This indicator measures the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
Countries are evaluated on the following factors:
- prevalence of regulations and administrative requirements that impose a burden on business; ease of starting and closing a new business; ease of registering property;
- government intervention in the economy; the extent to which government subsidies keep uncompetitive industries alive;
- labor market policies; employment law provides for flexibility in hiring and firing; wage and price controls;
- the complexity and efficiency of the tax system; pro-investment tax policies;
- trade policy; the height of tariffs barriers; the number of tariff bands; the stability of tariff rates; the extent to which non-tariff barriers are used; the transparency and predictability of the trade regime;
- investment attractiveness; prevalence of bans or investment licensing requirements; financial regulations on foreign investment and capital; legal restrictions on ownership of business and equity by non-residents; foreign currency regulations; general uncertainty about regulation costs; legal regulation of financial institutions; the extent to which exchange rate policy hinders firm competitiveness;
- extensiveness of legal rules and effectiveness of legal regulations in the banking and securities sectors; costs of uncertain rules, laws, or government policies;
- the strength of the banking system; existence of barriers to entry in the banking sector; ease of access to capital markets; protection of domestic banks from foreign competition; whether interest rates are heavily-regulated; transfer costs associated with exporting capital;
- participation of the private sector in infrastructure projects; dominance of state-owned enterprises; openness of public sector contracts to foreign investors; the extent of market competition; effectiveness of competition and anti-trust policies and legislation;
- the existence of a policy, legal, and institutional framework that supports the development of a commercially-based, market-driven rural finance sector that is efficient, equitable, and accessible to low-income populations in rural areas;
- the adoption of an appropriate policy, legal, and regulatory framework to support the emergence and development of an efficient private rural business sector; the establishment of simple, fast and transparent procedures for establishing private agri-businesses;
- the existence of a policy, legal, and institutional framework that supports the development and liberalization of commercially-based agricultural markets (for inputs and produce) that operate in a liberalized and private sector-led, functionally efficient and equitable manner, and that are accessible to small farmers; and
- the extent to which:
- corporate governance laws encourage ownership and financial disclosure and protect shareholder rights, and are generally enforced;
- state intervention in the goods and land market is generally limited to regulation and/or legislation to smooth out market imperfections;
- the customs service is free of corruption, operates transparently, relies on risk management, processes duty collections, and refunds promptly; and
- trade laws, regulations, and guidelines are published, simplified, and rationalized.
Relationship to Growth & Poverty Reduction
Improved regulatory quality can promote economic growth by creating effective and efficient incentives for the private sector. Conversely, burdensome regulations have a negative impact on economic performance through economic waste and decreased productivity. Researchers at the International Finance Corporation argue that “improving from the worst … to the best … quartile of business regulations implies a 2.3 percentage point increase in average annual growth.” Good regulatory policies help the poor by creating opportunities for entrepreneurship, reducing opportunities for corruption, increasing the quality of public services, and improving the functioning of the housing, service, and labor markets on which they rely.
This indicator is an index combining up to 14 different assessments and surveys, depending on availability, each of which receives a different weight, depending on its estimated precision and country coverage. The Regulatory Quality indicator draws on data, as applicable, from the Country Policy and Institutional Assessments of the World Bank, the African Development Bank, and the Asian Development Bank, the World Bank’s Business Environment and Enterprise Performance Survey, Bertelsmann Foundation’s Bertelsmann Transformation Index, Global Insight’s Business Conditions and Risk Indicators, the European Bank for Reconstruction and Development’s Transition Report, the Economist Intelligence Unit’s Country Risk Service, the World Economic Forum’s Global Competitiveness Report, the Heritage Foundation’s Index of Economic Freedom, the International Fund for Agricultural Development’s Rural Sector Performance Assessments, the French Government’s Institutional Profiles Database, Political Risk Service’s International Country Risk Guide, and the Institute for Management and Development’s World Competitiveness Yearbook.
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[ii] Pg. 4 of Djankov, Simeon, Caralee McLiesh, Rita Ramalho. 2006. Regulation and Growth. Economic Letters 3: 395-401.
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