The Costs Of Doing Business In Mauritius Economics Essay

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According to the World Bank's Doing Business 2012 report, the ease with which companies can start and run their businesses correlates with the regulations and protection of property rights of countries. In the 2012 report, Singapore ranks first for the ease of doing business and New Zealand tops the chart for starting a business. Many sub-Saharan African countries and Venezuela are at the bottom of the ranking.

In the 2012 Doing Business Report it is stated that "Overall in 2010/11, governments in 125 economies implemented 245 institutional and regulatory reforms, 13% more than in the previous year."

The concept behind the World Bank's Doing Business Report is that daily economic activity of countries is shaped by the laws, regulations and institutional arrangements put in place by governments and institutions. Therefore, the aim of this initiative is to examine these factors, starting with the number of bureaucratic and legal steps required to start a business or to register and transfer commercial property. The Report then delves into how long it takes and how much it costs to comply with regulations, for example time and money needed to enforce contracts, file for bankruptcy or trade across borders. Thirdly, the indicators of Doing Business measure levels of legal protections for investors and property. Finally, Doing Business evaluates the ease of closing a business and the quality of employment regulation.

The Doing Business project also encompasses a sub-ranking on starting a new business. It records all procedures that are officially required for an entrepreneur to start up and formally operate an industrial or commercial business. These include obtaining all necessary licenses and permits and completing any required notifications, verifications or inscriptions for the company and employees with relevant authorities. It also records the time and cost of complying with each procedure under normal circumstances and the paid-in minimum capital requirements. It is assumed that any required information is readily available and that all agencies involved in the start-up process function without corruption. Here we are doing to compare cost of doing business in two countries which are Mauritius and Madagascar.

OVERVIEW OF MAURITIUS

Mauritius has witnessed a massive development in the last decades. From a monocrop economy, depending mainly on sugar, it has diversified its economic activities into textile and apparel industry, tourism and financial services. The economy is also expanding into fish processing, information and communications technology, and hospitality and property development. For most of the period, annual growth has been in the order of 5% to 6%. This remarkable achievement has been reflected in more equitable income distribution, increased life expectancy, lowered infant mortality and a much-improved infrastructure. Mauritius has attracted more than 32,000 offshore entities, many aimed at commerce in India, South Africa and China. Investment in the banking sector alone has reached over $1 billion.

The tourism sector of Mauritius has attained a high level of excellence acquiring international fame and thus has generated a large supply of foreign currency along with the creation of jobs in relation to the tourism industry. The construction of luxurious villas has initiated a new important economic development in terms of foreign investments. Particularly concerned with the ecological and environmental impact brought about by the springing of new infrastructures, the government has engaged itself in the project "Maurice Ile Durable", a long term and ambitious project to integrate ecologically sustained development in all sectors of the Mauritian economy.

Mauritius ranks 46th out of 182 countries in Transparency International's Corruption Perceptions Index for 2011, third in Africa. Mauritius is one of Africa's least corrupt countries. In 2002, the government adopted the Prevention of Corruption Act, which led to the setting up of an Independent Commission Against Corruption (ICAC) a few months later.

Sound economic policies and prudent banking practices of Mauritius helped to mitigate negative effects from the global financial crisis in 2008-09. GDP grew more than 4% per year in 2010-11, and the country continues to expand its trade and investment outreach around the globe.

OVERVIEW OF MADAGASCAR

Madagascar is an extremely biologically diverse, with thousands of unique species of flora and fauna but yet being ranked among the world's poorest countries. It is an island with a population of around 20 million whereby almost 70â„… of the population lives in poverty. Industry in Madagascar is limited to textile manufacturing and agricultural products processing and its economy is dominated by agriculture.

Madagascar has showed chronic political instability and declining economic trends over the past few decades. In the1960s, the country was among the better-off African countries with an educated elite, strong institutions, good infrastructure, and an income per capita above the developing country average. It lost this position after several decades of economic mismanagement and recurrent crisis.

Between 2002 and 2008, Madagascar embarked on an ambitious transformation path that brought gradual improvements in social, economic and governance indicators. The economy grew at an average of five percent per year. But governance continued to be weak, and social indicators were still low by international standards.

However, Madagascar's economy is very fragile and its capacity to absorb further shocks is at a bare minimum. Being an open economy, Madagascar is particularly vulnerable to the global slowdown. Madagascar is also highly vulnerable to natural disasters including cyclones, droughts and flooding. In 2008 cyclones caused economic losses equivalent to four percent of GDP and initial estimates predict similar losses from the 2012 season. The political crisis in Madagascar has exacerbated this fragility further, as the ability to mount even partial public responses has been sharply curtailed.

Since early 2009, the political crisis has led to a decline in economic growth, at the beginning exacerbated by the negative impact of the global financial turmoil on export-oriented activities. Furthermore, Madagascar is faced with the challenge of preserving its unique environment and biodiversity, which is of global significance.

COMPARISON OF COST OF DOING BUSINESS IN MADAGASCAR AND MAURITIUS IN 2010-2011

According to the World Bank's 'Doing Business survey 2010', Singapore ranks 1st for the ease of doing business. Meanwhile Mauritius is ranked 17th out of 183 economies making it the star of the Africa region for the second consecutive year whereas Madagascar is rated 134th for the overall ease of starting of a business. A strong ranking on the ease of doing business index means the regulatory environment is more open to starting and operating a business.

The Doing Business 2012 report, published in October 2011 ranks a record 183 countries on 10 indicators which are as follows:

• Starting a business 

• Dealing with construction permits

• Getting Electricity 

• Registering property 

• Getting credit 

• Protecting investors 

• Paying taxes 

• Trading across borders 

• Enforcing contracts 

• Resolving Insolvency 

Start up cost

Faced with today's financial and economic crisis, policy makers continue to recognize the importance of private businesses and entrepreneurs in creating jobs and driving growth.

Rankings for starting a business are based on 4 indicators as mentioned below:

SOURCE: 2009 The International Bank for Reconstruction and Development / The World Bank

Where does the economy stand?

MAURITIUS VS MADAGASCAR

According to data collected by Doing Business, starting a business there requires 5 procedures, takes 6 days, costs The rankings for comparator economies and the regional average ranking provide other useful information for assessing how easy it is for an entrepreneur in Mauritius to start a business. 3.6% of income per capita and requires paid-in minimum capital of 0.0% of income per capita.

Globally, Mauritius stands at 10 in the ranking of 183 economies on the ease of starting a business in 2010. The rankings for comparator economies and the regional average ranking provide other useful information for assessing how easy it is for an entrepreneur in Mauritius to start a business. However in 2010, Madagascar was ranked 52 for starting a business. This shows that the cost of doing business in Madagascar is relatively increasing, assuming all other factors remaining constant. But in 2011, rating for Mauritius fell from 10 to 12 and from 52 to 70 for Madagascar. There has been a slight change for Mauritius whereas it is a big concern for Madagascar. New Zealand has been ranked 1st for the starting of a business for both 2010 and 2011.

The ease of starting a business in Mauritius over time is shown below:

Starting a business

2008

2009

2010

2011

Rank

10th

12th

Procedures (numbers)

6

5

5

5

Time (days)

7

6

6

6

Cost (% of income per capita)

5.3

5.0

4.1

3.8

Paid-in Min. Capital (% of income per capita)

0

0

0

0

By Doing Business report year

The ease of starting a business in Madagascar over time is shown below:

Starting a business

2008

2009

2010

2011

Rank

52th

70th

Procedures (numbers)

5

5

2

2

Time (days)

7

7

7

7

Cost (% of income per capita)

22.7

11.0

6.2

12.9

Paid-in Min. Capital (% of income per capita)

333.4

289.8

207.4

248.1

By Doing Business report year

For the start up cost Mauritius is ranked 10th while Madagascar is ranked 52th for the year 2010. This is because of the political instability whereby investors are thinking twice before injecting their money in Madagascar. They need to do more market research about Madagascar in order to know whether their companies will be profitable in the latter whereas since there is political stability and development in Mauritius, they will be keen to invest in Mauritius. In addition to this, there is a sound legal system in Mauritius, in which case, it is quicker to incorporate a company in Mauritius than in Madagascar. Since companies want to start production as soon as possible, they will prefer Mauritius to Madagascar. In terms of cost, a country taking less time to incorporate will obviously have a lower cost. Thus, Mauritius has a lower start up cost than Madagascar.

However, cost of start up procedures is lower in Madagascar than in Mauritius. In Mauritius, the State needs to investigate about the company and then it will give the latter authorisation to produce in our island whereas in Madagascar, there is low investigation as the latter strongly need these companies. This implies that start up procedures is lengthier in Mauritius than in Madagascar and it justifies the higher cost of the latter in Mauritius. Nevertheless, for paid-in minimum capital, it is nil for both countries due to the regulation which will attract companies by levering this requirement. There is thus no minimum capital requirement and so, there is no cost for both countries. In the light of the above, apart from cost of start up procedures, start up cost in Mauritius is lower than Madagascar. In general, Mauritius has a lower start up cost than Madagascar mainly due to the former's political stability and its sound legal system while the latter does not possess.

However, the time to register the company for Mauritius was 6 days but for Madagascar, it was 7 days. As such, a company is incorporated quicker in Mauritius than in Madagascar. A possible reason for this is the advancement of Mauritius in the business world compared to Madagascar which is still lagging behind. This will motivate companies to produce in Mauritius as it takes them less time to incorporate their company which in turn will allow them to start business rapidly and possibly earn a higher profit in Mauritius than in Madagascar.

Moreover, cost (â„… of income per capita) for Mauritius is 4.1â„… while for Madagascar, it is 6.2â„…. It means that a company investing in Mauritius will spend less than if it had instead invested in Madagascar. Since the aim of firms to minimise cost and especially, maximise profit, they will prefer a country having a lower cost which is Mauritius. The cost is due to the political instability in Madagascar while on the other hand, Mauritius has a political stability.

For paid-in minimum capital, it is nil for both countries due to the regulation which will attract companies by levering this requirement.

What reforms making it easier (or more difficult) to start a businessin Mauritius and Madagascar is shown below:

DOING BUSINESS YEAR

REFORM

MAURITIUS

MADAGASCAR

2010

No reform

Madagascar simplified business start-up through the streamlining of procedures at the one stop shop, elimination of stamp duty and elimination of the minimum capital requirement.

2011

No reform

No reform

2012

No reform

Madagascar eased the process of starting a business by eliminating the minimum capital requirement, but also made it more difficult by introducing the requirement of obtaining a tax identification number.

By Doing Business report year:

In a nutshell, for start up cost, apart for start up procedures, Mauritius has a lower cost than Madagascar and it explains the ranking of start up business. If Madagascar is able to cure the political instability, it may see it a favourable situation whereby it may even have a lower cost of start up cost than Mauritius.

Dealing with construction permits

Doing Business records the procedures, time and cost for a business to obtain all the necessary approvals to build a simple commercial warehouse in the economy's largest business city, connect it to basic utilities and register the property so that it can be used as collateral or transferred to another entity.

Regulation for construction is necessary to protect the public. But it needs to be efficient, to avoid excessive constraints on a sector that plays an important role in every economy. Many builders opt out due to the fact that complying with building regulations is excessively costly in time and money. They may pay bribes to pass inspections or simply build illegally, leading to hazardous construction that puts public safety at risk.

The indicators reported for dealing with construction permits are based on a set of specific procedures-the steps that a company must complete to legally build a warehouse-identified by Doing Business through information collected from experts in construction licensing, including architects, construction lawyers, construction firms, utility service providers and public officials who deal with building regulations. These procedures are those that apply to a company and structure matching the standard assumptions.

For the dealing of construction permits, Hong Kong is classified at the top position. According to the construction permits ranking, Mauritius is 42th while Madagascar is 107th for 2011 whereas no ranking has been provided for the year 2010. This shows that cost of construction permits is lower in Mauritius than Madagascar. As Mauritius wants to attract investors, it reduces start up costs. To the contrary, Madagascar which is controlled by a dictator increases construction permits in order to increase his wealth. Companies regard construction permits' cost as a burden and since they want to alleviate it, they usually choose companies which has a lower cost of construction permits. Hence, they will prefer Mauritius to Madagascar.

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