Poverty and the Ease of Doing Business

s usual, I was reading an article in The Economist, when I saw a statement that I so very often see in international development news stories:

Ethiopia’s doors are not all swung wide open to foreign investment, but rather opened selectively. The regime of Meles Zanawi, the prime minister, is ideological and authoritarian: the ruling party and its allies won 99.6% of seats in parliament in the 2010 elections. Its labyrinthine bureaucracy is the bane of the smallest of private businesses.

Basically, developing countries have horrific bureaucracies that stifle business. So, I wondered, what is the correlation between the ease of doing business and poverty?

Using world bank data, I created a graph to look at the relationship between the World Bank’s Ease of Doing Business Index rank and GDP per capita (adjust for PPP in $US). The results are quite striking.

Every increase in rank in the Cost of Doing Business Index is correlated with a 1.8 percent increase in GDP per capita. It’s no wonder that according to the official World Bank report, 36 of 46 sub-Saharan African countries adopted business friendly reforms in 2010/11.