, 'You know, I can't control this. This is just this measure, and we need to do better.' So, politically, I think it's very helpful to him.
Simeon Djankov: This is how, indeed, it is used. And it would be very helpful if he manages to do the reforms he set out in front of his government. If he's not successful, [?], because there have been a number of countries--Italy comes to mind, of 3 or 4 years ago, when then-Prime Minister of Italy Mario Monti, a top economist as you know, boldly said, 'Within a year our labor regulations are going to be transformed and we are going to be as flexible as the Anglo-Saxon countries, New Zealand, Australia, United Kingdom, United States.' Two years passed; nothing happened. Basically, his attempts were killed in the Italian parliament.
Russ Roberts: Talk is cheap for politicians, as we know.
Russ Roberts: Now, we could spend the rest of the time on this next question. We're not going to, because I want to give Matt a chance to talk. Matt's patiently sitting over there. And, Matt, we will get to you in a second. But I want you to reflect a little bit, Simeon, on how the experience of gathering these data, interacting with domestic, within-country actors who are dealing with these regulations, how that affected your time as a Minister of Finance. It's a crazy thing. Right? You had to put your money where your mouth was, your time where your heart was. Whatever you want to call it. And implement, or try to implement, some of the things you thought would make Bulgaria a more effective economic system. Can you talk about that?
Simeon Djankov: Well, one thing that did certainly affect it is the tactics of how to reform, in the sense that, certainly in academia, you are basically told you need to think deeply. Then there are a lot of pressure groups, lobbies, so you need to talk to them. You need to use the media for communicating the benefits of reform, and so on. Some of the reformers, successful reformers that I spoke with, before I joined the Bulgarian government, basically I said, 'You go, and on Day 1, you surprise everybody. So, you go in every direction you can, because they will be confused what's happening and you may actually be successful in some of the reforms. So, this is what I did. I went to Bulgaria in late July 2009; the Eurozone Crisis had already started around us. Greece was just about to collapse a few months later. So, there was kind of a feeling that something is to happen. But, instead of going, 'Let's now do labor reform,' then, 'Let's do business entry reform,' in the government we literally went 6 or 7 different directions hoping that Parliament will be, you know, confused or too happy to be elected--they were just elected. And we actually succeeded in most of these reforms. When I tried to do meaningful, well-explained reforms two years after, they all got bogged down, because lobbying will essentially take over and, 'Not now; let's wait for next year's government,' and so on.
Russ Roberts: What's the most important thing you did or you feel you contributed to in that setting? What was the lowest-hanging fruit that you were able to pluck in the chaos?
Simeon Djankov: Well, the lowest-hanging fruit was that in terms of business registration in Bulgaria you used to need to go to basically a public notary and they had to look, 'Is this you? Yes; this is your new passport or driver's license. Give me, literally, $2500' in Bulgaria, which is a large amount of money just so that they can basically attest that this is you. Many countries have tried to remove this, but the notaries have fairly strong lobbies.
Russ Roberts: Yeah. The notaries will explain that it's extremely important that it's you.
Simeon Djankov: And, by the way, this is after you've gone to the officials; they can also look at what you have[?], this is you.
Russ Roberts: But a notary--they've got a knack. That's not well-represented elsewhere.
Simeon Djankov: So, I managed as Finance Minister to remove that stem[?]; that cost me dearly later on, because the head of the Legal Commission here in Parliament was a notary herself. So, for the next 4 years, she managed to get me on a [?]. She did get me. But, this was a low-hanging fruit.
Russ Roberts: And, was there an increase in business establishments in the aftermath of that?
Simeon Djankov: There was almost too large of an increase, which coincided with Greece collapsing; and a lot of Greek companies starting to register in Bulgaria. So, it almost looked like, 'Wow. You do some small thing and suddenly business registration explodes.'
Russ Roberts: But, that's not a ridiculous claim. Because if the $2500 thing had still been there, a lot of those Greek businesses probably wouldn't have moved over. So, it's not bad.
Simeon Djankov: No, it's correct. And since then, of course, Greek businesses have continued to move to Bulgaria, because one thing that we did manage to reform but also to maintain during the Eurozone Crisis is the income tax rates. So, Bulgaria, if you don't know, one thing to remember from this, my[?] part in the conversation, has a flat tax, which is a dream for many economists; which is 10% personal income tax; 10% corporate income tax. Zero percent dividends. [Audience applause--Econlib Ed.]
Russ Roberts: So, I'm a fan of that, in principle, as well. I tend not to applaud on my own program. But, how has the Bulgarian economy done? Again, many things have changed; we're recovering from a Crisis. How did it do in 2010, 2011, 2012?
Simeon Djankov: Well, when--one way to say it is that when everybody around us, when everybody was going into very negative territory in terms of economic collapse--minus 3, minus 5, minus 7 percent, Romania, Greece, Serbia, Hungary, and so on--we actually managed to maintain above 0 growth. Which, for the Eurozone Crisis was a big success. We used to be one of only two countries, together with Sweden, to actually manage in 2010, 2011, 2012, to have above 1% of economic growth a year. Given the neighborhood, right? So, we have, to the south, Greece--
Russ Roberts: Be careful--the Russians, you know. They try to do that, too, compare themselves to the neighborhood. But there are some neighborhood effects; I don't want to deny it.
Simeon Djankov: Our neighborhood is more fun. So, but currently the Bulgarian economy is growing about 4, 4.5% per year.
Russ Roberts: And did you do any Keynesian stimulus at the same time, which you could explain?
Simeon Djankov: Very little.
Russ Roberts: And what happened to corporate--a more interesting question--what happened to corporate, revenue from the corporate tax that was reduced?
Simeon Djankov: Revenues did fall in the yearly period 2010, 2009 and 2010, but then recovered quite nicely, much faster, because--you seem to have a sophisticated view of changes. Much faster than the average of the whole European Union, which is, I think, not just our neighborhood, but the whole European Union.
Russ Roberts: That's why they pay me the big bucks.
Simeon Djankov: I hope.
Russ Roberts: So, now we are going to turn to Matt Warner, and we're at an Atlas Network event, so everyone in the crowd knows what Atlas Network is about. But, our listeners don't. Matt, remind us what you do and why Atlas Network was interested in the Doing Business Report, and how you are using it in countries around the world.
Matt Warner: Sure. So, Atlas Network is a non-profit organization that is committed to economic opportunity all around the world. That obviously has implications for economic development. And, as independent around the world that we work with, in terms of benchmarking and identifying targets, it's important to look for tools that can help verify and give some strategies around which to do the work. For us, the conclusion has recently been--you know, when you look at economic development around the world in terms of an institution of a lot of different actors, we think we've got to start doing development differently. And, one of the key things that is missing is putting a premium on locally grown solutions, led not by outsiders but by the people there who have their own division[?], their own understanding of the culture, and can lead to achieved reforms. Using something like Doing Business Report. It's one of the tools that can help provide some clarity to how to set out a vision, achieve something substantive, and then be able to measure the impact of that based on some of that good research that Simeon has been doing. A couple of ways that that plays out, for example: In India, you mentioned the Modi government. We have a partner in India, Centre for Civil Society, that's an extremely robust organization. They are independent. They have their own vision for change, in terms of creating economic opportunity for all levels of people in India. And they set out with a plan, about 2-and-a-half, 3 years ago, percentage at Austin[?] said, 'Here's where we think we can make a difference.' One of those things very explicitly was, was eliminating minimum capital requirements for new businesses. The India government had a policy that, before you start a business, you had to go show a bureaucrat and prove to him, or her, that you had 111.2% GDP [Gross Domestic Product] per capita in your bank account, as some sort of a proxy indicator that you were well set up to give that business its start. Now, from our point of view, the decision or the conclusion about whether someone is prepared to start a business is a decision that is wholly rested appropriately in the individual themselves, who is bearing the risk and sees the opportunity and has the tacit knowledge to do something about it. So, Centre for Civil Society put together a very robust research [?]; it's a campaign that we supported, in helping explain why something like this is not good policy and is not going to lead to the kind of economic opportunity outcomes, particularly for low-income people that are disproportionately burdened by such a, somewhat arbitrary rule. They did that. Part of their multi-faceted campaign was a robust multi-media outreach. One of their Twitter communications about the eye[?] of the relevant minister in the Modi government who responded via Twitter and said, 'Hey, let's get together and talk about this.' And so, they were able to have that kind of impact. And the result was the elimination of this minimum capital requirement. Which impacts the scores on the Doing Business Index. Which, based on this research can provide a bit of a tangible understanding of what that means in terms of translating to about 126,000 people being able to lift themselves out of poverty, you know, Year 1, and that continuing as long as that policy exists.
Russ Roberts: So, you claim, again, there was a big increase in--once that was eliminated there was an actual verifiable increase above trend, in businesses starting.
Matt Warner: Exactly. There's, in fact, even outside of the kind of tracking that we do, there are other organizations that are observing these kinds of responses to changes in the Doing Business Report in measuring those kinds of increase in registration.
Russ Roberts: So, we heard earlier about the French example, where Macron was taking advantage of the fact that he's new, and made a campaign promise, has this measure as a way to translate into maybe some internal political pressure for improvement. And similarly, maybe here--it's pretty clear to me that, you could make some kind of case, maybe that capital requirements--you don't want businesses going broke so often, but [?] require them to have a nice nest egg. But, mainly it's, I presume, a way to keep other people from competing with you. So, that's really good change. Why would anyone not think that was a good idea who thought it was a good idea--why would anyone support getting rid of that given that before they thought it was a good idea? And I guess some of that answer is: new governments are always going to be a chance, either for the fact that people are not ready to dig in their heels or just maybe that there's been a change in the underlying philosophy or ideology of the voting public that this maybe is a good thing. And that Modi is riding on that. Do you have any thoughts on that?
Matt Warner: Well, I think one of the key things is that the insights and the assessments of what those opportunities are, are not going to come from outsiders. It's going to come from the organizations within India who understand the dynamics of who is behind it, what kind of vested interests might be part of the problem. And, to develop a strategy that's going to account for that in their pursuit to achieve something that's actually successful.
Russ Roberts: Yeah. Simeon.
Simeon Djankov: Just to add on this point: People generally don't go to government to think. And I've discovered this myself. You don't have time to think. So, you go and then you do things. Sometimes it's as plain as there's a lot of ridiculous regulation around, and nobody in government has thought of what is this and what purpose does it serve?
Russ Roberts: What's the full range of impacts of these disparate--
Simeon Djankov: And if somebody like the Atlas Network's example comes and says, 'This is ridiculous. You don't need it. Just remove it,' sometimes--not the majority of the time, unfortunately, but sometimes they say, 'Yeah. This is ridiculous. Let's remove it.'
Matt Warner: Let me give you another example where, I think it was along those lines, where an organization in Argentina just last year came to us and said, 'Hey, we've got a plan to eliminate what we think is a really bad tariff, 35% tariff on laptops and tablets. And, I think people just don't understand how harmful this is for our economy.' You know, Argentina is in the bottom 10 on the Economic Freedom of the World Report, and so--
Russ Roberts: Another index that measures different aspects of economic freedom.
Matt Warner: Exactly. And so, they put together a plan, brought it us. We saw great promise in it and supported it. And, within a year, because they were able to come up with analysis that made it very clear to whether you are in a technical field or you are just someone trying to live their life on the street, recognizing that, 'Hey, here in Argentina we're paying double what they are paying in Chile for that same computer product. We are paying three times what Americans are paying for the same computer products.' And you've got, you know, parents, school teachers, small business owners, who need this technology to advance and become more efficient in what they are trying to do, increase education levels which we know is really important. And so, by the end of spring, mid-summer, they were able to prevail upon the Mauricio Macri administration to eliminate that tariff. And so, these kinds of changes are possible in a short time window if you've got the right people who have the local vision and the local leadership to put together the right kind of plan--something that an outsider may say, 'Oh, yeah, it's not good to have a tariff because we've looked around the world and we have this sort of aggregate understanding of what's good policy.' But, to build that sort of sophisticated strategy internally, to achieve it, and then make a difference--I think it's really got to come from the leadership of locals. And that implicates a role for outsiders limited to philanthropic support, not necessarily a paternalistic 'Here's what you should be doing.'
Russ Roberts: Talk about the South African example you shared with me earlier.
Matt Warner: Sure. In South Africa, that's a really interesting case. And for me personally fairly moving. Because there's a civil society organization in South Africa that's committed to ending the legacy of apartheid. Not everything that ended in 1994 went away completely. In the late 1990s you still had lots of people who were still living in government housing--didn't own their properties even though there's a long history of, in some cases, their property being taken away by[?--probably meaning the history was documented by--Econlib Ed.] their parents or grandparents and not restitution for that. This institute succeeded in changing the law, and went a step further to see the actual conversions from living in tenant housing to achieving land title for those same properties. And they did it in a really sophisticated way in terms of understanding local culture, building trust, using local attorneys that people knew, achieving a bulk rate in lowering the cost of actually doing the administrative work to get the titling done. Someone that stands out to me that benefited although there were many others was a woman named Maria Matufi[sp.?], who, at 99 years old, received title to her land after living for decades in government housing. Of course, we know when you achieve land title that gives you a lot more options economically in terms of, you could sell the land, which, the land that we're talking about had a value of $8000, US dollars. They can use the land as collateral to access credit for investing in education or starting a business or something like that. Or, a woman at 99, one is tempted to have mixed feelings about the celebratory nature of this achievement because it feels a little 'too little, too late' for someone who should have gotten better opportunities earlier. But she said something that really changed my mind about that, and it taught me something. She told the local institution that helped her do this, 'Now I have something to leave my grandchildren.' And so, to recognize, not only the importance of institutions like property rights and the norms that govern the behavior around the power of these things, but to see that, she has tacit knowledge that no one else could attain, no technocrat could attain, to recognize why that's significant to her and what is important to her, in terms of how to make use of that newly found independence, economic independence, and what she wanted to do with that.
Russ Roberts: Yeah. It also reminds us that not everything in an economy is about money. Right? There is a pride there. And although starting businesses are an important part of an organized society and the cooperation that's involved in the division of labor, it's about a lot of things--human dignity and lots of things that we don't measure that are incredibly important. Much more important, probably, than money. Unless you are starving to death. Which of course, in a lot of these cases, this can make a real difference in subsistence level of poverty and other things.
Russ Roberts: I want to come back to a comment you made--it reminded me when you said--the India example, you said they did a study and they showed what some of the ramifications would be of getting rid of this minimum capital requirement. And it dawns on me--I'd like to get both of your responses to this--it dawns on me that, we are blessed to live in America, those of us who are here in the room. Many of us are from America. And we are blessed to live in a country where the government is pretty transparent. There is corruption, but it's not close to the corruption that are often in other places. We have an active Press that's very effective. We have Constitutional protection of that Press, which we should always cherish and be vigilant about. It's incredibly important. At the same time, we are also more advanced at lobbying and entrenched interests in a different way than, say, the family issues that, Simeon, you mentioned, in a country like Morocco, where a nephew can get special treatment. We can worry about that today in America, a little bit, too, of course. But I think in a lot of countries it's more endemic. And it's more the standard way of doing business. So, what crosses my mind is that--you know, we have a lot of great think tanks in the United States. I'm in one, I hope--the Hoover Institution. And you are affiliated with--
Simeon Djankov: the Peterson Institute.
Russ Roberts: Right. The Peterson Institute. I've been in others. I've consumed a lot of interesting work from other think tanks across the political spectrum. And sometimes you wonder--you know, who is benefiting from those studies? Because, it's very rare in the United States that someone writes a study pointing out the bad things about regulation, and the Minister of Whatever tweets back, 'Hey, that's a good point. Let's take care of that.' And that's because we've got this massive big boat of government that is very hard to veer off anything that's current course of the status quo. So, what are your thoughts on what we might do in the United States or other developed countries to make the kind of impact that I think you are having, Atlas Network seems to be having in certain small countries? Which are making a big difference. Eventually. Some of those changes, those are--you've listed a few. Those are "small" but not the people who are affected by them. They are life-changing, as you point out. And yet, here, it's very hard. Maybe we need some grants to American think-tanks, to be more effective. And, of course, we have a lot of money here for think-tanks. We are an incredibly wealthy society, by the standards of the rest of the world, in most cases. And yet I have often wondered about just how effective we are. Do you have any thoughts on that? It's a depressing question, I have to admit. I'm sorry.
Matt Warner: Well, the interesting thing is that gets to an overall topic about think tank effectiveness and productivity. And, one of the exciting things that I think is happening is, you know, you go through different phases of topics that animate people within this community about, what's the next best thing, how can we improve--measurement and results is sort of a perennial topic. One of the things at Atlas Network we have become very interested in is something I would, you know, in sort of a silly way, a call-your-shots method. Like, in billiards.
Russ Roberts: Babe Ruth.
Matt Warner: Yeah. If you imagine Babe Ruth, look into the outfield. And, you know, it--when you say, 'Hey, I see something on the horizon that I think we can achieve,' I think we have a way to do it. And I'm going to admit publicly to try to do that and put together a really sophisticated strategy and marketing plan. It's not just doing the research. Research is critical. You've got to have the credibility. You've got to know that what you are doing is built on sound ideas. But, to be able to communicate what your, what the significance is of this kind of reform in a way that people consume information, and then being able to achieve that in a 12-24 month time horizon--it really adds credibility to this causal relationship. And, I think as more and more research and advocacy organizations, civil society organizations, think tanks, etc. around the world can commit themselves to that kind of a model where they say, 'Here's what we want to achieve. It's going to be obvious whether we achieve it or not. We're not going to be able to hide it or explain it away if it isn't what we wanted.' And, then, develop a track record that gives some confidence that that is worthy of donor support to do it. That is a model that I think we can increasingly get confidence in seeing happen. So, in the United States as well--we are--our mission is to increase economic opportunity globally, not just outside the United States, internationally. We have partners in the United States who are doing this. And these are the very conversations that they are having about what does it mean to be, to hold yourself accountable, achieve a real result. For example, in one cohort of investments that we've made in the last two and a half years, we invested in 29 countries, with reforms tied to either Doing Business or Economic Freedom of the World. We've had wins in 10 of them. Based on Simeon's research, that would translate to the equivalent to date of 405,000 people lifting themselves out of poverty as a result, based on what we've invested in all of the countries, not just the ones that win. That equates to about a $4.88 per person outcome. And I think that's the direction that we need to move in. Which is, that we don't have profit motive in the non-profit world; but we can certainly hold ourselves accountable to some clear outcomes. And then help in a friendly way, encourage each other to do better and better.
Russ Roberts: Well, I really like the pre-commitment idea. I think that's interesting. There's an incredible tension for me: I do like to measure things. People think I'm--because I'm skeptical about econometric analysis that I think that facts don't matter. Well, of course they matter. Outcomes matter a lot. And, trying to measure things, to me, is always a good idea. As long as you remember that some of the most important things you do can't be measured. So, I think the challenge there is a tradeoff between demanding measurable outcomes and maybe missing out on some things that are hard to measure that you could achieve that you can't really get reliable aid on. I think about this program I do; and it's--I use my downloads as a measure of my success. That's of course not my real measure because I don't know if they listen after they download. I don't know if they understand it after they listen. And I don't know if they remember it even if they do listen. And I don't know if it changes anybody's minds or teaches them anything or educates them--which is my fundamental goal. So, I could try to measure that. I could try to have a test. We could try to think of some different ways to do that. But fundamentally, I think what I'm doing, which is, I hope, trying to create--this sounds so pretentious; sorry--better public policy, through better-educated citizens--well, I'm feeling, I'm part of that; I'm also just entertaining. And how people in their commutes, which is part of life. But, I like to think that. But I don't think I'll ever measure that. I don't think the dummy variable in 2006 for EconTalk's genesis is going to be a spike in economic growth for better well-being. I don't just care about growth, obviously--whatever measure we use. So, I do think there's a tradeoff there that's very challenging. And, you know, I salute you for trying--you actually have to spend money in trying to allocate money to different activities. And obviously doing that through something beyond just 'It feels right to me' is probably a good idea. So, even though I worry sometimes about over-measuring, I think it's a great point. Simeon, you want to add to those ideas? [More to come, 1:09:41]