17 What does it all say about business climate in Bulgaria as compared to other former centrally planned economies? In contrast to Slovenia or Romania, Bulgaria has a simpler formal regulatory regime but overall less business-friendly climate. Complexities of Slovenian formal arrangements do not discourage businesses from going formal. On the other hand, simpler regulations in Bulgaria do. The question to which we shall now turn is what are these other ingredients erecting barriers to conducting business in Bulgaria. We shall take a closer look at areas of formal cost of doing business there.

In relation to other CEEC/CIS economies Bulgaria’s regulatory environment scores particularly low on labor market flexibility, protecting investors, starting a business and on system of property registration (see Table 7 above).<sup>8</sup> All are important: labor market flexibility augurs well for boosting domestic economic activity and attracting FDI,<sup>9</sup> and ease of registering property is the necessary condition, albeit not sufficient, to bring assets into formal sector which, in turn, allows using them to obtain financing. Data in Table 9 corroborate these observations.

**Table 9:** _Doing business in Bulgaria, Lithuania, and New Zealand and in ‘best regulatory environment’ in 2004_

|**_Area_**|**_Indicator_**|**_Bulgaria _**|**_Lithuania _**|**_New Zealand_**|**_Best practice_**|
|---|---|---|---|---|---|
|**Starting a business**<br>|Number of procedures<br>Time (days)|10<br>32|8<br>26|2<br>12|2<br>2|
||Cost (% of income per capita)|10.3|3.7|0.2|0.0|
||Minimum capital(% of incomeper capita)|116.6|62.8|0.0|0.0|
|**Hiring and firing workers**<br>|Difficulty of hiring index (0-100)|33|33|11|0|
||Rigidity of hours index (0-100)|40|60|0|0|
|<br>|<br>Difficulty of firing index (0-100)|10|30|10|0|
||Rigidity of employment index (0-100)|28|41|7|0|
||Firing costs (weeks)|30|34|0|0|
|**Registering property**|Number of procedures|9|3|2|1|
||Time (days)|19|3|2|1|
||Cost (%ofpropertyvalue)|2.4|0.9|0.2|0.0|
|**Enforcing contracts**|Number of procedures|34|17|19|11|
||Time (days)|440|154|50|27|
||Cost(% of debt)|14.0|14.1|4.8|4.2|
|**Closing a business**|Time of insolvency (years)|3.3|1.2|2.0|0.41|
||Cost (% of estate)|8.0|8.0|4.0|1.0|
|<br>|<br>Recoveryrate (cents onthe US$)|34.2|52.4|71.4|92.0|
|**Protecting investors**|Disclosureindex(0-7)|2|6|5|7|
|**Getting credit**|Cost to create collateral (% of income per<br>capita)|1.0|4.1|0.0|0.0|
||<br>Legal rights index (0-10)|6|4|9|<br>10|
|<br>|<br>Credit Information Index (0-6)|4|3|5|<br>6|
|<br>|<br>Public registry coverage (per 1,000 adults)|13|44|0|637|
|<br>|<br>Private Bureau Coverage (per 1,000<br>adults)|0|0|978|1,000|

Source: data from _Doing Business in 2005. Removing Obstacles to Growth_ . The World Bank and Oxford University Press, Washington DC, 2005.

Considering that Bulgaria has to compensate for its relative longer distance to EU markets than most other new EU member states, the frame of reference for Bulgaria’s regulatory reforms should be at least Baltic states. They are even more remotely located than Bulgaria from the center of EU economic gravity 8 It is interesting to note, however, that labor regulations are the fifth most problematic regulatory constraint, with almost 18 percent of respondents to the FIAS survey picking it up as a “major” or “very severe” problem. Yet, since in 2002 labor regulations were the second leading specific regulatory constraint, after tax administration, this suggests an improvement (FIAS 2004, p. 24).

> 9 As a recent study (Javorcik and Spatareanu 2004) shows, the magnitude in labor market flexibility is significant. For instance, with the flexibility of the host country labor market increasing from the level of Slovakia (inflexible prior to recent reforms) to the level of Hungary (flexible), the volume of investment goes up by between 14 and 18 percent, all else being equal. Moreover, FDI in services sectors appear to be more sensitive to labor regulations than investments into manufacturing