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Wednesday, October 20, 2021

Explained: The Ease of Doing Business rankings controversy

IMF MD Kristalina Georgieva is under scrutiny for her role in alleged rigging of the World Bank’s Ease of Doing Business rankings when she was chief executive there. A look at the claims, and the findings.

Written by Udit Misra | New Delhi |
Updated: October 13, 2021 7:34:42 am
IMF MD Kristalina Georgieva, formerly World Bank chief executive, speaks at a summit in Paris in May. The IMF has come out in her defence. (File Photo)

On Tuesday, the executive board of the International Monetary Fund (IMF) came out backing its Managing Director, Kristalina Georgieva, stating it has full confidence in her. The announcement aimed to quell weeks of increased questioning about Georgieva’s role in allegedly rigging the World Bank’s Ease of Doing Business rankings when she was the chief executive there.

What is the controversy around Georgieva?

Georgieva is a Bulgarian economist who held several high-profile positions in European politics. In January 2017, she was appointed the chief executive of the World Bank group. In January 2019, she took over as the interim president of the WB group after Jim Yong Kim resigned three years before the end of his second term. In October 2019, she took over as Managing Director of the IMF.

The trouble started when in January 2018, Paul Romer, then the chief economist of the World Bank — he took over from Kaushik Basu — told The Wall Street Journal that the World Bank’s Ease of Doing Business (EoDB) rankings were tweaked for political reasons. Soon Romer resigned. (Incidentally, Romer was awarded the Nobel Prize in Economics later that year for showing how knowledge can function as a driver of long-term growth.) Romer’s comments and resignation kick-started a series of queries both inside and outside the World Bank about the integrity of EoDB rankings.

In August 2020, the World Bank suspended its EoDB rankings after finding some “data irregularities”. “A number of irregularities have been reported regarding changes to the data in the Doing Business 2018 and Doing Business 2020 reports, published in October 2017 and 2019. The changes in the data were inconsistent with the Doing Business methodology,” it stated in a press release.

In particular, it was alleged that the EoDB rankings were tweaked to inflate the ranks for China (in EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020).

The World Bank initiated a full review and an independent investigation. One such effort was to engage WilmerHale, a law firm, in January 2021. In its report, submitted September 15 this year, Wilmerhale’s investigations found that the World Bank staff did indeed fudge data to help China’s ranking and they did so under pressure from Georgieva. In fact, at one point the report states that Georgieva “chastised” the World Bank’s country director for “mismanaging” the Bank’s relationship with China and “failing to appreciate the importance of the Doing Business to the country”.

These findings are particularly damning because China is the third-largest shareholder in the World Bank after the US and Japan, and it is being seen as manipulating its way to higher rankings.

WilmerHale did not find any evidence of wrongdoing with respect to the rankings of Saudi Arabia, UAE and Azerbaijan.

What are the EoDB rankings, and why do they matter?

The EoDB rankings were started in 2002 to rank countries on a number of parameters to indicate how easy or difficult it is for anyone to do business in a country. Each year, the EoDB rankings mapped whether, and by how much, a country had improved on a number of big and small parameters, such as how long it takes to start a business, or how costly it is to get a construction permit, or how many procedures one has to go through to enforce a contract etc.

Given the apparently extensive nature of rankings and that the World Bank was doing it, the EoDB soon became the go-to metric for international investors to assess risk and opportunity across the globe. Billions of dollars of investments started becoming predicated on where a country stands on EoDB and whether it is improving or worsening. It also acquired massive political significance as leaders in different countries started using EoDB rankings to either claim success or berate the existing government.

How reliable are the rankings?

Even before this controversy, it was openly known that there are several gaps in the rankings. For example, in India, which had registered a massive jump in the last few years, all the data to construct the ranking was taken from just two cities — Mumbai and Delhi. Any ranking based on such a small sample ignored how remarkably the “ease” of doing business varied once one moved away from these two metros.

Such weaknesses were exploited in boosting China’s ranking.

The WilmerHale report states that at one point, when Georgieva took direct control of China’s ranking and was looking for ways to raise it, a junior member suggested that they just take the average of the two best performing cities — Beijing and Shanghai — as they do for several other countries (such as India) instead of taking a weighted average of several cities. By cherry-picking the top two cities, China’s ranking would go up.

How can the ranking methodology be improved?

On September 1, the World Bank also published the findings of an external panel review of its EoDB methodology. It stated that “the current methodology should be significantly modified, implying a major overhaul of the project.

Some of the key recommendations are:

* A substantial methodological shift away from hypothetical case studies and in favour of more data collection from representative samples of “actual” business owners and operators on their de facto experiences of doing business.

* Don’t ignore the government functions that provide essential public goods to the private sector: transport and communications infrastructure, a skilled workforce, law and order, etc.

* Doing Business covers a diverse array of indicators that often have little meaning when aggregated with arbitrary weights. For some indicators, less is clearly better (e.g., delays in registering a business), while for others, optimal policy is far less clear (e.g., the optimal corporate tax rate).

* Do not rank countries on their tax rates. From a societal standpoint, collecting taxes is necessary, and thus lower tax rates are not necessarily better.

* Eliminate the indicators “Protecting Minority Shareholders” and “Resolving Insolvency.”

* Make the “Contracting with Government” indicator more relevant.

* Restore and improve the “Employing Workers” indicator, but do not rank countries based on this information.

* Improve the transparency and oversight of Doing Business.

Is this the first time the head of the IMF and/or World Bank has been in a controversy?

No. In recent years, several heads of the World Bank and IMF have been found guilty of some wrongdoing or the other.

In 2011, Dominique-Strauss Kahn, then the MD of IMF, had to resign after he was arrested in the US following allegations of sexual assault. Rodrigo Rato, IMF’s MD between 2004 and 2007, was jailed in Spain for a credit card scandal in 2017. Christine Lagarde, who was IMF MD between 2011 and 2017, has been found guilty of negligence in allowing the misuse of public funds in 2016 for a case dating back to 2011.

Paul Wolfowitz, president of the World Bank between 2005 and 2007, had to resign following ethical violations and his romantic links with a World Bank employee. The role of Jim Yong Kim, who was World Bank president until 2019, is also being questioned in the rankings controversy.

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