Business Climate and Failed States

This morning I launched a new business. Although I had to fill out many forms and submit fees to various government agencies, this process has been remarkably easy. In fact, I live in a country that offers helpful public resources to support entrepreneurs. For  entrepreneurs in failed states, starting a business is an arduous and expensive task, and one that is frequently abandoned.

People can reasonably disagree about how much businesses should be regulated. Most, however, would concur with the sentiment that the private sector should be restrained no more than necessary. This principle is especially important with regard to forming a new business. If it is too difficult to legally form an enterprise, whole economies suffer. The dynamism of free markets is suppressed. Prospective entrepreneurs will remain without work or under-utilized as employees of existing companies. And black markets will flourish.

The Burden of Bureaucracy

This collage features Franz Kafka and Max Weber, two authorities on bureaucratic obstacles. Illustration credit: Harald Groven (via Flickr, Creative Commons license).

It will come as no surprise that it is very difficult to start a business in failed states. Beyond the challenges of poor infrastructure and under-educated populations, poor governance hinders entrepreneurial activity. Each year the Heritage Foundation and the Wall Street Journal publish an “Index of Economic Freedom.” I don’t agree with all of the ideological judgments behind the index, but it is nonetheless a very valuable dataset.

One of the ten criteria assessed in the index is “Business Freedom,” which is defined as follows:

Business freedom is a quantitative measure of the ability to start, operate, and close a business that represents the overall burden of regulation as well as the efficiency of government in the regulatory process. The business freedom score for each country is a number between 0 and 100, with 100 equaling the freest business environment.

Poor performance on this criterion is common among failed states. Poor performers on “business freedom” are frequently referred to on this blog. These countries include: North Korea, Haiti, Zimbabwe, Central African Republic, Democratic Republic of Congo, and Myanmar (Burma).

In contrast, my home state of Virginia offers a “Business One Stop,” for new businesses. And, based on my experience, Virginia deserves the praise it receives for business friendliness. (Sorry, I couldn’t resist a bit of local boosterism.)

Weak and Failed States in 2012

The year 2012 was an eventful one for the world’s weak and failed states. What follows is a quick review of some key trends and highlights from the year that was.

In Afghanistan, the “forgotten war” continued. A long-sought political settlement with the Taliban proved elusive as NATO and the United States prepared for a full military departure in 2014. Insider attacks by Afghan government security personnel on NATO soldiers grabbed headlines, as did continued evidence of widespread corruption and dysfunction in the Afghan government. Afghan watchers are very nervous about the post-2014 era.

In 2012, Pakistan muddled along on a variety of fronts. Relations between Pakistan and the United States remained very strained, even as cooperation improved somewhat by the end of the year. Most critically, the military establishment has strengthened its position with regard to the country’s politicians. Civilian control of the military is only an aspiration at the present time, and true democracy is therefore on hold. Militant attacks on aid workers halted efforts to eradicate polio in Pakistan’s border regions.

In Syria, the ruling Assad clique fought a losing effort of regime survival. If last year was a tragic year in Syria, the year ahead may be catastrophic. The United Nations warns that this key crossroads state could produce more than one-half million refugees in 2013. Intense urban warfare in Damascus and Aleppo could lead to truly awful humanitarian conditions.

Tuareg Rebels in Mali

Mali, previously stable and democratic, suffered major setbacks in 2012. Photo credit: Magharebia (via Flickr, Creative Commons license).

In three African states, Mali, the Democratic Republic of Congo (DRC), and the Central African Republic (CAR), insurgents secured or expanded zones of open defiance. Governments lost the ability to control vast portions of territory, a key marker of state failure. The troubles in the DRC, related to the M23 rebel group, were particularly noteworthy. Rwanda and Uganda again meddled in the internal affairs of their large neighbor, as they did during Africa’s World War of the 1990s and early 2000s.

Despite gains in governance and economic development over the last decade, Nigeria continued to suffer the effects of a well-organized Islamist insurgency. Boko Haram does not seem to represent a mortal threat to the central government, but the Islamists’ activities are further straining religious coexistence in a deeply divided country.

Finally, I close this review with some hopeful developments. In Southeast Asia, the long-mismanaged Myanmar (Burma) is moving towards political openness and engagement with the rest of the world. Though sometimes ignored due to its location between China and India, Burma is an important, resource-rich state that deserves more attention. And Burma seems to be steadily moving in a positive direction, thanks in part to a more enlightened set of autocrats.

Aung San Suu Kyi

Burma’s opposition and pro-democracy leader, Aung San Suu Kyi. Photo credit: World Economic Forum (via Flickr, Creative Commons license).

In the Horn of Africa, 2012 was a relatively good year for Somalia. The Western-financed AU mission is helping the Mogadishu-based government push back militant Islamists. Al-Shabaab lost a huge amount of territory in the last year. And, whatever the reasons, maritime piracy off Somalia declined in the last 12 months.

In Latin America, a new narrative is emerging in Mexico, and perhaps all of Central America. In Latin America’s second giant, economic development and new political momentum is shifting the discourse away from drug violence, even though that violence is still stubbornly high.

Natural Disasters and Failed States

I live in the Mid-Atlantic region of the United States, and we are currently being pounded by a 800-kilometer wide hurricane (cyclone). This week’s storm refocuses our attention on natural disasters. Aside from their physical power, these events tell us much about societies and development around the world.

The most basic fact about natural disasters around the world is the highly variable death tolls they bring. Major disasters in developed countries are considered very deadly if they kill a few hundred people. Storms, earthquakes, or droughts of similar intensity can kill thousands, or even tens of thousands, in developing countries. True, it can be challenging to compare the severity of disasters in different contexts, but the basic global pattern is stark and sobering. With the important exception of Japan’s mega-disaster in 2011, modern mega-disasters exclusively occur in poorer countries, and especially those with weak governments. Here are just a few recent catastrophes:

  • Haiti earthquake (2010): more than 200,000 killed
  • Myanmar (Burma) cyclone (2008): more than 130,000 killed
  • Pakistan earthquake (2006): more than 70,000 killed
  • Indian Ocean tsunami (2004, Indonesia and other countries): more than 270,000 killed
  • Bangladesh cyclone (1991): more than 130,000 killed

And, lest you think that developing countries are simply more prone to natural disasters, North America (and the United States especially) is the most disaster-prone region in the world.

Why, then, do developing countries experience so much more loss of life in natural disasters? The answers are many, and vary by the type of disaster. In general, though, poor and weakly governed states suffer from the following problems:

  • Less effective advanced warning.
  • Illiteracy and lower levels of education.
  • Less sturdy buildings and infrastructure.
  • Less effective land use planning.
  • Slower and less effective disaster recovery.
  • In some cases, an unwillingness to accept international assistance, as with the case of Myanmar after Cyclone Nargis in 2008, and North Korea during various episodes of famine.

On a positive note, some developing countries are dramatically improving their disaster preparedness and response. Chile, for example, sustained relatively few casualties after a massive 8.8 magnitude earthquake in  February 2010. Even though major population centers were affected, only about 500 deaths were reported. Progress is possible.