Canada can improve cost of doing business

A recent issue of the Economist magazine showers high praise on Canada. It says we place second of sixty in the Best Countries index, second of 55 in the Most Reputable Countries ranking, and tenth of 163 in the Good Country index. We also captured seventh place out of 38 in the Life Satisfaction Score. We should welcome the praise and feel proud.

But we should not let our heads swell. Buried in the back pages of the same issue is a short note on the World Bank’s most recent Cost of Doing Business report. New Zealand comes out on top as the best country for doing business while Canada does not do as well as it did in the Economist’s ranking, coming in at 22^nd behind the usual suspects of Singapore, Hong Kong, Denmark and Norway and less obvious countries such as Macedonia, Estonia, Latvia and Georgia.

The report bases its findings on realistic scenarios of various types of business transactions. In dealing with construction permits, for example, the scenario assumes, among other things, that the applicant is a privately owned limited liability company with five owners and 60 experienced employees and is fully licensed and insured to carry out construction projects. The project is a two-storey storage warehouse of 14,000 square feet with complete architectural and technical plans that will take 30 weeks to complete. Lawyers, accountants and other experts supply details for the scenarios in their country.

The report presents ranks for the overall cost of doing business in 10 categories. Canada does best in the cost of starting a business (2^nd) and well in getting credit and protecting minority shareholders (both 7^th) and does worst for enforcing contacts (112^th), getting electricity (108^th), and dealing with construction permits (57^th).

And the report’s “distance from the frontier” index (DTF) measures how far an economy falls short of the best performer. The leader gets a score of 100 and the further a country is behind the leader, the lower is its score.  

DTF provides a more significant measure for a country than its ranking. When others are clustered around the best practice, a ranking can be low even though the country operates close to the frontier. The DTF index shows a country’s room for improvement.

On the whole the DTFs correspond well with the rankings. We have the most distance to make up for enforcing contracts and getting electricity where we sit 55 per cent and 64 per cent below the frontier respectively and are closest to the frontier for starting a business with a 98 per cent DTF. The largest gap between our ranking and DTF occurs for trading across borders where, despite our 46^th ranking, we are over 88 per cent of the way to the frontier. 

An additional 100-page report for Canada highlights performance with respect to enforcing contracts, where our ranking has slipped from 95^th in 2016 to 112^th in 2017. The category covers the time required for resolution, the cost of the claim, and the quality of judicial processes. In Singapore, the leader with respect to time, the resolution of a claim takes 164 days, less than a fifth of the 910 days required in Canada. In Iceland, a claim costs just nine per cent of the value at stake, less than half the 23 per cent cost in Canada.

For a country like Canada, the Trading across Borders indicator will be particularly significant. In our case it portrays the cost for a warehouse in Toronto trading with the United States through Buffalo, as the port of entry. The measure includes the time and cost of border and document compliance for both exports and imports. The export transaction consists of vehicles and the imports of containerized vehicle parts, in both cases with a value of $50,000.

Canada does quite well with respect to the times of these procedures with each needing only one or two hours. The costs of border compliance and documentation range from $155 to $172 for exports and imports, compared to $0 in the best performers, not that much for a $50,000 transaction.

For a country so dependent on external trade, our ranking for trading across borders (46^th) might be alarming. Still the distance to the frontier ranks smallest, behind only that for starting a business; our DTF here suggests we are 88 per cent of the way to the frontier. The relatively low ranking for this category may reflect the fact that the costs would be much less for trades within a customs union. Indeed, all the countries at the frontier belong to the European Community.

What conclusions can we draw from the report? It indicates possibilities for improvement in our performance building on the experience of others. Our 57^th ranking and 74 DTF score for Dealing with Construction Permits, for example, suggest that we have lots of room to cut construction costs by streamlining approvals. 

The World Bank’s 10 categories are a good start. Too bad the World Bank did not compare obstacles to internal trade, barriers to the movement of skilled labour, and the difficulties in gaining credentials for foreign professionals. Such a step would not make our provincial governments look good.