MONITORING of Administrative Barriers to Small Business Development in Russia Conducted by CEFIR in collaboration with the World Bank and financial support of USAID A case study for Shanghai Poverty Conference - Scaling Up Poverty Reduction Center for Economic and Financial Research

Purpose Monitor the level of administrative regulation on small business Analyze the effects of de-bureaucratization reform on actual administrative barriers to business The 1st round of surveys took place in the spring 2002 (collected information about the the 1 st and the 2 nd halves of 2001) Baseline information before the reform The 2 nd round of surveys took place in the fall of 2002 (collected information about the the 2 nd half of 2001 and 1 st half of 2002) Allows evaluation of the results of licensing and inspections reforms The 3 rd round of surveys took place in the spring of 2003 (collected information about the the 1 st and the 2 nd halves of 2002) Allows evaluation of the results of registration reform Two more rounds are planned to take place annually in springs of 2004 and 2005.

Key points about the monitoring Conducted by an independent organization (CEFIR) Checks specific guidelines described in the laws from the de-bureaucratization package Broad coverage across Russia Repeated surveys Collaboration from the Ministry of Economic Development and Trade

Regional coverage 20 regions in 7 federal districts (okrugs): 4 in the Far East and Volga, 1 in the South, 2 in the North-west, and 3 in each of the other federal districts

Sample 2000 firms total 100 firms per region Small private firms, that are legal entities (median number of employees is 11) 80 firms per region older than half a year –Wide industry distribution (manufacturing firms are over-represented compared to population of small firms) 20 firms per region are newly registered

Conclusions after the 3 rounds Before any of the deregulation laws took effect, the practices in the areas of registration, inspections, licensing, and certification were found to be very far from the benchmarks established in the new legislation. The new laws on inspections (August 2001) and licensing (February 2002) have induced significant positive changes in these areas of regulation. The new law on registration (July 2002) reduced the number of agencies to be visited during registration by one, made registration faster and simpler, but more expensive. Simplified tax system indeed simplified tax administration.

Conclusions after the 3 rounds (continued) The levels of administrative pressure on small firms in these (and other) areas remain high mostly due to poor law enforcement. Progress of reforms is not geographically uniform: better results were achieved in localities with better fiscal incentives, less concentrated production, and large initial pro-reform small business constituency There was a marked improvement in general perceptions of business climate Competition started to be perceived as a more serious problem than government regulations and tax administration

General perception of business climate Rounds:1 1→2 2 2→3 3 Round 3 to II2002-I2002-II Tax level3.52↓***3.30↓*** Macro instability3.28↓***3.00↓*** Competition2.63↑*** Tax administration3.11↓***2.82↓*** Regulation2.91↓***2.64↓*** Difficulties with access to capital2.65↓*** Anticompetitive barriers2.27↓***2.17↓* Corruption2.10↓*** Racket1.34↓***1.27↓*** (5 – threatens the existence of the firm, 4- a very serious problem, 3 – a serious problem, 2 – a slight problem, 1 – not a problem) Arrows indicate significant changes at 1%(***), 5%(**), and 10%(*) level of significance in panel regressions; green shows the most substantial changes.

Determinants of reform Regressions of changes in administrative costs yield the following results: –Fiscal incentives (the scale of independence of municipal budgets from regional transfers) positively affect the dynamics of deregulation registration is easier, time spent on certification lower, sanitary inspections less frequent –Concentration of output slows down the reform in licensing, but accelerates the reform in inspections (entry barriers are removed relatively slowly and the burden on existing firms is removed relatively fast) customs and tax inspections are fewer, more documentation requirements, more agencies need to be visited during registration –Initial level of small business development accelerates the reform in licensing, certification, and in time spent on inspections (the results point to the importance of small business constituency for deregulation reform) registration cheaper, number of sanitary, certification, and social security inspections falls, inspection and licensing overall less problematic, less complaints about regulation

Impact Analysis Establishment of dialog between government and private sector –Presentation, press releases Feedback to government on success of their reform –Presentations to the government (MEDT) –Further reform aimed at removal of administrative barriers

Driving factors Government Commitment –Interest from the start; help along the way Private Sector and Media Participation –Wide coverage of the results in press and among civil organizations External Catalysts –World bank as one of the initiators –Support of USAid

Lessons Learned Complementarity of reforms –De-bureaucratization was fastest in regions and cities with stronger fiscal incentives, less concentrated production, more political competition, and higher presence of small business. Successful reform and its monitoring require specific guidelines –The laws from de-bureaucratization package specified measurable goals –Hence, no need to rely solely on subjective perceptions