The end of Ease of Doing Business Rankings: Reasons and implications – Explained, pointwise

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Introduction

On September 16, the World Bank Group scrapped its flagship publication, the ‘Doing Business’ report. This report publishes the influential annual ranking of countries on the Ease of Doing Business (EDB) index.

The sudden announcement that the World Bank would end its most famous report, sent some shock waves through the business regulatory community.

Read moreWorld Bank’s Doing Business Report
What is the rationale behind the move?

The Group acted on its commissioned study, which examined the ethical issues flagged in preparing the 2018 and 2020 editions of the EDB index.

The allegation surrounding Kristalina Georgieva, Managing Director of the International Monetary Fund, is the proximate reason for scrapping the publication.

As Chief Executive Officer of the World Bank in 2018, Ms. Georgieva is accused of having exerted pressure on the internal team working on the Doing Business report to falsely boost China’s rank by manipulating the underlying data.

Similar irregularities were also reported in the case of Saudi Arabia, Azerbaijan, and the United Arab Emirates too.

What is the significance of the Ease of Doing Business report?

The “Doing Business” report, first published in 2004, was the dominant international scorecard, providing an annual snapshot of which countries provided better or worse business environments.

Countries see a high ranking in this report as a way to attract foreign investment and grow the economy.

Furthermore, the report’s rankings had additional weight because they could influence the World Bank’s decisions about lending support and projects.

The report didn’t just affect domestic business environments, but also encouraged countries to deregulate their economies

Hence, there’s been fierce competition amongst countries to get a top spot in these rankings.

What were the problems with the EDB index report?

The EDB index ranked countries as per the simplicity of rules and laws framed for setting up and conducting businesses. Peruvian economist Hernando De Soto’s theory underpins the index. The theory claims that secure property rights with minimal state interventions are a precondition for a free market to flourish.

But, the rankings have been criticised on account of the following factors:

i). The theory underlying the EDB index was inaccurate, the measurement and data might be faulty, or both. For example, China’s phenomenal economic success, especially its agricultural performance (after the reforms in 1978), is perhaps the most unmistakable evidence demonstrating that lack of clarity of property rights may not be the binding constraint in a market economy.

What matters is economic incentives. Measuring regulatory functions underlying the index could be tricky and subjective, and possibly politically motivated as well. Instances of data manipulation brought to light by the independent investigating agency seem to prove such a view.

ii). Vulnerable to modifications of underlying method: The EDB index also seems vulnerable to a tweaking of the underlying method.

For instance, Chile’s rank on the EDB index sharply rose when the conservative government was in power and went down when the socialists were ruling despite no changes in policies and procedures.

This was reportedly the result of the fine-tuning of the methodology and had profound political implications. Former World Bank Chief Economist, and later Nobel Laureate, Paul Romer, publicly apologised to Chile’s socialist President for the World Bank’s less-than-professional conduct in preparing the index.

iii). Attempts at manipulation: There were multiple cases where national governments attempted to manipulate the Doing Business scores by exerting pressure on individual contributors.

iv). Pressure to implement reforms: If a country wants to move up in the rankings, it will have to push through sweeping reforms to land ownership, investment regulations, and labor laws, that are not properly thought out. It may result in unintended consequences.

v). The index was incredibly limited in scope: The index was supposed to measure a country’s overall business environment, but it covers only government regulation (except for the tax indicator, which includes taxes as a share of gross profit). It leaves out some regulations that affect businesses, such as financial, environmental, and intellectual property rules.

vi). It gave no consideration to the benefits of the regulations and whether they create a better overall business environment. Likewise, Doing Business regards taxes only as a cost, and not as a source of revenue that can be used to deliver important economic benefits such as modern infrastructure and an educated workforce.

What are the implications of World Bank’s decision?

Global

i). ‘Doing Business rankings’ often created the wrong incentives, such as, by rewarding the countries that have low taxes. It encouraged poor countries to keep their taxes low and regulate them marginally. More importantly, the index did not measure all aspects of the business environment that matter to companies or investors, including macroeconomic conditions and policies, employment, crime, corruption, political stability, etc. WB’s recent decision will usher in efforts to bring in a mechanism that is cognizant of above-mentioned flaws.

ii). Credibility of global institutions: Irregularities in EoDB rankings will lower the credibility of not only the World Bank, but also other global institutions and their work. The trust reposed by countries in the World Bank’s EoDB report will definitely take a hit.

iii). A vacuum, wrt collection of data regarding prevailing business and regulatory environment across different countries, has been created. In the absence of such a framework, the global efforts to bring down poverty levels and push income-generating investments might suffer.

India

i). Impact on India’s policy efforts: Due to its consistent efforts, India boosted its EoDB ranking from 142nd position in 2014 to 63rd in 2019. In the process to improve its EoDB rankings, India, along with other top improvers, had implemented 59 regulatory reforms in 2018-19, accounting for a fifth of all reforms recorded worldwide. The World Bank’s decision to end the ‘Doing Business’ report may put these policy efforts to a halt.

ii). Shifting of supply chains to India: In light of the fact that the probe found no irregularities in Indian data and the evidence of fraud by China to improve its Doing Business ranking, will prompt multilateral initiatives such as the Supply Chain Resilience Initiative (SCRI) to move manufacturing to India.

ii). Impact on investor sentiment: The World Bank decision to discontinue the ‘Doing Business’ report can cast a spotlight on the sharp rise in India’s ranking. And, since the integrity of rankings vis-a-vis India has been upheld, it may boost the investor sentiment positively as compared to China.

What is the way forward?

Going forward, the World Bank Group should work on a new approach to assessing the business and investment climate.

There is a case for a more universal and robust international index that offers global investors meaningful information beyond the metrics of the EODB survey. Quality of life, for instance, plays a major role in investment decisions, as do such aspects as safety, pollution levels, health care infrastructure, entertainment facilities, and so on. Some of these variables are only partially captured in other global indices such as the Human Development Index or Transparency International’s Corruption Index, so there is space for an inclusive survey that addresses a broader range of investor concerns.

Indicator regarding labour laws: Doing Business does not include an indicator regarding labour laws and regulations (it did once have, but it was dropped). This is an unfortunate omission, which a revamped report should redress.

The World Bank should switch to collecting de facto data. Currently, the bulk of its ranking is based on countries’ de jure laws rather than the de facto situation.

De jure means practices that are legally recognized by the state.

De facto means what actually happens on ground.

Authoritarian governments can change their rule books through top-down orders—and thus improve their index score—even if this makes little difference to people’s lives.

Gathering de facto data will require independent surveys and some randomized data collection, making the report more expensive to produce. But the World Bank can easily bear the additional burden.

Ranking countries in terms of fairness and social justice: Doing Business report had become more of a game wherein the sole objective was to get a high ranking. This undermined the fact that the health of a country’s economy also depends on fairness and social justice. The World Bank now has an opportunity to correct this by creating a supplement to its Doing Business report that ranks countries in terms of ‘Being Just’. This supplement would assess how fair and just a country’s laws and regulations are. This can start as a small exercise, with such ranks being published alongside the annual Doing Business ranking.

Such an initiative would be bound to generate interest among researchers to investigate the connections between being good for business and being fair and just.

More importantly, it would create incentives for countries to excel in both areas.

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