Where Does the U.S. Rank in Global Business Friendliness?

March 27, 2013

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Research indicates that American companies and entrepreneurs still benefit from one of the most favorable business climates in the world, but government regulation and oversight may be eroding the country’s advantages.

Research from institutions across the political spectrum, including studies from the conservative Cato Institute and the more liberal Doing Business, both rank the U.S. in the top 20 nations with the most business-friendly regulatory environments in the world. Doing Business puts America fourth overall, while Cato ranks it 18th.

Specifically, the Doing Business rankings focus on the ease of doing business in various countries. A high ranking means “the regulatory environment is more conducive to the starting and operation of a local firm,” averaged across 10 criteria, such as dealing with construction permits, paying taxes, and enforcing contracts, with equal weight given to each.

Under those factors, Singapore ranks 1st, Hong Kong 2nd, New Zealand 3rd and the U.S. 4th, followed by Denmark, Norway, the United Kingdom, South Korea, Georgia, and Australia.

The Cato Institute’s study measures “the degree to which the policies and institutions of countries are supportive of economic freedom,” emphasizing the availability of civic rights such as personal choice, voluntary exchange, freedom to compete, and security of privately owned property. Cato analysts rely on 42 variables to construct a summary index across five basic categories: size of government, legal system and property rights, sound money, freedom to trade internationally, and regulation.

Under Cato’s rankings, Hong Kong is first, followed in order by Singapore, New Zealand, Switzerland, Australia, Canada, Bahrain, Mauritius, Finland, and Chile, while the U.S. places 18th.

Explaining America’s ranking, Cato officials note the U.S.’s “substantial decline in economic freedom during the past decade.” From 1980 to 2000, Cato officials said, the U.S. ranked in the top spot, but slipped to 2nd in 2000, 8th in 2005 and 19th in 2010. Cato points to increasing government regulations as a major cause for the decline.

The Heritage Foundation and the Wall Street Journal partnered to produce the 2013 Index of Economic Freedom, placing the United States at 10th in the rankings, between Denmark and Ireland, which marks the U.S.’s lowest score on the index since 2000.

Explaining the decline, Heritage researchers said reductions in “monetary freedom, business freedom, labor freedom, and fiscal freedom” are dragging down the nation’s economic competitiveness, and that “dynamic entrepreneurial growth is stifled by ever-more-bloated government and a trend toward cronyism that erodes the rule of law... Prospects for greater fiscal freedom are uncertain due to the scheduled expiration of previous cuts in income and payroll taxes and the imposition of new taxes associated with the 2010 health care law.”

Specifically addressing government regulations, the Heritage study explains that “over 100 new major federal regulations have been imposed on business operations since early 2009 with annual costs of more than $46 billion...the failure to adhere to a rules-based monetary policy has introduced price distortions and long-term inflation risks.”

The more positive assessment from Doing Business praises the U.S. for making it easier to start a business, which is typically associated with increases in the number of newly registered firms and sustained gains in economic performance, including improvements in employment and productivity because most economic growth “is driven by the entry of new formal businesses rather than by the growth of existing firms.”

And the Heritage report agrees that business start-up regulations provide a distinct advantage in the U.S. because they’re regulated primarily at the state level, are efficient, and benefit from a flexible labor market.

Doing Business also notes America’s efficient insolvency processes as a strengthening factor, which have helped major companies survive through restructuring, whereas many economies lack a restructuring framework entirely. Along with Denmark, the U.S. also allows fixed-term contracts for permanent tasks, which “encourages businesses to hire young workers” and provides a competitive advantage for the U.S. economy.

The Heritage Foundation highlights some areas of concern for the U.S. economy. Giving the U.S. high marks for protecting property rights overall and “predictable” independent judiciary functions, the study notes that the government’s “treatment of the property rights of certain bondholders during the 2009 bailout of the automotive industry raised long-term questions about the rule of law,” mentioning that corruption “is a concern,” as are “cronyism and economic rent-seeking” associated with the growth of government, which have all undermined institutional integrity.

 

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