The SDG Temple of Justice
The Fourth Pillar: Business Rights
The eight pillars of legal empowerment
of the SDG Temple of Justice
The blueprint presented here seeks to help realize the Sustainable Development Goals (SDGs) by leveraging the human rights foundation of SDGs through the eight pillars of rights relating to legal empowerment of people including the poor and disadvantaged groups.
The SDG Temple is further intended to be used as an SDG Acceleration Tool that seeks to mainstream human rights-based and market-based approaches to development in the work of national SDG policy makers and implementers. Within this holistic approach, legal, economic and technological empowerment of people (including the poor and disadvantaged groups) is put forward as a universal means of addressing “the greatest global challenge of eradicating poverty” while “leaving no one left behind” as stipulated in the 2030 Agenda.
Why business rights matter for the SDGs?
"Governments have the enormous task of fostering an enabling environment for entrepreneurs and small and medium-size enterprises. Sound and efficient business regulation is critical for entrepreneurship and a thriving private sector. Without them, we have no chance to end extreme poverty and boost shared prosperity around the world" (Doing Business - 2019, World Bank).
Facilitating the success of enterprises (most importantly small and medium enterprises) by ensuring their rights to vend, to have a workspace and related infrastructure and services (electricity, water, sanitation, etc) would be an invaluable step towards poverty reduction (UN HLCLEP*).
LEEG-net considers the Ease of Doing Business (EODB) score as an effective indicator for measuring the “SDG-readiness” of national business regulatory frameworks. The EODB score has been developed by World Bank’s Doing Business annual report team to indicate an economy’s position to the best regulatory practice in relation to 10 indicator sets – the best score is set at 100, and the worst performance is set at 0.
LEEG-net believes that a considerable number of SDG targets related to poverty eradication can be easily achieved if countries maintain an EODB score of over 80.
As supported by empirical evidence, actions taken by State institutions that promote, protect and assure the rights of businesses (irrespective of their size) have had a direct impact on reducing poverty. Such actions would therefore immensely help achieve the Sustainable Development Goals 1, 2, 5, 8 and 10 in particular.
Doing Business 2017 reported that economies with poor quality business regulation have higher levels of income inequality on average (This relationship can be partially explained by the strong association between measures of poverty and the distance to frontier score).
As reported in Doing Business 2018:
Doing Business data supports that there is a strong association between inequality, poverty and business regulation.
Economies with better business regulation have lower levels of poverty on average. Indeed, a 10 percentage point improvement in the distance to frontier is associated with a 2 percentage point reduction in the poverty rate, measured as the percentage of people earning less than $1.90 a day.21
When business regulation is overly cumbersome, entrepreneurs and workers are pushed out of the formal sector and must resort to operating in the informal sector (de Soto 1989, Dabla-Norris, Gradstein, and Inchauste 2008). The informal sector is characterized by a lack of regulation, minimal social protection and increased levels of poverty.
Fragility is also a factor linked to poverty. However, even fragile economies can improve in areas that ultimately reduce poverty levels. Despite their fragile status, several economies implemented reforms as captured by Doing Business 2018 (box 1.2).
The informal sector is characterized by a lack of regulation, minimal social protection and increased levels of poverty. Individuals living in poverty are likely to gain the most from smarter and more streamlined business regulation.
* The UN High Level Commission on Legal Empowerment of the Poor (2005 - 2008) (UN HLCLEP)
Some observations on Business Rights and the Agenda for Business Rights made by the UN High Level Commission on Legal Empowerment of the Poor (UN HLCLEP) are worth reproducing here:
Most of the world’s poor entrepreneurs operate informally, and as a consequence a considerable share of the economy in developing countries is informal. The poor occupy land that they do not hold title to, work in small, unregistered businesses, and have difficulty accessing finance and markets, and can rarely obtain tax breaks and other business incentives.
In many developing countries, poor entrepreneurs ill not be able to create a legal identity, obtain limited liability, associate with other entrepreneurs to integrate capital, access financial mechanisms to obtain liquidity, extend credit, contract with employees, suppliers and customers, access export opportunities, and much more.
When the laws regulating small businesses are unfairly drafted, implemented, or enforced, or are simply too weak and inefficient, they leave the poor little option but to trade in the informal economy. Obtaining a license, the first step to registering a business, is often prohibitively expensive and difficult. Costly and cumbersome regulations prevent poor people from bettering themselves through enterprise, and stifle the economy’s development.
An Agenda for Business Rights
Economic policies and commercial law, which in the great majority of poor countries are most often geared to large enterprises, have to change to become inclusive of the vast numbers of business owners at the base of the economic pyramid. Reform of these policies and legal frameworks should focus on helping informal businesses use all of their assets to operate productive and profitable enterprises. Key elements in efforts to achieve these aims include:
A package of business rights underlined in policies, and instituted and enforced through regulatory bodies
Irrespective of their size or growth potential, the rights of all those operating informal businesses must be recognized. These include the right to work and to incorporate a business, which necessitates the ability to vend, occupy a workplace, and access basic infrastructure such as shelter, electricity, water, and sanitation. As informal businesses grow they will need additional legal rights and protections, such as the ability to obtain tax breaks, export licenses, and access to services like transport and communications.
Efforts to strengthen basic business rights must be based on an in-depth knowledge of local practices, and, where possible, incorporating them into the legal framework. Creating mechanisms and financing to provide social protection to informal entrepreneurs is also important, as are legal mechanisms that help people operate and expand their businesses once they have entered the market. Absence of commercial rights, including rules relating to entity shielding, limited liability and capital lock-in, and perpetual succession of the firm as well as manager and employee liability rights and protection of minority shareholders, increases the likelihood of businesses returning to informality.
Streamlined administrative procedures
Administrative barriers are the bureaucratic requirements that flow from regulations, their implementation, and enforcement. A regulation may be well designed, proportionate, and efficient, but its true effect on enterprises comes from the way in which it is administered.
Administrative barriers are the hassle that dissuades informal enterprises from wanting to interact with government officials. The regulations imposed on business fall into several categories. Some regulations governing business start-ups raise the costs of entering the formal sector. Other regulations govern ongoing business activity, and still others affect closing a business. The central authority dictates some of these regulations while regional or municipal governments determine others. Furthermore, small businesses face government-imposed costs in the areas of labour practices, payroll charges, health and safety standards, taxation, and foreign trade.
The time and money spent complying with government regulations imposes burdensome transaction costs on businesses. In addition, the direct cost of payments, such as licensing fees, also represents a significant cost of doing business. Conversely, payments made to avoid detection of non-compliance, or payoffs to government officials, are the costs of operating in the informal sector.
The red tape and costs involved in registering or obtaining licenses for a business need to be slashed and all business owners need to be given easy access.
Broadened access to financial services and support innovation in financial products
Access to finance is essential for businesses. However, businesses in the informal economy lack access to financial markets and the capacity to compete in product markets.
Improved access to basic financial services consisting of savings, credit, insurance, pensions, and tools for risk management, is a critical input for emerging and potential entrepreneurs to leverage economic opportunities and improve their quality of life.
More inclusive financial markets require that there be awareness in both formal and informal credit systems of the way the working poor use credit, and the barriers and inappropriate rules in formal lending procedures. They also require having in place legal and administrative processes that make the processing of collateral –including movable property as well as social collateral – cheaper, transparent, and faster. It is also necessary to give support to innovation in financial products and services, with a view to deepening their outreach.
Consultation, participation, and inclusive rule-setting
Informal businesses and their representatives need to be consulted and to participate in relevant policy-making and rule-setting bodies. They need to be kept informed of their legal rights so that they can bargain effectively, enforce contracts, and seek redress. The legal empowerment agenda for business rights emphasizes reforms to provide a legal and institutional environment, and the rule of law, which will enable poor business owners to develop their capacity and to use their talent, energy, and initiative to build up their assets and to generate efficient and productive enterprises.
Business reforms combined with property reforms can bring security, resources, and increase competitiveness of all firms but particularly micro-, small-, and medium-sized enterprises. Growth of these enterprises greatly enhances the possibilities of strengthening labour rights. The more inclusive and attractive the formal market becomes, the better the chances for regulating labour rights, which in turn helps build the human capital for the next generation. As Ireland and Spain have shown in recent history, there is tremendous potential in bringing policymakers and SME entrepreneurs together to develop strategies along these lines.