Since summer 2007, when the crisis in Europe started and later burst big economic bubbles, we have been talking about state debt, the state debt/GDP ratio, savings in all governmental areas, and so on. Over the course of the last years we have seen the Troika (European Commission, European Central Bank, and IMF) recommending recovery adjustment programs, and the discussion has again been around where money can be saved.
But if you look twice at those programs, you will find out that they don’t talk solely about savings – they also very often refer to the so-called business environment.
The “business environment” can be defined as a combination of internal and external factors that influence a company’s operating situation. The business environment can include factors such as: clients and suppliers; its competition and owners; improvements in technology; laws and government activities; and market, social and economic trends.
But why is that? Because if your target is to bring down the state debt/GDP ratio, there are two levers – decrease state debt or increase GDP. If we consider both of these, we will arrive at the task of building an investment-friendly business environment to attract entrepreneurs and also well-established companies – domestic and abroad – to found new businesses or expand existing ones, to create jobs, to create wealth. The goal is to revert to a high level of fiscal and economical sustainability.
But of course this is not just an issue for the European states that are affected by the crisis. If you observe Africa or other developing areas, you will notice that they are working on the same targets: not to revert to a certain level but to achieve a sustainable one and further develop their countries. Unemployment rates are high in Africa, and a lot of young people desperately search for jobs or any kind of vocation. They strive for wealth just as people do in other parts of the world. Of course, inspiring entrepreneurs and foreign and domestic investors to propel the pace of development is high up on their local political agenda.
But what makes a Business Environment “Good” or Even “Excellent”? It is amazing how heavily interwoven topics around the business environment are with all the relevant programs in the savings arena. Looking at the government’s playing field in savings, you will certainly recognize that taxes, social programs, a decent public finance management, and expenditures such as on healthcare or higher education have a direct impact on the business friendliness of a country. The interconnection is simple. The tax system can be more or less business-friendly. Higher contributions to social systems lead to higher labor costs – which may lead to lower attractiveness. If your state debt is high you might run into crowding-out effect – which again has a negative impact on financing businesses in your country. And remember that the effectiveness and efficiency of the overall government administration has a major impact on its ability to delivery high-quality services in an appropriate time. If the administrative burden to be carried by potential investors is too high, this apparently is a negative for a country’s attractiveness.
To Be Continued
Next time: Ways of “Measuring Attractiveness”