16 do. Slovenia—the most developed in the CEEC/CIS group—has better regulatory climate than only Ukraine and ranks 19<sup>th</sup> . Hungary, which attracted huge amounts of FDI, Poland, ranks 10<sup>th</sup> below Russia and Poland. The latter, the bold reformer during the initial stages of transition in the early 1990’s ranks below the two Transcaucasian states—Armenia and Georgia. Last but not least, Bulgaria has more hostile regulatory environment than 12 CEEC/CIS countries including, in addition to the above-mentioned, Kazakhstan and Kyrgyz Republic.

The results may be counterintuitive but revealing. Note that rankings take into account simplicity and cost of formal business regulations. They do not address corruption, illicit payments, taxation and other informal interventions that might be pursued by respective administrations. Simple regulations convolutedly executed may be as bad, if not worse, than more complex ones enforced by less corrupt administration.

In order to address these other components affecting the cost of doing business, we supplement the formal ease of doing business with information on the size of informal economy. In consequence, a greater weight is given to formal regulations in some areas, directly affecting decisions to stay or exit shadow economy (e.g., access to credit and contract enforcement). It also indirectly captures other aspects of administration/business interplay including corruption.<sup>7</sup> Table 8 presents the values of ‘revealed’ ease of doing business calculated as an average of formal ease of doing business and the normalized size of the informal sector taking the lowest size of informal economy as percent of GNI from the CIS/CEEC group as 100.

**Table 8:** _The size of informal economy and ‘revealed’ ease of doing business_

||Informal economy<br>% of 2003 GNI|“Revealed’ ease of doing<br>business|Ranking in ‘formal’ ease<br>of doingbusiness|Current ranking|**Memorandum:**<br>CPI,2000-04|
|---|---|---|---|---|---|
|Slovak R.|18.9|78.5|3|1|3.8|
|Czech R.|19.1|77.8|4|2|3.9|
|Estonia|n/a|74.0|5|3|5.7|
|Lithuania|30.3|64.2|1|4|4.7|
|Hungary|25.1|61.5|10|5|4.9|
|Poland|27.6|58.2|8|6|3.8|
|Latvia|39.9|53.9|2|7|3.8|
|Slovenia|27.1|53.7|19|8|6.0|
|Uzbekistan|34.1|47.7|15|9|2.5|
|Romania|34.4|47.2|16|10|2.7|
|Armenia|46.3|46.8|6|11|3.0|
|**Bulgaria**|**36.9**|**46.4**|**13**|**12**|**4.0**|
|Kyrgyz R.|39.8|45.8|12|13|2.2|
|Kazakhstan|43.2|44.6|11|14|2.3|
|Russia|46.1|44.4|9|15|2.7|
|Moldova|45.1|41.4|14|16|2.3|
|Georgia|67.3|39.3|7|17|2.1|
|Belarus|48.1|39.2|17|18|4.1|
|Ukraine|52.2|34.6|20|19|2.3|
|Azerbaijan|60.1|34.5|18|20|1.9|

Note: CPI—Corruption perception index, the average for 2000-04. It assumes values between 1 (maximum incidence of corruption) and 10 (minimum) Source: Own calculations based on data in WB 2005a and Web site of Transparency International.

The change in ranking is rather dramatic and brings it more in line with expectations. Slovenia moves up 11 positions to join other new EU member states that have moved decisively to the top eight positions in terms of real business friendliness of regulatory regime taking into account the extent to which entrepreneurs prefer to stay in the shadow economy. So has Romania by six positions. Bulgaria’s ranking, however, has barely changed.

> 7 The correlation between the values of Corruption Perception Indices, as reported by Transparency International, and the size of informal sector in percent of GNI for CEEC/CIS states is 67 percent. For a discussion on why and how this indicator is derived, see Kaminski (2005a).