Business Removing

67
Closing a business
Where is exit easy?
Who is reforming exit?
What to reform?
Why reform?
Each year, more businesses—about 13,200—go through
bankruptcy in Canada than in all non-OECD countries.
More go through bankruptcy in Belgium—one in every
55—than in Latin America. More go through bankruptcy
in Norway—one in every 40—than in South Asia
and Africa. 1 The difference is large even as a share of all
firms (figure 9.1).
This is not because businesses don’t fail in developing
countries. They just don’t use bankruptcy. And even
in rich countries, use of bankruptcy is rare. Creditors
and debtors in OECD countries would typically renegotiate
the terms of the loan, extend the payment period or
write-off some part of the debt. Bankruptcy is only used
when it lowers the cost of exit. Everyone recognizes the
names Enron, Kmart and WorldCom, the three largest
among 57,324 US bankruptcies in 2003. But these constitute
only a fraction of the 600,000 business closures
that year. 2 The remaining 90 percent took place outside
of bankruptcy, by creditors foreclosing on their loans
and businesses shutting down voluntarily.
Bankruptcy—through liquidation or reorganization—is
a backup for simple foreclosure procedures. 3 It
is needed when a company like Daewoo, with dozens of
creditors, thousands of employees and billions of dollars
in assets, becomes insolvent. Or when the failure of a
business, such as Swissair, affects the normal functioning
of many other businesses. Or when corporate fraud
needs to be investigated—as for Parmalat. Liquidation—
when a business is judged unviable and sold to new
owners—and especially reorganization—when an attempt
is made to keep the business in operation with
current owners and (often) managers—involve a complex
process of sorting through assets or revising the
business plan.
But developing countries have few industrial giants
like Daewoo or Parmalat. Their businesses typically have
few sources of financing and face simpler problems in
coordinating among creditors when becoming insolvent.
And simpler problems need simpler solutions. But new
bankruptcy laws—and over 60 developing countries
have adopted them in the last 10 years—seldom meet the
needs of investors. The effort has often been misdirected
into establishing complex procedures for reorganizing
businesses in distress: in Albania, Benin, Burkina Faso,
Cameroon, Egypt, Guinea, Mali, Moldova, Mongolia,
Niger, Togo, Vietnam and Yemen, to name a few. Turkey
and Uzbekistan both introduced reorganization in 2003,
preventing creditors from using the less complex liquida-
FIGURE 9.1
No bankruptcy in developing economies
Annual bankruptcy filings
(average number 1999–2003)
9,744
Rich
countries
314
Middle
income
Poor
countries
Source: Doing Business database, Claessens and Klapper (forthcoming).
53
Bankruptcies as a percentage
of all limited liability firms
Finland 4.14
New Zealand 3.67
United States 3.65
Norway 2.59
France 2.62
Russia 0.31
Colombia 0.16
Argentina 0.12
Thailand 0.12
Peru 0.05