Doing Business in East and Southeast Europe – a Second Look at Economic Freedom

When we delve deeper into the data analysis of the 2015 Doing Business Report, we discover a wealth of information, and the countries of East and Southeast Europe show some promising results. Overall, none of the 21 countries made it into the top 10 as regards the total score. Georgia is on top of the region with position number 15. 

However, if we look at the eleven sets of indicators, the picture for the region is a bit rosier. Three of the 21 countries make it into the top 10 as regards “starting a business” (Macedonia 3rd, Armenia 4th, Georgia 5th overall). Georgia is world number three in “dealing with construction permits”, but the only economy of the region to make it into the top 10 in that category. In “Registering property” Georgia is number one in the world and three other countries from the region range in the top 10 of this category (Belarus 3rd, Kyrgyz Republic 6th and Armenia 7th). Regarding the indicator “getting credit”, three countries of East and Southeast Europe make it into the top 10 (Montenegro 4th, and both Romania and Georgia 7th). 

Now let us have a closer look at the areas where positive reforms are largely absent or insignificant. I would like to single our three indicators: (1) "dealing with construction permits”, (2) “getting electricity” and (3) “trading across borders”. 

(1) Dealing with construction permits
Despite some positive reforms (five cases were recorded, all from rather a low basis, see below) in this field, only two of the 21 countries in East and Southeast Europe are listed as part of the top 50 countries (Georgia, Kyrgyz Republic) of the world and only six are among the top 100. In many cases issuing any type of permit is fraught with corruption. In almost all the countries of East and Southeast Europe this is a serious issue. On a more positive note: Georgia is number three worldwide in granting construction permits.

(2) Getting electricity
No positive reform is recorded in any of the 21 polities in the field of access to electricity. None of the countries of East and Southeast Europe is among the top 10. Only two of the 21 countries rank among the top 50 (Turkey and Georgia) and only seven are in the top 100. As with construction permits, “getting connected to the grid”, is a source of corruption. It also shows that more investment is needed in infrastructure; maybe the privatization of the energy sector would also help so that a competitive environment is nurtured.

(3) Trading across borders
Opening borders usually has a positive effect on economic growth and income generation. Closed borders make it difficult for businesses to interact with the outside world to create wealth. It seems that the 21 countries of East and Southeast Europe are rather closed economies. None of them is among it into the top 10 of the world, only one (Georgia) is among the top 50 and only nine are among the top 100. This is the more surprising since three countries are European Union members. From a liberal perspective complicated multinational or bilateral agreements are not necessary if a country is willing to open up and integrate in the international division of labour. One might try something radical: Unilateral action and opening borders, which might lead to reciprocity. 

In the 21 countries of East and Southeast Europe we can identify 35 cases, where reforms made it easier to do business during 2013/14. In particular, “starting a business” must have been in the focus of national reforms, since nine cases of improvements could be counted. In five cases “dealing with construction permits” was improved (Montenegro, Croatia, Albania, Kosovo, Tajikistan), in four cases “registering property” became easier (Russia, Albania, Kazakhstan, Azerbaijan). We also find positive examples in the field of “paying taxes”, which became easier in six countries (Romania, Belarus, Azerbaijan, Moldova, Ukraine and Tajikistan), but has worsened in four (Turkey, Kazakhstan, Albania, Croatia) through negative reforms. Government reforms do not always have a positive effect on the ease of doing business. In the eleven areas that the index covers, we have eight cases of change making it more difficult for businesses in the 21 countries. 

This leaves a huge field of possible reforms for the 21 governments of the region with untapped potential that may yield enormous benefits for societies in East and Southeast Europe. The good news is that government reforms suitable to positively contribute to doing business in a more efficient and effective manner are not rocket science. Many of the solutions and reform measures to be taken are well tested, documented and easy in their application. Political will alone is necessary to overcome vested interests of oligarchs and of big businesses hostile to competition and the broad creation of wealth and prosperity. Needless to say, in the absence of tangible reform efforts countries in East and Southeast Europe will fall further behind in the world and will see other stars rise and shine. Already people are voting with their feet and the net outmigration of the most talented and qualified people are on the rise. 

International comparisons certainly have their limits. But insisting on uniqueness and then staying passive as far as reforms are concerned is becoming less and less a viable option for any government. Since the rank of many of the countries of East and Southeast Europe is so terribly low, the cost of reform is often low too. Low hanging fruit, so to say, can be collected more easily. The risks of reform are often negligible and administrations may acquire knowledge and experience, which will help to build capacity of state institutions. In fact the interconnected modern world produces often high expectations of citizens, and governments, which are too slow at reforms, are at risk of being voted out. In non-democratic countries disenchanted populations might take to street protest and violence might occur leading to further disturbances and/or unrest. Never before was good practice so widely shared among governments, businesses and other actors. Never before were we in a position to inform regulatory reform programs. And last but not least, never before were we in a position to lift millions out of misery within a framework of markets and competition, enabling people to realize their aspirations for peace and prosperity.

The author wishes to thank Ms. Sylvia Stoeva for the collection and collation of the relevant data and the production of the tables.