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:
- the World Economic Forum’s World
Competitiveness Reports,
- the UN’s Human Development Index,
- Transparency International’s Corruption
Perceptions Index,
- the Heritage Foundation’s Index of Economic Freedom.
- The Global Entrepreneurship Monitor
- F. Schneider’s regular updates on the size of
shadow economies around the world (a recent and very comprehensive one here)
- 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.
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.
