World Bank's Bo­gus Ease of Do­ing Busi­ness Rank­ings

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Just when the World Bank has peo­ple con­vinced that it has re­formed and is no longer the de­struc­tive preda­tory cap­i­tal­ist tool that it has long been, it lets the mask slip and re­veals its true na­ture.

The most re­cent slip is the World Bank's Flag­ship Re­port Do­ing Busi­ness 2017, (DBR) in which it ranks coun­tries from 1 to 190 by "quan­ti­ta­tive mea­sures of busi­ness reg­u­la­tion in 11 reg­u­la­tory ar­eas that are cen­tral to how the pri­vate sec­tor func­tions."

But the rank­ings don't ac­cu­rately re­flect the busi­ness cli­mate in some coun­tries. There is an ob­vi­ous po­lit­i­cal agenda in some of the rank­ings. Coun­tries that take steps to im­prove gov­er­nance and sup­port a civil so­ci­ety can be pe­nal­ized while oth­ers who in­crease sup­port for the prof­its of multi-na­tional cor­po­ra­tions at the ex­pense of the peo­ple are re­warded with higher rank­ings. Some of the rank­ings are en­tirely il­log­i­cal and ob­vi­ously in­flu­enced by hid­den fac­tors. This raises the ques­tion, is the World Bank cor­rupt or just in­com­pe­tent, or both? The re­port claims "the over-arch­ing goal of Do­ing Busi­ness is to help en­trepreneurs in low-in­come economies face the eas­ier busi­ness con­di­tions of their coun­ter­parts in high-in­come economies." This laugh­able state­ment ex­poses the ar­ro­gance and delu­sional cul­ture of the World Bank. Its overt bias against poor coun­tries and dog­matic be­lief that rich coun­tries have bet­ter busi­ness cli­mates is one of the fun­da­men­tal flaws in the or­ga­ni­za­tional cul­ture of the World Bank. The re­al­ity is that many high-in­come coun­tries im­pose se­vere ob­sta­cles to busi­ness while some lower in­come na­tions make it much eas­ier for busi­nesses to flour­ish.

An­other fun­da­men­tal flaw in the World Bank's think­ing is its in­sis­tence on re­fer­ring to na­tions merely as "economies". A coun­try is far more than just its econ­omy and iso­lat­ing a na­tion's econ­omy from its gov­ern­ment, so­cial dy­nam­ics, cul­ture, en­vi­ron­ment, in­ter­na­tional re­la­tions, etc. is just plain stupid. The my­opic per­spec­tive of the economists at the World Bank is one of the pri­mary causes of its de­struc­tive na­ture.

De­spite its many flaws, the 2017 Do­ing Busi­ness does have some im­prove­ments. For the first time, the Re­port takes into con­sid­er­a­tion gen­der dif­fer­ences and how women are treated not just in busi­ness but through­out so­ci­ety. This is an es­sen­tial mea­sure that is decades late in com­ing but still a wel­come im­prove­ment. When it comes to busi­ness, how women are treated cer­tainly mat­ters and the World Bank needs to put more weight into gen­der dis­par­ity. If it did, it would not rate coun­tries like psy­cho­pathic Saudi Ara­bia so highly.

In ad­di­tion to the grossly fraud­u­lent high rank­ing for Saudi Ara­bia, an ex­am­ple of gross er­rors was its rat­ing for Bangladesh, ranked 176th among 190 economies, be­low civil war-rav­aged Iraq and Syria! De­spite making sub­stan­tial progress in gov­er­nance, Bangladesh even slipped two places from 174 in the 2016 rank­ing and is three places be­low its 2015 rank­ing.

Malaysia, too, slipped five places. The Do­ing Busi­ness Re­port (DBR) 2017 ranked Malaysia at 23, down from 18 in the pre­vi­ous two re­ports for 2015 and 2016. In­cred­i­bly, this had noth­ing to do with news of the big­gest scan­dal ever in the coun­try's his­tory.

Malaysia seems to have slipped be­cause, it had "made start­ing a busi­ness more dif­fi­cult by re­quir­ing that com­pa­nies with an an­nual rev­enue of more than MYR 500,000 reg­is­ter as a GST payer," and made tax pay­ments more com­plex "by re­plac­ing sales tax with GST".

Pre­vi­ously, Malaysia was rec­og­nized in DBR 2016 for re­duc­ing the prop­erty tax rate from 12% to 10% of the an­nual rental value for com­mer­cial prop­er­ties in 2014, even though this con­trib­uted neg­a­tively to over­all gov­ern­ment rev­enue or pub­lic fi­nance.

Thus, ‘be damned if you do, and be damned if you don't'. Coun­tries are asked to raise do­mes­tic rev­enue, but stand to slip in their rank­ings if they act to raise tax rev­enues. Tax­a­tion may re­duce the in­cen­tive to in­vest, but low tax rev­enue would also hurt the busi­ness en­vi­ron­ment if it re­duces gov­ern­ment rev­enue needed to fi­nance pub­lic in­fra­struc­ture, ed­u­ca­tion, health­care and busi­ness ser­vices.

Rank­ings

Should Bangladeshis, Malaysians and oth­ers worry about their coun­tries' down­ward slide in the ‘Do­ing Busi­ness' rank­ing? Should those do­ing bet­ter be elated about their el­e­va­tion in the rank­ings? The sim­ple an­swer is ‘no', but it re­ally de­pends.

What do the rank­ings im­ply? How does the World Bank com­pare coun­tries with very dif­fer­ent eco­nomic struc­tures at dif­fer­ent stages of de­vel­op­ment and with var­ied ca­pa­bil­i­ties ad­dress very di­verse prob­lems? By rank­ing coun­tries, the DBR ig­nores their het­ero­gene­ity and es­sen­tially treats them as com­pa­ra­ble on a sin­gle scale.

This se­ri­ous method­olog­i­cal prob­lem was pointed out by an in­de­pen­dent panel in 2013, headed by South Africa's Vice Pres­i­dent and for­mer fi­nance min­is­ter Trevor Manuel. It con­cluded that "The Do­ing Busi­ness re­port has the po­ten­tial to be mis­in­ter­preted…. It should not be viewed as pro­vid­ing a one-size-fits-all tem­plate for de­vel­op­ment…. The ev­i­dence in favour of spe­cific coun­try re­forms is con­tin­gent on many aux­il­iary fac­tors not cap­tured by Do­ing Busi­ness re­port top­ics."

The panel also noted that "the act of rank­ing coun­tries may ap­pear de­void of value judge­ment, but it is, in re­al­ity, an ar­bi­trary method of sum­maris­ing vast amounts of com­plex in­for­ma­tion as a sin­gle num­ber." It rec­om­mended drop­ping the over­all ag­gre­gate rank­ing from the re­port.

The in­de­pen­dent panel had been set up by the Bank in re­sponse to heavy crit­i­cism of the DBR. Yet, the Bank has cho­sen to ig­nore most of the in­de­pen­dent panel's rec­om­men­da­tions, es­pe­cially to drop over­all coun­try rank­ings.

In re­sponse to crit­i­cisms of over­all coun­try rank­ing, the Bank added a ‘dis­tance to fron­tier' mea­sure. Thus, in­stead of the or­di­nal mea­sures used for rank­ing, the os­ten­si­ble (car­di­nal) ‘dis­tance' from the best per­for­mance mea­sure for each in­di­ca­tor be­came the new ba­sis for rank­ing.

Yet, it does not ad­dress the main con­cern – het­ero­ge­neous coun­tries can­not be ranked me­chan­i­cally. Thus, not sur­pris­ingly, the best per­form­ers are rich, de­vel­oped coun­tries.

Ig­nor­ing crit­i­cisms

Be­sides the ex­ter­nal panel, the World Bank also ig­nored much of its own in­ter­nal re­view. For ex­am­ple, its le­gal unit has been un­easy about the DBR process and find­ings.

The unit's Septem­ber 2012 in­ter­nal re­view of the 2013 DBR ques­tioned the rank­ing's ‘ma­nip­u­la­tion' and noted the ‘em­bed­ded pol­icy pref­er­ences' un­der­ly­ing some

in­di­ca­tors. It went so far as to ac­cuse the DBR of bias as it ‘tends to ig­nore the pos­i­tive ef­fects of reg­u­la­tion'. For ex­am­ple, the ‘start­ing a busi­ness' in­di­ca­tor uses the lim­ited li­a­bil­ity cor­po­rate form as the only ‘proxy' for busi­ness cre­ation. The le­gal unit con­sid­ered this ap­proach ‘de­cep­tive' as there is no ev­i­dence that eas­ing "com­pany for­ma­tion rules leads to in­creases in busi­ness cre­ation".

The Bank's le­gal unit also ar­gued that the DBR method­ol­ogy is se­ri­ously flawed, high­light­ing ‘black box' data gaps, ‘cherry pick­ing' back­ground pa­pers, and ‘dou­ble count­ing'. The le­gal team even asked, "are high in­come the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD) coun­tries placed higher in the Do­ing Busi­ness rank­ings be­cause they have im­ple­mented the (types of) re­forms ad­vo­cated by the re­port?" In its 26 Septem­ber 2015 is­sue, The Economist, usu­ally a right-wing cheer­leader for pro-busi­ness re­forms, ar­gued that the DBR rank­ing did not pro­vide a re­li­able guide to in­vestors.

Coun­tries have per­versely amended reg­u­la­tions to try to im­prove their rank­ing in or­der to im­press donors or prospec­tive for­eign in­vestors, rather than to ac­tu­ally in­crease in­vest­ments and growth. Coun­tries are also likely to do more to favour for­eign in­vest­ments, rather than do­mes­tic in­vest­ments, which are gen­er­ally more likely to con­trib­ute to sus­tain­able de­vel­op­ment.

Bi­ases

The DBR sur­vey is gen­er­ally bi­ased against reg­u­la­tions and taxes. Fol­low­ing ear­lier crit­i­cisms, ease of hir­ing and fir­ing work­ers and flex­i­bil­ity of work­ing hours are no longer used in the over­all rank­ing, but none­the­less re­main in the re­port, high­light­ing the au­thors' ap­pre­ci­a­tion of such reg­u­la­tions. Con­versely, the DBR con­tin­ues to look un­favourably on a coun­try which seeks to en­hance work­place reg­u­la­tions by im­prov­ing wages, work­ing con­di­tions or oc­cu­pa­tional safety, or by al­low­ing work­ers in ex­port pro­cess­ing zones to union­ize.

Sur­pris­ingly, the DBR does not cover se­cu­rity, cor­rup­tion, mar­ket size, fi­nan­cial sta­bil­ity, in­fra­struc­ture, skills and other crit­i­cal el­e­ments of­ten deemed im­por­tant for at­tract­ing busi­ness in­vest­ments. More­over, many DBR in­di­ca­tors are con­sid­ered to be quite su­per­fi­cial. For ex­am­ple, the sur­vey's credit mar­ket in­di­ca­tor does not re­flect how well credit is al­lo­cated. Sim­i­larly, the DBR sur­vey fo­cuses on how dif­fi­cult it is to get elec­tric­ity con­nected with­out tak­ing into ac­count the state of elec­tric­ity gen­er­a­tion or dis­tribu- tion, which of­ten de­pends on a coun­try's level of de­vel­op­ment.

The DBR ap­proach is very ‘le­gal­is­tic' as it mainly looks at for­mal reg­u­la­tions with­out con­sid­er­ing how such reg­u­la­tions af­fect SMES or other in­vestors be­sides the stereo­typ­i­cal for­eign in­vestor. It also ig­nores, norms and other in­sti­tu­tions in­clud­ing ex­tra-le­gal pro­cesses. For ex­am­ple, Mary Hall­ward-driemeier of the World Bank and Lant Pritch­ett of Har­vard com­pared the DBR with the Bank's firm sur­veys. They found large gaps be­tween the DBR re­port and re­al­ity.

They also found ‘al­most zero cor­re­la­tion' be­tween DB find­ings and other Bank sur­veys of busi­ness en­ter­prises. For in­stance, the av­er­age amount of time that com­pa­nies re­port spend­ing on three tasks — ob­tain­ing construction per­mits, get­ting op­er­at­ing li­censes and im­port­ing goods — is ‘much, much less' than those cited in the DBR. [http://pubs.aeaweb.org/doi/ pdf­plus/10.1257/jep.29.3.121]

Pritch­ett, who once worked for the Bank, has ar­gued that de­vel­op­ing coun­try pol­icy mak­ers fo­cus­ing on im­prov­ing their DBR rank­ings could di­vert scarce re­sources away from more im­por­tant and ur­gent re­forms, e.g., to help the gov­ern­ment bet­ter ad­min­is­ter, im­ple­ment and en­force busi­ness reg­u­la­tions.

"The pre­tense that Do­ing Busi­ness mea­sures the real rules, and that if we just mod­estly im­prove these Do­ing Busi­ness in­di­ca­tors, they would some­how be­come the re­al­ity of what the rules are and how busi­ness is re­ally done — I think that's a very dan­ger­ous fic­tion." [http://blogs.wsj.com/eco­nom­ics/2015/08/04/is-the­world-banks-do­ing-busi­ness-re­port-at-odds-with-how­busi­ness-is-done-in-the-de­vel­op­ing-world/].

In sum, the DBR as­sumes that there are uni­ver­sally ‘good' and ‘bad' poli­cies re­gard­less of con­text. This ap­proach clearly misses the need for con­crete anal­y­sis in spe­cific con­texts. Not sur­pris­ingly, the DBR con­tin­ues to pro­mote dereg­u­la­tion as the best strat­egy for pro­mot­ing eco­nomic growth. To be fair, the Bank ac­knowl­edges that the DBR should not be seen as ad­vo­cat­ing a one-size-fits-all model, but the Bank's own pro­mo­tion and coverage of the re­port sug­gests oth­er­wise.

Check out our new au­tho­r­ata­tive re­port that ranks how friendly a coun­try is to busi­ness!

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