Small firms blossom as red tape wilts

THE BARBERÍA Charly has been open for only two months but demand for the hairdresser's speciality cut - a military style known as the corte inglés - looks pretty healthy, with up to 30 hard-looking young men passing through the premises each day.

The barber, Carlos Vañegas, a former army sergeant, says setting up his own salon has been easier than he expected, mainly because of the way the local council in Tegucigalpa, the capital of Honduras, has been slashing red tape.

"It took a few hours to do all the paperwork," says Vañegas (30). "I don't think we would have opened had it been like it was."

Obtaining formal status for his business made it easier for Vañegas to borrow 40,000 lempira (€1,337) to equip the shop.

Vañegas is not the only small trader to benefit. Over the past year or so, the mayor's office in Tegucigalpa has reformed an antiquated registration process, reducing the number of procedures to obtain an operating licence from 180 to just 25.

Entrepreneurs formerly had to fill in 35 forms. Now they can be up and running with three. Obtaining an operating licence used to take more than a month, but can now be done within a day.

Since the start of last year, more than 8,000 restaurants, workshops, grocers and other businesses have been registered in the city, increasing the number of those formally registered from 22,000 in 2005 to 34,000, and making an appreciable dent in Honduras's sprawling black economy, which accounts for more than 50 per cent of economic output and is one of the biggest in any developing country.

Under previous rules, small businesses had to take their applications through the same tortuous procedure as the biggest and most risky businesses. It was virtually impossible without the involvement of agents, who earned a 10 per cent commission for guiding applications through the process. "It was completely out of control before. Complete chaos," says Jorge Alberto Velasquez, one of the surviving agents.

The contrast today could not be greater. Even for bigger businesses, the rules are simpler.

The Honduran experiment is one of a number under way in developing countries.

The idea that governments should do more to alleviate poverty by capitalising on the potential of the informal economy surfaced in the 1980s.

The International Finance Corporation (IFC), the private-sector arm of the World Bank, which has advised the Honduran government, has been working on the issue for more than a decade.

Doing Business, a report the IFC publishes annually comparing how easy it is to open and close businesses around the world, provides a benchmarking system that allows comparison between governments and measures progress.

Noting that many of the biggest blocks are at municipal or state level, the IFC has also begun working with 184 local governments in 10 Latin American countries, including three of the poorest, Bolivia, Nicaragua and Honduras. Again, a score chart helps mayors and governors measure their progress.

Perhaps significantly in a country traditionally hamstrung by clientelism, mayors from both the left-of-centre governing Liberal party and the more conservative National party that runs Tegucigalpa are backing the changes. "The logic is simple," says Tegucigalpa mayor Ricardo Álvarez. "If you have a permit, it opens doors. You can get credit. At the end of the day you can grow." - (Financial Times service)