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Tuesday, 9 July 2013

REVOLUTION IN THE KINGDOM OF WONK: REVIEWING THE WORLD BANK'S DOING BUSINESS INDICATORS


This post was written by myself but originally appeared as a series on the ACCA Blog. This is a slightly modified version.

Ever heard that your country is the nth best place in the world in which to do business? Have you chuckled or raged at the list of developing countries that rank inexplicably higher? If you have, chances are you have heard of the World Bank’s Doing Business reports. What you may not have heard of is that these rankings very nearly ended up being consigned to history this summer.

On 24 June 2013, the Independent Panel reviewing the Doing Business methodology reported on its findings and recommendations. The most controversial of them all? Scrap those pesky country rankings. To understand how they came to suggest this, and whether this is a good idea, you need a little bit of background.

The study itself

The Doing Business methodology is based on replicating the hoops a small-but-not-too-small (eventual size of ca. 60 employees) formal business has to jump through throughout its lifecycle: Starting up, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. The researchers then assign scores to each category, with countries with low levels of burden scoring higher, and aggregates those into a single ‘Doing Business’  score for the country.

Drawing on published documents and the experience of professional advisers (see here for a full listing), the methodology generally considers three types of burden: time, money, and access to legal instruments or information; all measured in standardised increments. Any distinct ‘process’ is assumed to take at least a day (even if one could, in theory, conduct it in seconds or simultaneously with other processes). Costs are standardised as shares of each country’s per capita GDP. Businesses are assumed in most cases to be located in the country’s capital city. The list goes on, but you get the picture. There are substantial limitations that casual readers will tend to ignore, or dismiss.

Incidentally, some of these topic names are misleading too. ‘Getting credit’, for instance, does not reflect the ease of getting credit in a country. Rather, it reflects how burdensome it is for a lender to provide a business with credit – can they get sufficient credit information on the borrower, for example? Or how easily can they enforce a claim?  

Even worse, measurement errors can make any such composite rankings nearly irrelevant. The Independent Panel cited evidence that measurement errors in alone can change the Doing Business ranking of a mid-ranking country such as Vietnam by about 30 places.

Finally, the way topic scores are aggregated into a single country score assumes that all elements of the Doing Business indicators are equally important (i.e. it applies no weighting). This is clearly not true as the importance of different obstacles shifts within a business’ lifecycle and between different stages of economic development. Burdens, moreover, do not accumulate in an additive way: being unable to access electricity, for instance, would make it irrelevant how well regulated the business is in other respects.

The Magic Circle

Doing Business was, from its inception, part of an elite group of global policy-relevant publications. If you’re interested in such data you will no doubt have your own list, but here’s mine:

  1. the World Economic Forum’s World Competitiveness Reports,
  2. the UN’s Human Development Index,
  3. Transparency International’s Corruption Perceptions Index,
  4. the Heritage Foundation’s Index of Economic Freedom.
  5. The Global Entrepreneurship Monitor
  6. F. Schneider’s regular updates on the size of shadow economies around the world (a recent and very comprehensive one here)
  7. The World Bank’s Enterprise Surveys

To make this Magic Circle, a publication needs to offer regular, scheduled releases and a guarantee of longevity. But it also needs to produce two things that policy wonks crave: first, summary tables that condense a range of very complex issues into standard, quantitative information. Second, country scores and rankings covering a three-digit number of countries – ideally downloadable through a user-friendly interface. 

The first of these features is valuable because the policy industry has, over time, become more standardised and de-skilled, relying on large numbers of bright but relatively inexperienced graduates. Sitting on top of these seven datasets, one can offer sage opinions on Cambodia’s regulatory shortcomings or key medium-term challenges for Burkina Faso without being able to point to either on a map.

The second feature, national scores and rankings, is important for three reasons. First, because rankings ensure a high profile for otherwise dry subjects; they inject an element of urgency and national pride into matters that are otherwise hard for either politicians or Joe Public to care about. Second, because rankings point out best practice. The world is an impossibly big place and most people will never see much of it, so it is hard to know which countries have the best-financed small businesses, much less what one might be able to learn from them. And finally, because scores can be correlated with other variables, such as per capita GDP or unemployment, in order to demonstrate the potential impact of reforms.

The Crisis and the Critics

This is not the first time in its 10-year history that the Doing Business methodology has come under scrutiny. Despite DB’s many methodological flaws, the reason for such attention often has little to do with the quality of the work itself – simply put, Doing Business influences policy and occasionally capital allocations on a global scale. You can’t do that without making enemies.

As DB became more successful in setting the agenda for regulatory reform, especially in the developing world, stakeholders began to take particular issue (see here, here, here and here) with the ‘Employing Workers’ pillar of the DB index, which measured the ease and cost of hiring and (crucially) firing across countries. The charge was that both the DB methodology and the World Bank’s commentary rewarded reforms that served to reduce employment protection, including some in breach of the International Labour Organisation’s (ILO) guidelines.

It was becoming unclear whether the ‘Employing Workers’ score was measuring genuine ease of doing business or whether it was an ideologically-driven measure of the balance of power between employees and employers. Similarly, the ‘Paying Taxes’ score, it was argued, largely reflected countries’ political preference for a big or small state and the ability of some nations to rely on natural resource revenues rather than tax to finance the state.

Eventually, and despite having published an independent evaluation already in 2008, in 2009 the World Bank asked a Consultative Group representing Unions, civil society organisations, businesses and the legal profession to review its methodology once again. This new Group reported on its findings in 2011 and the World Bank has not reported Employing Workers scores ever since.

These debates are typical of a wider debate on Better Regulation – that of accounting for the benefits of regulation to small business (see here for a nuanced discussion).

Cost and benefits are properties of the entire regulatory framework related to business activity and must be seen in context. Providing information to government or a third party is costly but whether or not it is a burden depends on what the entity would have done without coercion and what the market and society get in return. Being pro-market and being pro-business are two different things and it is dangerous to confuse them. This was, in fact, ACCA’s rationale when we lobbied against the European Commission’s proposals to exempt micro-companies from the need to file annual accounts.

ACCA’s brief experience of Doing Business

As a global organisation, ACCA often has good reason to use such datasets too. A good example can be found here. It is taken from our Accountants for Small Business report), where we demonstrate (tentatively) that the financial system is better able to allocate capital to SMEs in countries where more borrower information and legal protection are available to finance providers.

But we’ve also been more intimately involved from time to time. Back in 2009, the UK was in the throes of a regulatory reform fever, which we reviewed in our report, Coming of Age: What next for the UK Regulatory Reform Agenda? as well as a detailed submission to the UK Regulatory Reform Committee. As part of this range of activities, the Better Regulation Executive within the UK’s Department for Business, Innovation and Skills (BIS) was actively considering ways of improving the UK’s already-high Doing Business ranking, so they spoke to ACCA about company registration and taxation, as well as the general governance of regulatory reform. By 2010, the UK had overtaken Denmark to become –quite symbolically- Europe’s ‘best place to start and grow a business.’

The BIS staff even presented their thoughts to ACCA’s UK Small Business Forum, and were extremely honest and clear about the following:

1.    Britain’s high rankings on Ease of Doing Business helped put into context the constant complaints from small business bodies about how over-regulated their members were.
2.    the government of the day had made a political decision not to try to improve Britain’s Employing Workers ranking (Britain’s weakest DB score at the time) as the financial crisis had increased support for regulation in this area
3.    they found Doing Business to be methodologically flawed and were discussing their concerns with the World Bank and IFC.
4.    they were keen for a greater and more varied pool of expert contributors (including accountants) to become involved in informing the Doing Business scores.
5.    they believed there were limits to how high a liberal democracy and EU member could rank on Doing Business, as well as how quickly they could climb in the rankings.
6.    That they nevertheless thought the ranking element of Doing Business was crucial to their efforts to raise the profile of the regulatory reform agenda with ministers.

This last point is crucial. Kai Wegrich of the Hertie School of Governance has demonstrated that, once a critical mass of countries have adopted a particular regulatory reform tool, a race of ‘leaders v. laggards’ tends to develop that spurs more countries to adopt whatever methodologies are seen as best practice for fear of being left behind on a regional or global basis. Tools such as Doing Business create a drive for reform and convergence.

Besides the UK, the Doing Business disciples are not a collection of aid-dependent emerging markets at the mercy of the Washington Consensus – Russia, for instance, had a stated target of getting to the top 20 by 2018 (from 112th place in 2013), and was hoping to attract increased foreign investment in the process.

This time the critics mean business

Why then is this year’s review different? First, because it reflects the growing assertiveness of the BRICSA countries, whose representatives instigated the review in the first place. Forbes hints strongly that the review panel was intentionally balanced between BRICSA and non-BRICSA representatives. Second, because it comes at a time of increased questioning of top-down reforms based on the notion of ‘quality of institutions’.

Essentially, this wonkish debate is part of the much bigger tectonic shift currently underway in what people call the Washington Consensus. Emerging markets are claiming their place in global governance and at the helm of the international institutions that once dictated policy to them. For now, the World Bank’s President has indicated that ‘rankings are part of [Doing Business’] success,’ which I guess must mean they are here to stay. But little by little, the World Bank, and the World, are changing.



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