Doing Business ranking at odds with how business is done in the developing world: how the World Bank’s flagship publication influences policy-makers
This article was originally published in Rundbrief 4/2015 of the German NGO Forum Umwelt und Entwicklung, a NGO network working on international processes regarding sustainable development.
The World Bank’s 2016 Doing Business report (DBR) – a flagship annual publication that ranks countries according to their business climate – has just been published to much scrutiny. The new edition includes a series of methodological reforms that were meant to answer criticisms made by a wide range of actors on the shortcomings of the report. However, it seems to be business as usual when it comes to acknowledging the contribution small- and medium-sized enterprises (SMEs) make to development.
Since 2002, the World Bank’s Doing Business report has been ranking the business climates of 189 countries through 10 different indicators1. Each indicator is built to assess the regulations applied to SMEs. Both the quality and the quantity of these regulations are assessed and ranked.
Despite the fact that there is little connection between the report’s findings and reality on the ground, it nevertheless has a notable impact on policy-making, especially in the developing world. It is regularly used by donors, governments and academics in analysis and cross-country reporting and receives high-level media coverage. According to the World Bank2, around 120 000 media articles have cited the Doing Business project since the first report in 2004.
It has been used as the basis for reform programmes in developing countries such as Rwanda, Zambia and more recently India, where the government has set the improvement of the country’s ranking in the report as an objective of its reforms policies.
How has the Doing Business report evolved in recent years and why?
The 2016 edition of Doing Business includes a series of methodological changes that were taken on after extensive criticism of the report from the Bank’s own Independent Evaluation Group3 – an Independent Panel appointed by the Bank – and civil society organisations (CSOs). The conclusions of the Independent Panel mirror concerns raised by CSO groups that the DBR is irrelevant to the two goals that the Bank set for itself – ending extreme poverty and promoting shared prosperity.
The changes concern three main areas. First, the Bank changed the way ranking calculations are made. Second, the case scenario that serves as a basis to collect the data now incorporates a second city for 11 countries that have more than 100 million inhabitants. And third, some indicators have been changed by broadening what is being measured but also by changing the way data is scored. The expansion of the collected data brings some added value to the report, notably as there is now more qualitative information included in the indicators. However, the methodological changes implemented in the 2015 and 2016 editions of the report completely miss the target of contributing to ending poverty.
What are the main problems with Doing Business?
There are three main problems: First and foremost, Doing Business
indicators do not take into consideration the social or economic benefits and cost/risks of regulation. They regard regulations as obstacles to efficient markets. Under this assumption, those obstacles need to be removed to achieve poverty reduction. The report of the Evaluation Group4
pointed out that regulation “performs a necessary function in enabling markets to function and in protecting public health and safety
”. Translation: insufficient regulations can be an obstacle to private sector development.
In addition to the lack of consideration for the benefits of regulations, the Doing Business indicators focus on some topics, such as corporate tax rates, despite their negative spillover effects, especially in developing countries. 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.
Second, and in contrast to aid effectiveness principles, Doing Business indicators promote one-size-fits-all solutions to development. The Busan Declaration on Aid Effectiveness outlines five fundamental principles for improving cooperation for effective development. The Declaration highlights how ownership is the first of those principles, stating that, “Partnerships for development can only succeed if they are led by developing countries, implementing approaches that are tailored to country-specific situations and needs”.
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 private sector development.
Indicators do not reflect small businesses reality in developing countries
Last but not least, Doing Business indicators use law firms as the main source for their data. This approach is problematic and means that analysis is often disconnected from reality. Concrete application of laws and regulations, as well as the reality of corruption, are absent from the report. In addition, there is a question mark over the relevance of some of the indicators as far as the real needs of SMEs in developing countries are concerned. A recent article published in the Journal of Economic Perspectives5 by two economists from the World Bank and Harvard University show that the indicators of the Doing Business report do not capture the reality lived by SMEs. Using the World Bank’s own Enterprise Surveys6, the authors show that there is almost zero correlation across countries between the Doing Business survey and Enterprise Survey responses. Interviewed by the Wall Street Journal, one of the authors claims 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”.
At the same time, Doing Business fails to assess important issues causing market failures. Geographic location, availability and cost of real estate, transport infrastructure, skilled workers and finance are key factors of a functioning market ignored by the indicators.
Eurodad believes that private sector development should play a role in poverty eradication. However, drastic changes in the report’s methodology are needed to produce a document that serves as a valuable tool to assess and help private sector’s contribution to this goal. Until these changes are made, the World Bank should remove the rankings from its reports as they exert unnecessary influence over the agenda of policy-makers in many countries. The World Bank has previously undertaken a dialogue with relevant stakeholders but has failed to take their recommendations into consideration. It is therefore very unlikely that the World Bank will be able in the future to improve the Doing Business Report.
1 The indicators are: ‘Starting a business’; ‘Dealing with construction permits’; ‘Getting electricity’; ‘Registering property’; ‘Getting credit’; ‘Protecting minority investors’; ‘Paying taxes’; ‘Trading across borders’; Enforcing contracts’; ‘Resolving insolvency’. The report also produces an indicator on ‘Labour market regulation’ that is no longer used when establishing the rankings. 2 http://www.doingbusiness.org/press3 http://siteresources.worldbank.org/EXTDOIBUS/Resources/db_evaluation.pdf4 http://ieg.worldbank.org/Data/reports/chapters/inv_clim_overview_0.pdf5 http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.29.3.1216 Enterprise Survey is a firm-level survey of a representative sample of an economy’s private sector. The survey covers a broad range of business environment topics including access to finance, corruption, infrastructure, crime, competition and performance measures.