Martin Vlachynsky // 26 February 2025

Several competitiveness rankings assess factors such as law enforcement, infrastructure, and taxation law from a business perspective. However, they often lack accessible and practical explanations of how these factors impact the daily operations of small businesses. The Bureaucracy Index uses a straightforward approach to provide a detailed list and quantification of bureaucratic burdens faced by small and medium-sized enterprises (SMEs). In collaboration with industry experts, it identifies all state-required administrative tasks for two model businesses: a small industrial company and a small hotel. These tasks are categorised as ‘starting a business’ or ‘running a business’, with time demands assigned to each. The score is calculated based on the number of hours of administrative work required per business.

Starting a business

In 2024, Ukraine had the highest bureaucratic burden for starting an industrial SME, requiring 64 hours. In contrast, Poland excelled with the lowest time requirement of just 19 hours. Most other countries fell within the narrow range of 37-46 hours.

Starting a small hotel was consistently more bureaucratic across all countries due to stringent hygiene regulations.

Running a business

This category measures the number of hours that established SMEs spend on administrative work annually. Slovakia topped the rankings, with 272 hours (34 working days) spent on running an industrial SME, followed by Hungary. Conversely, Ukraine and Poland had the lowest bureaucratic burden among the six participating countries.

Interestingly, running a hotel was not universally more bureaucratic than running an industrial SME. Rankings for running a hotel largely mirrored those for starting a business, with Georgia and Czechia swapping positions.

In most countries, the bulk of bureaucratic costs for running a business came from employment administration (e.g., hiring & firing and worktime evidence). However, in Czechia and Poland, operational administration was the primary driver of bureaucracy. Ukraine stood out with higher-than-average costs under the ‘legal changes’ category and the ‘other’ category (mostly administration of obligatory statistical reporting ).

Legal changes

A notable subcategory within ‘running a business’ is the administrative cost of legal changes. This includes analysing and implementing updates stated in the three main business-related laws: the National Corporate Income Tax Code, Labour Code, and Business Code. Ukraine recorded the highest number of legal changes in 2024, significantly increasing its bureaucratic burden of running a business.

Overall rankings

The overall results were calculated by averaging the time required for starting and running a small hotel and an industrial SME. Slovakia had the highest bureaucracy score (328 hours), followed by Hungary and Georgia. Poland emerged as the most business-friendly country with the lowest overall bureaucracy score of 173 hours. Despite the ongoing war, Ukraine has demonstrated the second-best result among all participating countries – 267 hours.

Conclusion

The Bureaucracy Index serves as a valuable tool for sparking discussions about excessive red tape and its impact on competitiveness. By identifying areas for improvement, it encourages the development of practical solutions to reduce the administrative burden on businesses.

Bureaucracy represents an economic deadweight, reducing profitability and hindering investment in the economy. It also distorts entrepreneur motivation, compelling them to adopt suboptimal strategies for managing and developing their businesses. The EU has acknowledged excessive bureaucracy as a significant issue in its recent Draghi report. The report describes bureaucracy as a ‘time robber’ and a ‘cost driver’ that obstructs investment, stifles innovation, and hampers growth. According to Letta, excessive bureaucratic demands weaken the competitive position of European companies in international markets. He argues that this bureaucratic burden inadvertently benefits non-European companies that are not subject to similar regulatory constraints.

This concern is particularly pressing in light of competitive pressures from countries such as the US and China. Therefore, reducing red tape should be a top priority for every government. These efforts can be supported by formal tools, such as regulatory impact assessments, or specific policies, such as the sunset law or the ‘one in, one out’ rule. Some countries that participated in this survey (Slovakia, Hungary) have already incorporated these measures into their legislative processes, offering hope for future improvements in the Bureaucracy Index score.

This blog was originally published on 4Liberty.