Improved Business Environment: Joint EBRD--World Bank Survey
by Steven Fries and Saso Polanec

The business environment in the transition economies improved significantly during the last three years according to the findings of the business environment and enterprise performance survey (BEEPS), which the EBRD and World Bank have conducted jointly first in 1999 and then again last year. BEEPS investigates the extent to which government policies and practices influence business development in CEE countries and the CIS.

Between the time of the two BEEPS surveys, the improvements in the business environment have been most noticeable in the Baltic region and in the CIS-6 countries (Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Moldova, and Uzbekistan, albeit from a relatively worse base). The central CIS countries (Belarus, Kazakhstan, Russia, and Ukraine) showed the least improvement, with the CEE countries (Croatia, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia) and southeastern Europe (Albania, Bosnia and Herzegovina, Bulgaria, FYR Macedonia, and Romania) falling in between. To make comparisons over time consistent, the groups include only those countries for which data were available in both 1999 and 2001 (see the table).

A consistent finding in both the 1999 and 2002 BEEPS was the unexpectedly favorable perceptions of the business environment in Belarus and Uzbekistan given the limited extent of market-oriented reforms in these countries, including the liberalization of markets and trade. One interpretation of this finding is that businesses are being sheltered from competitive pressures and therefore have relatively positive perceptions of the business environment because they face relatively little competitive pressure from foreign and domestic rivals. The survey did not cover those enterprises and entrepreneurs that would like to enter these markets, but are prevented from doing so by the countries’ restrictive policies. The following are some interesting findings of the surveys:

• In CEE countries, firms in Croatia, the Czech Republic, Hungary, and Slovenia witnessed the most significant improvements in how they perceived the business environment, while those in Poland saw little improvement. In the Baltic region Estonia, which had achieved the most favorable perceptions in 1999, saw less improvement by 2002 compared with Latvia and Lithuania. Nevertheless, in 2002 Estonia, Hungary, Latvia, and Slovenia remained the clear front-runners, with Poland lagging well behind the others.

• In southeastern Europe all the countries except Bosnia and Herzegovina witnessed significant gains in ratings of the business environment between 1999 and 2002. In 2002 Bulgaria, FYR Macedonia, and Serbia and Montenegro achieved the most favorable levels of perception and Albania received the least favorable, with Bosnia and Herzegovina and Romania occupying the middle ground.

• In the CIS Azerbaijan, the Kyrgyz Republic, and Russia saw business environment ratings improve the most, while Kazakhstan and Ukraine made the least improvement. The countries with the most favorable ratings in 2002 were the resource-rich countries of Azerbaijan, Kazakhstan, Russia, and Uzbekistan, as well as Armenia. The business environment laggards were Georgia, Moldova, and Ukraine, with Belarus, the Kyrgyz Republic, and Tajikistan falling in between.

The gains in perceptions of the business environment between 1999 and 2002 were concentrated in five of the seven areas: inance, infrastructure, taxation, corruption, and crime. These gains were fairly uniformly distributed across the three broad country groups except for finance and crime, where the Baltic states and the CIS-6 countries achieved relatively strong gains. Perceptions of business regulation and the judiciary saw less improvement. Only the Baltic states and the CIS- countries saw significant improvements in business perceptions of the judiciary. Perceptions of business regulation improved only moderately in all five subregions. Notwithstanding these improvements, the aspects of the business environment that continued to pose the most significant obstacles to the operations and growth of firms in 2002 were finance, taxation, the judiciary, and corruption. Many of the persistent obstacles in the business environment may therefore arise because states are still too weak to reign in their own officials or to enforce their own taxes, regulations, and laws.

The business environment was "polluted" by the following factors:

• Overtaxation and customs delays. Firms in the institutionally less developed countries use two tax evasion strategies: not reporting actual sales to tax authorities and bribing tax authorities. The countries facing the most severe problems in relation to tax avoidance were Albania, Georgia, the Kyrgyz Republic, and Tajikistan, while the countries with relatively strong tax discipline were Armenia, Estonia, Lithuania, Poland, and Slovenia. For those firms that import, the duties levied on imports and the customs procedures through which these levies are collected are important. Countries with the longest delays at customs were Russia, Tajikistan, and Uzbekistan and those with the shortest were Estonia, Latvia, and Romania.

• Over-regulation. BEEPS asked the respondents what proportion of their senior managements’ time was spent dealing with public officials about the application and interpretation of laws and regulations ("time tax") and how frequently firms like theirs paid bribes to deal with various aspects of business regulation, including business licenses and permits, health and safety inspections, fire and building inspections, and environmental inspections. The countries with the highest time taxes were Albania, Georgia, and FR Yugoslavia and those with the lowest time taxes were Armenia, Azerbaijan, and the Czech Republic.

• Crime. One measure of the cost of crime to businesses is the amount of losses incurred due to crime. The countries with the highest losses caused by theft as a percentage of total sales were Armenia, Azerbaijan, the Kyrgyz Republic, and Uzbekistan and the lowest were Albania, Bosnia and Herzegovina, Estonia, and Hungary.

• Infrastructure inadequacies. One indication of the extent to which infrastructure inadequacies create business obstacles is the delays in connections versus the proportion of firms that pay bribes to be connected to services and the number of working days lost because of an interruption in infrastructure services. The number of working days lost was particularly great in Central Asia and the Caucuses, as well as in Albania, Moldova, and Ukraine Countries with the longest connection delays were Belarus, the Kyrgyz Republic, Tajikistan and FR Yugoslavia and the countries with shortest delays were Bosnia and Herzegovina, Croatia, the Czech Republic, and Lithuania.

• Inefficient finance One measure of the extent to which finance represents a business obstacle is the length of time required to receive a bank loan after the submission of a successful loan application. Countries with the highest level of banking efficiency were Estonia, Latvia, and Slovenia, and the lowest were Armenia, Azerbaijan, and Uzbekistan.

Firms often pay bribes to overcome obstacles in the business environment. Countries in which more than half of firms reported paying at least some bribes included Albania, Azerbaijan, Bulgaria, FYR Macedonia, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Romania, Russia, Serbia and Montenegro, the Slovak Republic, Tajikistan, and Ukraine. Among those firms in these countries that paid bribes, the average "bribe tax rate" was around 5 percent of their total annual sale, except in FYR Macedonia, where it was significantly lower. Armenia, Croatia, Moldova, and Slovenia appeared to have the lowest incidence of corruption in government procurement.

State capture refers to actions taken by individuals, groups, or firms to influence the formulation of laws, regulations, decrees, and other government policies to their own advantage though illicit or nontransparent means. Public officials can also capture the state if they abuse their authority to shape institutions to further their private interests at the expense of the broader public interest. Firms that succeed in state capture can have a significantly higher investment rate and faster productivity growth than firms that do not engage in such behavior and believe in fair competition. This suggests that state capture is a zero (or negative) sum game for the economy as a whole.

Steven Fries is deputy chief economist at the EBRD, One Exchange Square, London, EC2A 2JN, U.K.; e-mail: friess@ebrd.com. Saso Poanec is with the European University Institute, Florence, Italy, and the University of Ljubljana, Ljubljana, Slovenia; email: polanec@iue.it. 

Qualitative Assessments of the Business Environment									
(scale of 1 to 4, with 1 indicating a minor obstacle and 4 a major obstacle)

Country

Year

Finance

Infrastructure

Taxation

Regulation

Judiciary

Crime

Corruption

Average

Albania

1999

3.27

3.01

2.86

2.03

2.99

3.35

3.30

2.97

2002

2.34

2.61

2.74

2.19

2.85

2.23

3.10

2.58

Armenia

1999

2.46

1.79

3.21

1.54

2.34

2.15

2.34

2.26

2002

2.42

1.86

2.77

1.78

1.66

1.34

1.85

1.95

Azerbaijan

1999

3.38

2.28

2.96

2.22

2.79

2.47

2.88

2.71

2002

2.19

1.66

2.29

1.57

1.25

1.15

2.07

1.74

Belarus

1999

2.85

1.55

3.35

2.17

2.30

2.34

2.91

2.50

2002

2.62

1.24

2.95

2.32

1.98

1.73

2.14

2.14

Bosnia and
 Herzegovina

1999

3.02

1.83

3.41

2.22

2.12

2.30

2.26

2.45

2002

2.67

1.64

2.63

2.02

2.52

2.18

2.65

2.33

Bulgaria

1999

3.05

2.30

3.02

2.35

2.37

2.81

2.85

2.68

2002

2.83

1.51

2.41

1.78

2.23

2.23

2.53

2.22

Croatia

1999

3.56

1.87

3.27

1.94

2.77

2.40

2.79

2.66

2002

2.23

1.23

2.24

1.81

2.57

1.63

2.29

2.00

Czech Republic

1999

2.88

2.48

3.29

2.40

2.48

2.29

2.52

2.62

2002

2.49

1.43

2.58

1.86

1.91

1.85

1.95

2.01

Estonia

1999

2.84

1.62

2.70

1.79

2.10

1.99

2.04

2.15

2002

1.99

1.54

1.99

1.79

1.85

1.70

1.69

1.79

Georgia

1999

3.47

2.22

3.40

2.13

2.33

2.58

3.09

2.74

2002

2.37

1.98

3.10

1.86

1.91

2.42

2.87

2.36

Hungary

1999

2.86

1.64

3.07

2.18

1.96

2.10

2.14

2.28

2002

2.26

1.26

2.41

1.74

1.51

1.44

1.77

1.77

Kazakhstan

1999

2.04

1.32

2.33

1.63

1.67

1.73

1.99

1.82

2002

2.36

1.32

2.27

1.64

1.76

1.71

1.96

1.86

Kyrgyz Republic

1999

3.94

2.20

3.58

2.54

3.29

3.55

3.75

3.26

2002

2.30

1.59

2.58

1.71

1.98

2.06

2.36

2.08

Latvia

1999

2.84

2.10

3.27

2.19

2.61

2.37

2.64

2.57

2002

1.91

1.38

2.80

1.95

1.56

1.62

1.94

1.88

Lithuania

1999

3.24

1.87

3.36

2.66

2.71

2.90

2.88

2.80

2002

1.81

1.55

2.78

1.74

2.16

1.91

2.15

2.01

FYR Macedonia

1999

3.67

1.85

3.18

2.48

2.69

2.41

2.90

2.74

2002

2.24

1.51

2.32

2.06

2.45

2.17

2.45

2.17

Moldova

1999

3.53

2.53

3.49

2.44

2.80

3.18

3.11

3.01

2002

2.72

1.39

3.12

2.22

2.10

2.43

2.65

2.37

Poland

1999

2.86

1.70

3.15

2.17

2.35

2.43

2.52

2.46

2002

2.91

1.55

3.17

2.32

2.47

2.26

2.50

2.45

Romania

1999

3.71

2.51

3.34

2.41

2.66

2.68

3.00

2.90

2002

2.67

1.61

2.92

2.03

2.45

1.95

2.70

2.33

Russia

1999

3.32

2.10

3.47

2.29

2.38

2.70

2.83

2.73

2002

2.26

1.43

2.64

1.77

1.88

1.80

1.99

1.97

Slovakia

1999

3.37

1.90

2.96

2.08

2.26

2.59

2.59

2.54

2002

2.53

1.41

2.43

2.05

2.50

1.93

2.50

2.19

Slovenia

1999

2.73

1.74

2.87

1.92

2.29

1.64

1.71

2.13

2002

2.00

1.19

1.87

1.60

2.02

1.33

1.67

1.67

Tajikistan

2002

2.65

1.97

2.74

1.97

1.88

1.75

2.27

2.17

Ukraine

1999

2.52

1.47

2.77

2.05

2.13

2.12

2.51

2.22

2002

2.55

1.48

2.78

2.04

2.23

2.14

2.51

2.25

Uzbekistan

1999

3.04

1.90

2.76

2.07

2.28

2.18

2.76

2.43

2002

2.41

1.46

2.48

1.66

1.67

1.50

1.71

1.84

FR Yugoslavia

2002

2.60

1.74

2.78

2.02

2.13

1.79

2.02

2.15