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Lessons from the death of the ease of doing business index

Sonalde Desai writes: The economic consequences and political benefits associated with it encouraged many countries to try and “game” the system by making superficial improvements on indicators being measured and, when that failed, by putting explicit pressure on the World Bank research team.

Written by Sonalde Desai |
Updated: October 6, 2021 7:54:59 am
World Bank researchers developed the EoDB ranking system under the assumption that better laws and regulatory frameworks would increase the ease of doing business and improve economic performance.

The much-touted Ease of Doing Business Index (EoDB) is dead. The flagship product created by the World Bank came under attack on grounds that its data was modified in response to pressure from countries like China and Saudi Arabia. As a result of an independent audit, the index has now been abandoned by the Bank. The question for us is, should we try to revive it or sing its requiem and move on? What are the lessons from this for the future of international indices that rank countries on a range of outcomes in the hope that it will shame them into performing better? An autopsy of EoDB is needed before we can answer this question.

World Bank researchers developed the EoDB ranking system under the assumption that better laws and regulatory frameworks would increase the ease of doing business and improve economic performance. It collected data from respondents in various countries regarding existing laws and regulations on multiple dimensions, validated them through internal scrutiny, and then combined them into an overall index that allowed us to rank countries. For example, the index included dimensions like procedures involved in starting a business, getting construction permits, getting an electric connection, registering property, getting credit, protecting minority investors, and paying taxes, among others. Each dimension was weighted equally and added up to create a scale.

If we want to create an internationally comparable index, we must ask similar questions. Yet, many of these questions may not be locally salient in economies at different levels of development. For example, EoDB asked questions about the ease of getting an electric connection, where India’s score improved from 70 in 2015 to 89 in 2020. However, the devil is in the details. It is not getting a connection that is the problem, rather the reliability of electricity supply that hampers Indian industries. In addition, most of the questions focused on hypothetical cases about limited liability companies. However, the World Bank’s own enterprise survey shows that 63 per cent of Indian enterprises are sole proprietorships and only 14 per cent are limited partnerships. Once we include unregistered enterprises, this number is likely to be even smaller. Thus, focusing on protecting minority owners’ rights in this tiny segment of Indian industries and using it to rank the business climate in India does not seem particularly useful.

What is ironic is that the index placed tremendous faith in formalised systems while simultaneously disdaining bureaucratic structures embedded in this formalisation. The dimension dubbed getting credit is an interesting example. Unwary readers might think it has something to do with the ease of obtaining credit in a country. Not so. It is simply based on bankruptcy laws and the existence of a credit rating system in a country.

The problem with EoDB is not simply that it is a crude measure that poorly captures the business climates of complex and informal economies like India. A bigger problem is that it had acquired such power that countries competed to improve their rankings. Why does the index matter so much that countries stoop to pressure the World Bank to improve their rankings? For example, India ranks 139th out of 149 on the World Happiness Index, yet we pay little attention to it while climbing the ranks on the EoDB ladder has been made an explicit policy goal.

The answer lies in the potential consequences of ranking. Countries assume that their EoDB ranking will attract foreign investors. Since foreign investors often have no real way of assessing the underlying business climate in any country they may use the rankings as a signal in making their investment choices. Empirical evidence about this presumed impact is questionable. There is indeed some evidence that the score on EoDB is associated with FDI, but this association exists mainly for more affluent countries. Studies by Dinuk Jayasuriya, and Adrian Corcoran and Robert Gillanders show that this association is weak for poorer countries. For instance, in 2020, China was the largest recipient of FDI despite ranking 85th on the EoDB.

One of the less visible parts of the EoDB exercise was the underlying political message. Regulation, often treated synonymously with bureaucratic hurdles, is bad, and abandoning regulations will bring positive results. In a review of EoDB, Timothy Besley highlighted the anti-regulation bias that underlay the “Employing Workers” measure, which looks at the ease of hiring and firing workers and rigidity of working hours. Led by the ILO, there was sufficient opposition that this dimension, though reported, be dropped from the final rankings.

Nonetheless, the presumed economic consequences, as well as political benefits associated with improving the rankings, encouraged many countries to try and “game” the system by making superficial improvements on indicators that are being measured and, when that failed, by putting explicit pressure on the World Bank research team as the current debacle shows.

This leaves us with an interesting dilemma. The EoDB experience has highlighted both the power of data and the political influence such rankings can yield. Should we try to reform the index or give up on it? The decision rests on the answer to two questions. First, are there universally acceptable standards of sound economic practices that are applicable and measurable across diverse economies? Second, if the indices are so powerful, should their construction be left to institutions like the World Bank that bring not just knowledge but also wield the heft of global economic power? For the moment, the answer to both seems to be a no.

This column first appeared in the print edition on October 5, 2021 under the title ‘The unease of ranking’. The writer is Professor and Centre Director NCAER-NDIC and University of Maryland. Views are personal

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