9.3. Business environment
Policies and regulations set by governments can support an environment that is favourable to business development and performance or conversely create obstacles to their economic activity. The World Bank Doing Business survey measures various factors that influence entrepreneurial activity, with a focus on business regulations and the ease of doing businesses, especially for Small and Medium-Sized Enterprises (SMEs).
According to the World Bank’s ease of doing business index, the Western Balkan region performs fairly well compared to OECD and OECD-EU countries. In 2020, the regional average was 73 (on a scale from 0-100) compared to 77 and 78 in OECD and OECD-EU countries respectively. However, there is significant differences in the business environment of the Western Balkans. North Macedonia is the regional frontrunner at 81 and is above OECD and OECD-EU average scores. On the other side of the spectrum, Bosnia and Herzegovina has the least favourable business environment in the region, with a total score of 65. As mentioned in chapter 1, governments in the Western Balkan region have made concerted efforts to boost their economic growth and competitiveness, inter alia through the Economic Reform Programmes, and these efforts seem to have been paying off.
The average scores of the Western Balkan region vary significantly across the index components, but in most cases Western Balkans, OECD and OECD-EU countries follow the same pattern. In absolute values, the Western Balkan region perform best in starting a business (85) and trading across borders (95). On the contrary, countries and economies across the region have the lowest scores for protecting minority investors (59) and enforcing contracts (62). These are on average also challenging components for the OECD and OECD-EU countries, as the differences across regional averages is comparatively small, 7 and 5 points respectively. The greatest differences from the Western Balkan regional average to the OECD-EU average is in the ease of paying taxes and getting electricity, where the region’s averages are 13 and 12 points below the OECD-EU average, respectively. Getting credit is the only area where the average of the region is above the OECD-EU average, with 16 p.p. difference. As explained in chapter 1, access to finance is a key barrier for SMEs in the region, so this seems to contradict the Doing Business scores. However, this component of the index mainly measures the strengths of legal rights of lenders and borrowers and the existence of an online collateral registry, not the actual uptake of credit.
Examining the sub-components shows that Western Balkans have the greatest distance to OECD and OECD-EU averages in the area of paying taxes. The ease of paying taxes for businesses also varies widely across the region, from 60 in Bosnia and Herzegovina to 82 in Kosovo. Businesses in the Western Balkans generally have to make a high number of payments in order to pay all necessary taxes and it takes a long time to comply with regulations. In three countries in the region businesses need to make over 30 payments, namely in Albania (35), Serbia (33) and Bosnia and Herzegovina (33) in order to comply with their fiscal obligations making it a lengthy and cumbersome process. On average, it takes 244 hours a year for an incorporated business to deal with tax forms in the Western Balkans, compared with an OECD-EU average of 164 hours and an OECD average of 163 hours. Businesses in Bosnia and Herzegovina spend 411 hours per year complying with tax obligations, 2.5 times more than the OECD-EU average and 3.5 times more than North Macedonian businesses.
The World Bank Doing Business index benchmarks regulations affecting SMEs across the world. Doing Business captures several important regulations affecting domestic firms. It provides quantitative indicators on how easy or complicated it is to start a business, deal with construction permits, get electricity, register property, get credit, protect minority investors, pay taxes, trade across borders, enforce contracts, and resolve insolvency. The information on these regulations are summarised in a composite index of Ease of Doing Business. The scores for the composite index and its components are reflected on a scale from 0 to 100, where 0 represents the lowest and 100 represents the highest performance.
The index is established so that it uses simple business cases to ensure international comparability. Doing Business encompasses two types of data and indicators. “Legal indicators,” such as those on investor protections and legal rights for borrowers and lenders, provide a measure of legal provisions in the laws and regulations on the books. “Time and motion indicators” on administrative procedures such as starting a business, registering property and dealing with construction permits, measure the efficiency and complexity in achieving a regulatory goal by recording the procedures, time and cost to complete a transaction in accordance with all relevant regulations from the point of view of the entrepreneur. For some indicators—for example, the indicators on dealing with construction permits, enforcing contracts and resolving insolvency—part of the cost component (where fee schedules are lacking) and the time component are based on actual practice rather than the law on the books.
For more information on the variables used for building the ease of doing business measure, see https://www.doingbusiness.org/en/methodology.
Further reading
World Bank (2019), Doing Business 2019: Training for Reform, World Bank, Washington, DC, https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2019-report_web-version.pdf.
Figure notes
Table 9.9.: Paying taxes - time in hours, measured as a median number of hours required to complete the procedure.
Source: World Bank (2020), Doing Business database (http://www.doingbusiness.org).
Source: World Bank (2020), Doing Business database (http://www.doingbusiness.org).
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