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World Bank isn’t listening – changes to the Doing Business Report are wide of the mark

Added 05 Jun 2014
In late April, the World Bank announced several methodological changes that will appear in the 2015 Doing Business Report (DBR). This report, which is due to be released in October, will include the first round of changes after the Independent Panel Review of the DBR, which was published in June 2013. However, despite repeated calls from civil society organisations (CSOs) to implement the recommendations of the Independent Panel, the methodological changes announced by the World Bank simply ignores them.

The DBR is a World Bank flagship publication, which ranks countries according to the impact of their business regulations and legal framework, making it a ‘legalistic’ document about the business environment. This information is collected via four different sources: 

  1. Firm-level surveys 
  2. Relevant laws and regulations 
  3. Governments 
  4. World Bank Group regional staff. 

The report’s impact on policy-making, especially in the developing world, makes it impossible to ignore. The DBR is often used as tool to judge the business environment of a country and it receives high-level media coverage. In some cases it is used as the basis of reform programmes in developing countries, such as in Rwanda or in Zambia. This is in spite of a note included in the report itself stating that not all DBR indicators are “action-worthy in a particular context” and that “governments have to decide what set of priorities best fits the needs they face”.

Because of its impact, the DBR has been under scrutiny and criticised by CSO groups, trade unions and World Bank clients and shareholders. Reacting to those critiques and to a report from the World Bank’s Independent Evaluation Group, World Bank President Kim decided to appoint an Independent Panel to review the report. 

The conclusions of the panel mirror concerns raised by CSO groups that the DBR is irrelevant for the two goals that the Bank set for itself – ending extreme poverty and promoting shared prosperity. 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. According to the World Bank, the DBR should not be seen as a one-size-fits-all model. However, the Bank’s communication around the report continues to maintain this image. In addition, the DBR heavily promotes deregulation as the best strategy for economic growth, although this is often contradicted by reality

Changes miss the target
Considering these weaknesses, the methodological changes announced by the World Bank last month were expected to address the both civil society and Bank shareholders’ concerns. Unfortunately, however, this is not the case. 

The proposed changes will be put in place during the next two years and are divided into three main areas: 
  • The World Bank will make a revision of the ranking calculation of the DBR. This revision will result in additional information by indicating not only the ranking of each country but their relative distance as well. According to the World Bank, the outcome of this revision will be the credit given to governments making reforms without improving their country’s rankings. It will also reduce the importance of difference in rankings. This change will already appear in the 2015 DBR. 
  • The World Bank will also expand the sampling frame. Until now, the DBR’s indicators referred to case scenarios in a fictional small or medium-sized enterprise (SME) located in a country’s biggest business city. The Bank decided to add an additional city for the 11 countries with more than 100 million inhabitants. This change will also appear in the 2015 DBR.  
  • The World Bank finally announced an improvement of some of its indicators, by broadening what is being measured but also changing the way data is scored. For some indicators, the goal is to increase the qualitative analysis by measuring the quality of the regulations. This will be the case for five indicator sets: ‘dealing with construction permits’, ‘getting electricity’, ‘registering property’, ‘enforcing contracts’ and ‘resolving insolvency’. For two other sets of indicators – ‘getting credit’ and ‘protecting investors’ – the goal is to expand the areas covered. Finally, the scoring methodology of the ‘paying taxes’ indicators will change. The timing of implementation of those rules is still unclear and it is likely that those changes will take place progressively between the 2015 and 2016 DBR.

These changes do not reflect the recommendations of the Independent Panel, although the World Bank claims it does. Analysing the Independent Panel’s report, we can see that the main recommendations can be divided as follow: 

  • The aggregate rankings: As the Independent Panel Review points out, “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. According to the Panel, the use of aggregate rankings gives a normative position to the DBR, although its role is only to inform. The DBR should therefore only present cardinal-based rankings for the indicators without aggregate rankings.  
  • The data collection: The approach is very ‘legalistic’ as it relies on law firms and therefore 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. A change in the title could be a good way to clearly express those limitations. 
  • Selection and construction of the indicators: Lacking a scientific approach, the selection of the criteria for the construction of the indicators needs to be more objective. Indicators must therefore be reviewed regularly to ensure their relevance, comparability and applicability. 
  • The Employing Worker Indicator is particularly problematic: This criteria sees labour market regulations only through the lens of costs and never in terms of benefits. It has been widely criticised by many actors, including the International Trade Union Confederation (ITUC). Criticism has been so strong that the criteria have been removed from the DBR. Despite this decision, the data is still collected and accessible on the World Bank’s website. It shows that the World Bank is listening to external actors but remains unable to make a firm decision. The Panel recommends the development of a more comprehensive approach to labour-market regulation in consultation with the International Labour Organization (ILO) and other stakeholders.
  • The Paying Tax Indicator has also been a major source of concern: The Independent Panel believes that its methodology is not relevant for assessing the ease of doing business. The main focus of this indicator is the tax burden on SMEs. However, the ‘tax rate’ and ‘number of payments’ sub-indicators are not relevant when it comes to fair assessment of the tax burden on SMEs. In addition, it is not the only factor that governments should consider when designing a tax system. Although the criteria could be improved, the Panel recommends removing it from the report. 
  • Implement a peer-review process: This would provide a ‘safety net’ to the report. A body including external representation should be formed to perform this task. 
  • The hypothetical firm approach: The current approach is based on a hypothetical firm based in the country’s largest business city. A new approach should be put in place to take into consideration the complexity of the tax systems, administrative burdens and ways administrations can alleviate this. 
 
Comparing the methodological changes of the DBR with the recommendations from the Independent Panel raises questions about why the World Bank engaged in the review process in the first place. As the table below shows, the panel recommendations were for the most part ignored. The World Bank’s President Kim has defended the DBR, stating that “Doing Business has been an important catalyst in driving reforms around the world […] and rankings have been part of its success”. It is therefore not a surprise that the World Bank is ignoring the recommendations made by both the Independent Panel and civil society. 


Comparison of the methodological changes of the DBR with the recommendations made by the Independent Panel

Recommendation

Ignored

Partly implemented

Implemented

Exclude the overall aggregate ranking

 

 

 

Change the title

 

 

 

Indicators must be reviewed regularly

 

 


The employing worker criteria should be replaced by a more comprehensive approach

 

 

 

The paying tax criteria should be removed from the report

 

 

 

A peer-review process should be put in place

 

 

 

The hypothetical firm approach should be changed

 

 

 


If the DBR is going to become a credible source of information that is useful for governments and helpful towards achieving the World Bank’s goal of poverty eradication, the methodological changes must go beyond the current proposals: 

  • The countries’ rankings should be dropped
  • All indicators should be reviewed to make sure that their focus is poverty eradication
  • The surveys used to collect the data should be broadened to include Micro Small and Medium Enterprises, and firms in rural areas
  • The Employing Worker Indicator should be removed and the data should cease to be collected until a new and balanced approach is put in place
  • The Paying Tax Indicator should be changed to promote fair, equitable and efficient tax systems
  • Multi-stakeholder consultations should take place to debate the report’s relevance in-country
  • A peer-review process should be put in place to analyse the credibility of the indicators and the methodology 
  • The communication strategy of the DBR must be reviewed to make sure that its purpose is clearly stated.

While the DBR is one of the World Bank’s most high-profile publications, it has other potentially influential products in the pipeline. The Benchmarking the Business of Agriculture report, currently in development, is another initiative that could have a broad impact. The report’s goal is to help policy-makers strengthen agribusiness globally. In the same spirit as the DBR, it will identify and monitor policies and regulations that limit market access for small to medium-size producers. It is important that the World Bank learns from the defects of the DBR if other similar products are to be credible.