Much recent economic news is focused on the current financial crisis. But beneath the investment portfolios that have caused so much concern is the real economy, where actual goods and services are produced, marketed, and sold.  Crucial to market stability and growth is the ease or difficulty these businesses experience to open, run, and even close down. 

This, in turn, is dependent on the hand of government regulation. The harder the government makes it to  start and operate an enterprise, the less opportunity there is for innovation, adaptation to changing circumstances, and avenues for new employment.

In his 2001 book, The Mystery of Capital, Peruvian economist Hernando de Soto said that people in the developing nations could have far more prosperous lives if governments would recognize the property rights of tens of thousands of informal businesses. 

Regulations that make it difficult or impossible to register businesses, or to have land titles recognized and contracts enforced by the courts, mean that millions of people are forced to operate outside the law  to make their livings in a shadow economy. 

In his native Peru, de Soto wrote, 81 percent of the rural property and 53 percent of the urban property was owned outside the official legal system. To obtain legal authorization to build a house took, on average, almost seven years, and required 207 administrative steps in 52 government offices. To acquire title to the land upon which the house would sit required an additional 728 administrative steps. 

De Soto and his team of experts found that the same process in Egypt also would take around seven years and would involve 77 bureaucratic procedures at 31 different agencies. In the Philippines, the process took between 13 and 25 years (!) and required 168 steps at 53 government agencies and offices.  

The pathbreaking work done by de Soto and others slowly but surely has made an impact on policies to reduce governmental barriers to opening and operating private enterprises. 

The World Bank has recently come out with a detailed study of government regulation of business in 181 countries. Doing Business, 2009 emphasizes the improvements that have been made in recent years to free business from the stranglehold of government controls. But it also highlights the extent to which political authorities in every corner of the world continue to make doing business difficult and costly. 

Not surprisingly, the report focuses on reforms in the developing countries of Asia, Africa, and Latin America, and in the former Soviet-bloc nations of Eastern Europe. But before looking at those findings, which will we do in Part II of this series, it is worth glancing at the barriers to doing business in the developed nations of North America and Western Europe. 

The report judges the legal and regulatory costs of doing business by analyzing a series of indicators. Among these: 

• Starting a business
• Construction permits
• Registering property titles
• Paying taxes
• Trading across borders
• Enforcing contracts
• Hiring and firing labor
• Closing a business. 

The United States is the most business friendly when it comes to hiring and firing employees. Many workers are employed on an at-will basis, and there are minimal rules in terms of mandated severance pay. 

Firing costs elsewhere in the developed countries are much higher. Severance pay is required in other leading Western economies. The number of mandated weeks vary as follows:

• Italy, 11
• Netherlands, 17
• United Kingdom, 22
• Canada, 28
• France, 32
• Spain, 56
• Germany, 69

It's no wonder that many European companies are reluctant to increase their workforces when firing a worker legally requires paying the equivalent of 1.3 years of salary in Germany, more than one year in Spain, and more than a half a year in France. 

The following table summarizes business costs in three areas: 1. Starting a business (number of legal procedures, number of days to get through the legal procedures, and the percent of per capita national income to get through the legal process); 2. Registering a property (number of legal procedures, the number of days they take to complete, and the cost of the registration as a percentage of the property’s value); and 3. Closing a business (the years the process takes and the cost of doing so as a percentage of the value of the business estate).  

The United States and Canada are the least costly for starting a business by these benchmarks. Sweden requires the least steps and the fewest days to register a property, but the U.S has the lowest monetary cost as a percentage of the value of the property. 

Canada, Spain, and the U.K. have the shortest times to close a business. In Canada, the Netherlands, Sweden, and Switzerland, the cost of closing a business is the lowest percentage of the value of the business property (4 percent). 

The costliest countries in which to start a business are Italy and Spain, especially in terms of the legal costs. In Italy, it is the equivalent of 18.5 percent of per capita national income; in Spain, the cost is 14.9 percent. Spain also requires the most days to finish the process, 47 days. 

France has the longest time to register a property among these Western economies, 113 days, or almost a third of a year. France and Spain have the highest monetary costs as a percentage of the value of the property being registered. 

Italy and Spain impose the highest taxes on closing down a business, with the government taking, respectively, 22 and 15 percent of the property value. 

Finally, each of these countries impose business taxes. The table below shows the cost of these taxes in terms of the average number of hours per year it takes to file and the percent of profits taken by the government.  

Switzerland ranks as number one by these measurements. It takes less than 29 percent of profits in taxes, and annually absorbs only a little more than two-and-a-half 24-hour days to file tax documents. In Italy, tax filing takes the equivalent of almost 14 full days. In the U.S. a bit less than eight days of business time is absorbed.

Italy is the champion in burdening business. The tax rate on business profits is 73.3 percent. France and Spain are the runner-ups in this negative category. Frances takes 65.4 percent of business profits; Spain takes 60.2 percent. Sweden is not far behind with a tax rate on business profits of 54.5 percent. 

Switzerland, the U.K. and the Netherlands all beat the United States with lower rates for business. 

Clearly, the free market economies of the West have a long way to go when it comes to being business friendly. They may be heads and shoulders over many countries. But all of them – including the United States – are far from standards of any free enterprise ideal.

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