World Bank faces credibility crisis
News that its rankings have been manipulated has not only dented the reputation of the Doing Business index but also raised questions about its methodology.
Since its first publication in 2003, African policymakers have poured over the World Bank’s Doing Business report for evidence of how attractive their country is to foreign investors. The widely-read annual report – which reviews and ranks 190 economies based on their regulatory environment – has become a yardstick by which policymakers can measure their progress against other countries, and a key tool in attracting crucial foreign direct investment from financiers who analyse its conclusions.
But after years of rising influence, the Doing Business index is facing a crisis of credibility after the World Bank released a damning report in December revealing that staff had manipulated data to inflate the rankings of certain countries. The report detailed how the performances of China and Saudi Arabia were exaggerated, with Beijing appearing seven places above its rightful place of 85 in 2018 and Riyadh one place above its rightful 63 in 2020. Meanwhile, Azerbaijan appeared six places below the correct 28 in 2020, and the United Arab Emirates received an inflated score for a tax metric in 2020 which did not affect its overall ranking. The report revealed that staff were pressured by management to alter the data.
“Doing Business team members reported undue pressure, both directly and indirectly, by management to manipulate data in 2017 during the Doing Business 2018 production process and in 2019 during the Doing Business 2020 process. The data irregularities occurred after the Doing Business data had been circulated for Bank-wide review, just prior to finalising the data for publication… they were made outside of the appropriate review process and were not justified by the Doing Business methodology or by any new information provided to the Doing Business team,” said the report.
The conclusions prompted a correction of the rankings for the affected years, a review of management processes and an external review of the methodology, which is expected to present its findings in mid-2021. But even before the scandal, there were concerns among critics about the credibility and usefulness of Doing Business, which some say prioritises an economically conservative agenda of tax cuts and loose regulation inappropriate for developing nations.
“I think absolutely there’s a credibility problem in the index, they’ve been caught red-handed essentially manipulating the data to help the Saudis and several other cases,” says Justin Sandefur, senior fellow at the Center for Global Development and a member of the independent review panel.
“They’re going to have to reassure the world that they have processes in place so that people should believe the numbers in future.”
An influential product
From its launch in 2003, the Doing Business project has mushroomed in size and importance. Originally a regulatory survey of 133 economies based on five indicators, the report today ranks 190 countries against each other based on 11 indicators. The index is influential among policymakers, who strive to improve regulatory areas highlighted by the report, including starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. Countries are likely to pour resources into areas where they fall short in the hope of achieving a better ranking next year, while politicians set ambitious improvement targets and tout Doing Business ranking improvements during election campaigns.
Yet while the index has earned a great deal of favourable publicity for the Bank – placing its work at the heart of the economic agenda and ensuring a steady stream of headlines - some say it has also encouraged an unhealthy desire to achieve higher rankings regardless of real developmental outcomes. Sandefur says the latest scandal is emblematic of an index unmoored from genuine development.
“I have conversations with people at the Bank and other defenders outside the Bank, and often the justification for leaving the index in place or not reforming its components is to point out how successful it’s been in generating press and attention from developing country policymakers, which is all fine and good, but it is different to saying you have evidence that improvement on the index is linked to development outcomes.”
While the report details the pressure on staff to inflate data, it does not delve into why management was inclined to bestow more generous ratings on certain countries. In off-the-record comments, experts worry that Saudi payments for World Bank consultancy services such as its Research Advisory Service, and the World Bank’s hope for greater contributions to its International Development Association, may have opened the door to conflicts of interest.
Time for a rethink?
Whether or not the speculation is accurate, long-term critics say that the scandal is a chance to renew an index which prioritises a conservative approach to development.
“The real issue is that the DBI is fundamentally based on neo-classical economics, with little evidence that these policy prescriptions actually drive up investment or reduce risk in developing country settings,” says Hannah Ryder, CEO of Beijing-based consultancy Development Reimagined.
“On the one hand, the World Bank and others tell governments to seek to expand domestic revenue mobilisation - including through taxes – but the DBI rewards them for doing exactly the opposite, e.g. they get points for increasing tax exemptions for foreign investment, meaning the tax burden has to fall on poor citizens, not wealthy potential investors.
“Similarly, constraints that governments might want to impose in order to achieve Sustainable Development Goals and support local citizens and businesses directly (e.g. for trade or jobs), such as local content requirements or local employment requirements are discouraged - which itself can impede development.
“That’s why the 2021 review is so important - to encourage the World Bank to rethink and rehaul its overall approach - equalising the burdens on investors as well as domestic businesses and citizens of business reforms, and basing it on the reality of investment drivers.”
Long-term critics say that the scandal is a chance to renew an index which prioritises a conservative approach to development
Sandefur agrees that the narrow focus on businessfriendly regulation and generous tax rates only offers a partial prescription for developmental success.
“When the publication starts to take on the status of being the World Bank’s definitive stance on, for example, the economic management of Ghana, you do need to be a bit more holistic,” he says.
The external review of the methodology will have the “goal of strengthening the product and its usefulness to stakeholders worldwide,” says the World Bank. Sandefur says that the panel he has joined has a chance to “review the conceptual underpinnings of the project” and draw on other centres of expertise within the Bank.
“The tax team is quite frustrated that the only advice [in Doing Business] is to cut tax rates. The Bank has all kinds of advice about how to build a stronger tax system and is quite nuanced on that. Whether it’s on taxation or business regulation, [the index] ought to be congruent with what the best experts at the Bank think countries should be doing. Right now it’s simply not – the best advice of the best people working within the institution is often at odds with what the publication is saying.
“The index has been this sort of private fiefdom for a long time which is somewhat intellectually at war with other parts of the Bank. There’s enough frustration with this recent scandal that it’s time to end that hostility between other functional departments and Doing Business.”
The World Bank did not respond to a request for an interview.