Friday, 10 January 2014

Hindering growth from within: Start-up costs

I'm sure you've all heard of it. It's been around the news for so long we do not even pay attention to it any more. It has become the favourite catchphrase of politicians and policymakers when they want to show they are sympathetic towards the perils of the populace. But it is often vague, it appears rather cold and insensitive and it lacks application. The word we are looking for here is growth.

It's all we've been hearing for the past couple of years. First came Ireland during the sub-prime lending crisis, then Greece, with each subsequent Prime Minister promising policies to rejuvenate growth, then Spain, then Italy, then Cyprus and even Germany. But most promises were nothing but thin air. The more we talk about growth, the more "emphasis" placed on the problem of youth unemployment, the more youngsters stayed out of the job market and the more GDP contracted. The latest (seasonally adjusted) data show that the trend is still on the rise:
Who's to blame for this? Some point at the ECB who has done very little  in order for the euro to survive (as they claim). I beg to differ. As already said the ECB's "whatever it takes" declaration was interpreted as a positive sign by the markets (although we usually forget this, markets are nothing but the collective wisdom of many humans). Then who might the reader ask? The EU? It's policies? No, not really. The simple answer is the Member-States themselves.

What follows is graph of the start-up costs per country, as obtained by the EU website, adjusted by the effective exchange rate. Note that the official EU "encourages" countries to allow for a set-up of under 3 days, at a cost of less than 100 euros. 
Of the 5 countries who required assistance or were in trouble during the crisis, Italy has the highest cost at 2046, followed by Greece at €1007, Portugal at €360, Cyprus at 265 and Spain at €120. Ireland is the only country which abides by the EU standards at €56. Things don't fare better when it comes to days of required to set-up a new business: 5 for Greece and Cyprus, 2-5 for Ireland, a surprising 1 for Portugal and Italy and a whooping 17.5 for Spain. Multiply the cost with the days required to set up a business and a rather different setting occurs:
While the multiplication may appear to be rather arbitrarily chosen (although the idea resembles the Misery Index) it shows the relative cost per country better than just the cost of setting up a business. For example, even though it just costs 120 to set up a business in Spain, the 17-day delay will mean that the cost rises; and note that the official amount of days is most likely the best case scenario where the application is perfectly completed with no mistakes at all, from either side. In this new setting, Greece dominates. It takes more than 1000 euros and 5 days  to set-up business there, in the best case scenario, at a total "cost" of 5036. Not that Northern countries would fare better: Germany would get 1445 in the above index, with Sweden at an even worse 2933. From what it appears, most Member-States need more than "encouragement" to do things like they should.

This unwillingness, nevertheless makes things tougher for their citizens. Think about it for second: what do start-ups have in abundance and what do they mostly lack? The answers are willingness and money respectively. Why should one bother with high costs and a mountain of bureaucratic obstacles (such as most periphery countries) and not set up a business elsewhere? That is why there has been a flight of the periphery's brightest to the North. As the Wall Street Journal notes, Ireland is ranked the most entrepreneurial country in the EU (the cost in the above index is a very low €196) followed by Sweden, the UK, Finland and Denmark. Not surprisingly, there were no periphery countries in the top 10 list. In fact, Europe actually lacks start-ups as The Verge points out

In order for unemployment to fall, we need new job openings. In order to get more job openings we need more investment. (Don't take my word that start-up costs hinder growth. Nobel laureate Christopher Pissarides and his colleagues showed evidence about this argument more than 10 years ago.) For investment we need two things: sufficient current demand or high potential demand and institutional support. Even if the periphery has the former it certainly lacks the latter. Why does this occur though? In a discussion with an MEP, she noted that there is a built-in resistance to changing these issues; perceived voter pressure is what holds them back. 

The magic word here is perceived. I doubt that any citizen would object to doing things faster than at the moment and I can really find no sane argument against that. If we all want more jobs and more investment in our countries then why should we object to this from within (and blame the EU about it) when we can do something to overcome these issues? It's rather odd to act like a victim when you are the culprit. So please, next time a politician speaks of growth and policies, just point the start-up costs and time needed to form a business.

P.S. There are more than one ways to build a better structure for start-up support. One of these ways has been online by fellow bloggers Horatiu Ferchiu, Alex Ghita and yours truly since 2012. Here are the links:


  1. Here's a thought - maybe what could be done right away is to allow fro start-ups to operate on a low key fro the first 3 months - minimum paper trail, minim requirements - that would allow the start-up to begin operating right away, and the 3 month period would allow for the completion of more complicated national procedures. If discussing financial aid, then it should be available after completion of all procedures (3 months in).

    1. That is a very good point; but I think that changing the legislation to streamline the process would not be that time-consuming. It just requires action instead of meetings

    2. True. I'm pretty sure all governments have a way to change this type of legislation, that is usually organic, very fast.

    3. Exactly. Especially if it is supported by the EU

    4. But it might just not be in their interest to do so.