JEDDAH, 6 December 2005 — The World Bank produces an annual index known as the “Doing Business Index” which evaluates the ease of doing business in 155 different countries. The index ranks the different countries from 1 to 155. It is calculated by using the simple averages of country percentile rankings in each of 10 business areas evaluated by the World Bank.
In this year’s index, New Zealand ranks first and the Democratic Republic of the Congo ranks last. Saudi Arabia’s overall ranking is a respectable 38 out of 155. The countries ranked include all the advanced industrial ones as well as the Asian tigers, China and India. Saudi Arabia’s position is only three slots below Taiwan and above all other listed Arab countries.
If, however, we break the overall ranking into the ten areas, the picture that emerges is somewhat different and it becomes apparent that business development and the ease of doing business in Saudi Arabia are uneven. It would be more accurate, then, to look at the ten areas in order to accurately understand the Saudi business environment.
The ten areas the World Bank uses in the calculation of the index are: Starting a business, dealing with licenses, hiring and firing workers, registering properties, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The data used in the evaluation is from January 2005. On the overall ranking of the ease of doing business, as we have seen Saudi Arabia ranks 38. Looking at the ten areas, Saudi Arabia ranks 147 in starting a business; 34 in dealing with licenses; 28 in hiring and firing workers; 3rd in registering properties; 56 in getting credit; 74 in protecting investors; 5 in paying taxes; 87 in trading across borders; 95 in enforcing contracts; and 67 in closing a business.
Saudi Arabia does well when it comes to registering properties and paying taxes; and fairly well when it comes to dealing with licenses, getting credit, and hiring and firing workers.
Nonetheless, entrepreneurs and businessmen face real problems when it comes to starting a business, getting credit, protecting investors, trading across borders and enforcing contracts. The five business areas where the country’s performance is very weak are certainly the most important and most sensitive ones. The five areas are all important but there are three that could be measures for the readiness of the Saudi economy in to integrate with the rest of the world after joining the World Trade Organization (WTO).
Establishing a new business is truly a big challenge in Saudi Arabia which ranks 147 in this area. According to World Bank statistics, it takes 13 steps to launch a business which extends into an average of 64 days at a cost equal to 68.5 percent of gross national income (GNI) per capita. In addition, those setting up a new business must deposit at least 1,236.9 percent of GNI per capita in a bank in order to obtain a commercial registration number. In starting a new business, Saudi Arabia is behind all other Arab countries on the list with the exception of Yemen which ranks 151. As a comparison, in the Middle East and North Africa (MENA), it takes an average of 10 steps to launch a business which can be done in about 45 days, at a cost equal to 64.2 percent of gross national income (GNI) per capita, and the entrepreneurs must deposit at least 859.3 percent of GNI per capita in a bank in order to obtain a business registration number.
After joining the WTO, people expect to see the opening of many new businesses in the Kingdom, especially foreign ones. Thus, the ease of starting a new business is vital in order to attract new investors to the country. Also, the ease of starting a new business will contribute to the absorption of unemployed Saudi youth who possess some entrepreneurial skills but who cannot find jobs when the labor market is tight.
Trading across the borders is another major area that needs attention in order to ensure the success of the Saudi economy in integrating with the global economy. In this area, the costs and procedures involved in importing and exporting a standardized shipment of goods into and out of Saudi Arabia are considered in detail. The World Bank recorded every official procedure involved - beginning with the initial contractual agreement between the two parties, and ending with the delivery of the goods which are the subject of the contract. To export from Saudi Arabia, it requires 5 documents, 12 signatures, and 36 days; and to import, 9 documents are required, 18 signatures and 44 days. Evidently this problem is not limited to Saudi Arabia because the average figures for the MENA region are similar to those of Saudi Arabia, which reflects the region’s poor integration into the global economy. In the OECD (Organization of Economic Cooperation and Development) where the majority of international trade takes place, things are brighter. It takes an average of 5 documents, 3 signatures and 12 days to export; and 6 documents, 3 signatures, and 14 days to import.
The third topic is enforcing contracts. Enforcing commercial contracts is not easy in Saudi Arabia but it is one of the major factors that investors take into consideration when they are thinking of investing in any country. Without a proper legal infrastructure that protects the investors’ money, it is difficult — if not impossible — for them to have faith in the economy. Moreover, this shows the capability of the legal system to deal with commercial disputes and conflicts. In Saudi Arabia, it requires 44 steps and 360 days to enforce contracts at a cost equal to 20.0 percent of the original debt. This is discouraging for local companies since small and medium sized ones cannot bear the costs and the time necessary for them to enforce a commercial contract.
The overall ranking suggests that Saudi Arabia is becoming, both regionally and globally, a good place to do business. At the same time, if Saudi Arabia wants to become a dynamic member of the WTO, then more attention must be directed to the country’s performance in the five major areas where the country’s ranking is low. In addition, it is important that Saudi Arabia attains a level similar to that of OECD members in order to ensure that the country continues to attract new investments.
