World Bank's Bogus Ease of Doing Business Rankings
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.
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.
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.
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!