> Ann Low, US Department of State:
Business Registrations Are Fuel for Global Prosperity
W
e have known for a long time that if developing countries could bring their businesses into the formal sector, there would be strong dividends in terms of providing worker protections, transparency and tax revenue generation. Now we have a tool to help all governments facilitate those results. GER. co is an Internet platform, launched in October 2014, by the Kauffman Foundation’s Global Entrepreneurship Network and the United Nations Conference on Trade and Development (UNCTAD) with input from the US Department of State. The platform contains links to all the official business registration websites in the world and a rating of each website’s user-friendliness. GER.co’s mission is to simplify business registration processes on a global scale. The site includes promotional materials for its Go Green by 2019 campaign, where governments are asked to put their processes online and make them clear and simple by 2019. It also includes educational materials on its schools page to inspire behavioural change, so future government officials see processes from the user’s standpoint, and future entrepreneurs see business registration as the first step towards business success. We hope readers will visit GER.co, link to the website, and make the site better known. WHY DO BUSINESS REGISTRATIONS MATTER? Inclusive Growth: Unregistered businesses are the elephant in the room. According to the Organization for Economic Cooperation and Development (OECD), over 60% of the global work force, or 1.8 billion of the world’s 3 billion workers, are employed informally, meaning they work for unregistered businesses. According
“As more businesses register, governments will receive more tax payments and can provide better services and infrastructure, which will help businesses grow.” to the International Labor Organization (ILO), “the informal economy comprises half to threequarters of all non-agricultural employment in developing countries. Women, migrants, and other vulnerable groups of workers who are excluded from other opportunities have little choice but to take informal low-quality jobs.” This means the majority of the world’s workers do not benefit from social safety nets and international labour standards. Their businesses have no access to new research and development funds or the global supply chain. They can’t contract with governments or most registered businesses, and they have no ability to seek justice when they are wronged. Instead, they work in uncertainty. Unregistered businesses are unable to open business bank accounts, so they can’t borrow money to grow their businesses. They don’t pay taxes, but they stay small. They are easy victims for unscrupulous officials, and their employees have no recourse to address unfair wages or unsafe working conditions. Governance – the balance between the state and the private sector: In countries where informality is high, the lack of registered businesses often contributes to governance challenges in the State-Owned Enterprise (SOE) sector. Governments that are unable to find high quality,
Stop the vicious triangle.
24
CFI.co | Capital Finance International
registered, local suppliers may establish more SOEs to fill the supply gap. These additional SOEs can compound existent shortcomings, such as inadequate financial disclosure by SOEs, and conflicts of interest between a government’s roles as regulator and owner. The OECD states that “experience shows that market-led development is the most efficient model for the allocation of resources.” It also notes that “structuring the complex web of accountabilities [for SOEs] in order to ensure efficient decisions and good corporate governance is a challenge and requires profound attention to the same three principles that are paramount for an attractive investment environment: transparency, evaluation, and policy coherence.” Simple online administrative procedures can facilitate the establishment of new businesses both to meet SOEs’ needs and to bring the benefits of increased competition to the market place. Transparent online procedures can also improve the business environment so that privatized, former, SOEs have a better chance of success. If a country with high informality also limits foreign investment to a minority stake, the result can increase income inequality and reinforce a lack of competition. This occurs because foreign companies cannot just fill the supply gap through direct foreign investment. Rather, an interested foreign investor must be willing to cede majority control of his company to a local partner just to enter the market. This limits the pool of willing foreign investors, thus hampering competition. If the pool of local registered businesses is tiny (and includes government-favoured SOEs), the same small group of local businesses benefit from the foreign investment, which may increase, or perpetuate, income inequality.