Rule of Law 1: Entrepreneurship and Government Permits

The World Bank and International Finance Corporation (WB-IFC) conducts an annual report, “Doing Business” and its 2009 Report was released last week. The goal of such report is to assess the 181 countries (178 countries in the 2008 Report) included in the survey on how easy or how bureaucratic they are for entrepreneurs and businessmen – who create jobs, who buy and produce various goods and services in society. It is a complex and delicate procedure, involving the inputs of top business consulting, auditing, legal and other companies in the countries surveyed.

After assessing the countries through assignment of a certain score, it ranked all the 181 countries. For this year, the 10 factors considered and measured in coming up with a composite score and where rankings are made, of “Ease in Doing Business” were: (1) Starting a business, (2) Dealing with construction permits, (3) Employing workers, (4) Registering property, (5) Getting credit, (6) Protecting investors, (7) Paying taxes, (8) Trade across borders, (9) Enforcing contracts, and (10) Closing a business.

So, how did the Philippines fare?

Rank in Ease of Doing Business, 2008

1. Singapore
4. Hong Kong
12. Japan
13. Thailand
20. Malaysia
23. Korea
61. Taiwan
83. China
88. Brunei
92. Vietnam
122. India
129. Indonesia
135. Cambodia
140. Philippines
165. Lao PDR

Again, for the nth time, the Philippines proved to be among the most bureaucratic of all supposedly “emerging economies”, ranking 140th out of 181 countries included in the survey! What pulled down its ranking were its scores on the procedures in Starting a business, also in Closing a business.

The top 10 countries with easiest procedures in starting a business – New Zealand, Canada, Australia, Georgia, Ireland, United States, Mauritius, United Kingdom, Puerto Rico and Singapore – only have one, at most 6 or 7, procedures to register and start a business, and each procedure does not take long to complete, and the fees are not plenty and high. In addition, the local governments hardly have any part in business registration procedures.

In contrast, the Philippines requires at least 15 procedures: 3 with the Securities and Exchange Commission (SEC); 4 with the barangay/village and city/municipality; 6 with the Bureau of Internal Revenue (BIR); 1 with the Social Security System (SSS); and 1 with PhilHealth. Registration with Pag-IBIG maybe optional, but most firms are required or advised to do so. Ask any serious entrepreneurs around, and most likely they will pinpoint at the local governments and the BIR that really give them difficulty if not hell.

The empowerment of local government units (LGUs) after the enactment of the Local Government Code (1991) was supposed to make the LGUs more responsive to the needs of the people in the locality. What happened in many cases, was the lives of hard-working and entrepreneurial people became more complicated, the less-responsible and less hard-working people were placated and subsidized, and personnel of the barangay/municipal/city halls were expanded and often pampered. Political decentralization and devolution did not mean less government but on the contrary, more government, as both national government agencies (NGAs) and LGUs take turns in slapping new regulations, new taxes and fees, to entrepreneurs who are deemed to have less political clout to the incumbent set of politicians.

The BIR will remain to be the nest of wastes and inefficiencies, if not large-scale corruption, because of the various powers and authority, whether transparent or arbitrary, given to that agency by various revenue laws sought by the Executive branch and granted to them by the Legislative branch.

Then there are many other NGAs that also require their own set of requirements, regulations and fees, on top of regulations, taxes and fees imposed and collected by the above-mentioned NGAs and LGUs. If a firm is manufacturing or distributing various food products, drinks, medicines and related products, it will have to get a license from the Bureau of Food and Drugs (BFAD) and/or the Department of Health (DOH). A friend of this writer who likes cooking produced different sauces for different type of barbeques. He invented around 20 different sauces, had his own packaging, already set up the marketing channels with selected local restaurants, shops, supermarkets, even a few outlets in the US. Six months have passed, 10 months, a year, and he still never got his BFAD license despite having submitted various samples for testing and re-testing. This experience plus some family concerns pushed him to abandon his business plan and migrated to the US instead.

If a firm is dealing with minerals extraction, it will have to go through a very long and complicated process in getting an Environmental Clearance Certificate (ECC) and other environmental permits with the Department of Environment and Natural Resources (DENR) and LGUs.

Friedrich Hayek observed in his book, The Constitution of Liberty, that government regulations “will always limit the scope of experimentation and thereby obstruct what may be useful developments. They will normally raise the cost of production or reduce overall productivity” (Chapter 15, Economic Policy and the Rule of Law). More regulations, more restrictions. Although such regulations may mean more revenues and more power for any national or local government body, they definitely kill certain innovative spirit and outcomes that some entrepreneurs may produce and develop.

The Rule of Law philosophy explicitly limits the arbitrary power of governments to create and enact too many rules, too many regulations and restrictions. Entrepreneurship and job creation is not a crime and harmful to people, especially those who need jobs, those who need new products and services. What often results with more restrictions, is that more ways and schemes are invented – and allowed in exchange for bribes – to circumvent and avoid those restrictive rules. This results in high levels of what are known as “informal” or “underground” economies.

For entrepreneurship and rule of law in the economy to flourish, the number of business regulations have to be drastically cut and reduced. Then entrepreneurship and job creation will be rewarded with freedom and prosperity, not penalized with endless regulations and taxation.