Should we worry about ‘Doing Business’ ranking?

by Anis Chowdhury | Published: 23:29, Nov 13,2016


THE World Bank has recently published its high-profile Doing Business Report 2017 with the theme ‘Equal Opportunity for All’. Bangladesh ranked 176th among 190 economies, below civil war-ravaged Iraq and Syria! Bangladesh even slipped two places from 174 in the 2016 ranking; and it is three places below the 2015 ranking.
Should our heart be aching too much at Bangladesh’s downward slide in the ‘Doing Business’ ranking? The simple answer is ‘no’.
Let me explain why.
The foremost objection is to do with ranking. How can we compare countries at different stages of development facing diverse problems and with varied capabilities? By ranking countries, the Doing Business Report ignores the heterogeneity among them and essentially treats them all the same.
This is a serious methodological flaw which has been pointed out by an independent panel in 2013, headed by South Africa’s planning minister Trevor Manuel. The panel 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 observed ‘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’. The panel, therefore, recommends excluding the overall aggregate ranking from the report.
The independent panel was set up by the World Bank in response to heavy criticism of the DBR. Yet it chooses to ignore most of the independent panel’s recommendations, especially not to provide overall country ranks.
In response to criticisms of overall country ranking, the World Bank decided to use a ‘distance to frontier’ measure. This introduces a cardinal logic to the rankings by indicating, in addition to the rank, the actual ‘distance’ to the best performance for each indicator and for the aggregated best performance. The trouble is, in most cases, the best performers are rich, developed countries, for obvious reasons. Thus, the change is cosmetic since the main feature of the report remains the ranks of heterogeneous countries.
The World Bank also ignores its own internal critical review. For example, the World Bank’s legal unit has been uneasy about the process and findings of the DBR. The unit’s September 2012 internal review of the 2013 DBR questioned the rankings’ ‘manipulation’ and exposed the ‘embedded policy preferences’ under some indicators, eg the ‘starting a business’ indicator, which is based on the limited liability corporate form as a ‘proxy’ for business creation. According to the legal unit, this approach is ‘deceptive’, because there is no evidence that ‘easing a company formation rules leads to increases in business creation.’
The World Bank’s legal unit also argued that the methodology is seriously flawed, highlighting ‘black box’ data gaps, ‘cherry picking’ of background papers, and double counting of data in indicators. Equally serious was the legal unit’s accusation of bias: it ‘tends to ignore the positive effects of regulation’. These inconsistencies led the legal team to ask: ‘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 September 26, 2015 issue, The Economist, usually a cheerleader for market-oriented reforms, pointed out several flaws of the World Bank’s DBR and concluded that the DBR ranking does not provide a reliable guide for policies. Countries might seek to improve their ranking just to appear good in the eyes of donors or foreign investors by amending regulations in ways that have little substance.
The DBR survey has a bias against regulation and taxes. A disputed labour-market gauge that looks at the ease of hiring and firing workers and the flexibility of working hours has not been used in the overall ranking in part to counter criticisms; but it still remains in the report, highlighting possible adverse impacts of such regulations. The indicator related to paying tax also survives.
So if Bangladesh tightens workplace regulations aimed at improving working conditions and safety or allows union activities in the export processing zones, it would be presented in a negative light.
Bangladesh also faces a dilemma — improve tax collections or improve its DBR ranking; either way, it is doomed. High taxation may hamper the incentive to invest, but a low tax take can also hurt the business climate if it means governments do not have enough revenue to pay for essential infrastructure, education and healthcare.
The DBR does not cover important elements of the business climate, such as security, corruption, market size, financial stability, infrastructure and skills. Moreover, the indicators that are included are often incomplete. For example, the survey’s credit-market indicator does not measure how wisely credit is allocated. Similarly, the DBR survey focuses on how troublesome it is to get electricity connected without taking into account the state of electricity generation or distribution infrastructure, which depends on a country’s level of development.
The DBR’s approach is very ‘legalistic’ as it looks at only formal regulations without trying to assess how those regulations translate into the reality faced by SMEs across the developing world or the influence of extra-legal processes. For example, Mary Hallward-Driemeier of the World Bank and Lant Pritchett of the Harvard University compared the DBR with surveys of firms carried out by the World Bank. They found large gaps between the DBR report and reality and ‘almost zero correlation’ between the Doing Business findings and those based on surveys of business enterprises that the World Bank helps conduct around the world. For instance, on average, the amount of time companies tell surveyors they spend on three tasks — obtaining construction permits, getting operating licenses and importing goods — is ‘much, much less’ than the times recorded in the Doing Business report. (See http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.29.3.121)
Lant Pritchett, who once worked for the World Bank, said in an interview with The Wall Street Journal that for developing-country policy makers, focusing on rising in the Doing Business ranks could draw scarce resources away from more substantive reforms that would help the government better administer 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-the-world-banks-doing-business-report-at-odds-with-how-business-is-done-in-the-developing-world/).
In sum, the DBR is designed under the assumption that there are ‘good’ and ‘bad’ policies. This assumption clearly misses the need to examine the specific context of each country it assesses. In addition, the DBR heavily promotes deregulation as the best strategy for economic growth, although this is often contradicted by reality. To be fair, the World Bank acknowledges that the DBR should not be seen as a one-size-fits-all model. However, the World Bank’s communication around the report continues to maintain this image.
Perhaps the only area where we may soul-search is the rankings of our South Asian neighbours with whom we share many of our economic, social, historical and political characteristics. All South Asian countries are ranked far above Bangladesh. Bhutan topped the ranking (73), followed by Nepal (107), Sri Lanka (110), India (130), Maldives (135), and Pakistan (144).
Again, there is no need for a knee-jerk reaction. Bangladesh does better than most of these countries on social development indicators. Thus, one wonders whether the regulations that are seen as impediments for doing business are there precisely to mitigate the adverse social and environmental impacts of deregulated markets and help Bangladesh stand tall in South Asia in terms of social development.

Anis Chowdhury, a former professor of economics, University of Western Sydney, held senior United Nations Positions during 2008-2015 at New York and Bangkok.

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