It’s Time to End the World Bank’s Biased Business Regulation Ratings

22 January by Peter Bakvis

After years of criticism from labor unions and other progressive groups, the Bank’s own chief economist is accusing his colleagues of ideologically-driven data manipulation.

The World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

http://worldbank.org
’s chief economist has set off a firestorm over its system of assigning ratings to 190 countries’ business climates, which are published yearly through its flagship Doing Business report. Trade unions, civil society organizations, some governments, and international organizations have long criticized the report for its ideologically driven anti-regulation stance.

Now even World Bank chief economist Paul Romer has attacked the report for its lack of “integrity.” As reported by the Wall Street Journal, Romer stated that many countries’ Doing Business scores and rankings, which purport to measure the degree of business friendliness of regulations, changed from year to year because of changes in the report’s methodology — not in countries’ regulations.

While Romer noted that many countries’ scores have been unjustly altered through the methodology changes, he specifically apologized to the government of outgoing Chilean President Michelle Bachelet, observing that the actions of the Doing Business team consisted of putting a “thumb on the scales.” The changes penalized Chile when the Socialist Party’s Bachelet was in power, leading to worsening scores, but improved when conservative President Sebastián Piñera was in power. Romer stated that “changes to the methodologies used in the rankings had the appearance of being politically motivated.”

In the face of strong pressure from trade unions, the World Bank dropped the labor market flexibility indicator from its ratings in 2010, but it continues to give worse scores to countries that mandate higher levels of taxation and social contributions from business.

Bachelet is calling for a full investigation of the World Bank’s ratings system, noting that such a financial monitoring apparatus “should be trustworthy, since they impact investment and countries’ development.” Chilean Economy Minister Jorge Rodriguez Grossi said in a statement that “it is rare to see action this immoral.” Some Chilean officials have suggested that the country’s poor Doing Business ranking might have been a factor in the conservative Piñera’s successful campaign to regain the presidency last month.

The Wall Street Journal article extensively quotes the former director of Doing Business, Augusto Lopez-Claros, currently on leave from the Bank, who vigorously defends the report. Prior to heading the team that prepares Doing Business, Lopez-Claros had a career at the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, Lehman Brothers, and the University of Chile.

Before Romer’s harsh attack, much of the criticism of Doing Business has focused on an earlier labor indicator that gave best scores to countries with highly deregulated labor markets. Having no minimum wage laws, for example, garnered a higher score. Contrary to what Doing Business repeatedly asserted, the World Bank’s own research has found that in most cases labor market deregulation does not improve economic outcomes.

In the face of strong pressure from trade unions, the report dropped the labor market flexibility indicator in 2010, but it continues to give worse rankings to countries that mandate higher levels of taxation and social contributions from business.

This year’s 300-page Doing Business 2018 also made unfounded claims that more “business friendly” regulations are key to lowering income inequality. The report notes that the 20 countries receiving their best (i.e. most business-friendly) scores — almost all of which are advanced economies — have a lower Gini coefficient than the 20 countries that receive the worst scores.

A casual look at the 20 poor performers reveals they include many countries facing severe civil or political conflict, including Syria, DR Congo, Afghanistan, Central African Republic, Libya, Yemen, South Sudan, Venezuela, and Somalia. It’s ludicrous for the Bank to imply that the only thing these war-torn countries have to do to achieve more equal income distribution is to deregulate business.

The International Labor Organization and some academic critics have also observed that the Doing Business report is susceptible to manipulation by the pro-business law firms that complete the survey questionnaires on which the Doing Business scores are based. The firms have included such illustrious corporate citizens as the Mossack Fonseca group, made famous through the Panama Papers for helping wealthy individuals hide their assets in tax havens. Even the IMF acknowledged the “subjective nature” of the Doing Business indicators in a working paper published in 2011.

Amidst all the controversy, the World Bank’s executive board established an independent panel in 2013 that recommended several changes to the ratings report and its status within the Bank, including the elimination of country rankings and deleting the tax rate indicator. The latter penalizes countries that require business to pay taxes or make contributions to pensions and other social protection schemes that exceed a low threshold. However, Bank management rejected almost all the recommendations made by the independent panel.

In the current firestorm created by their chief economist, World Bank officials are continuing to defend their ratings system, including its treatment of Chile. But Romer’s criticism raises critical questions about the appropriateness of the World Bank, a publicly funded multilateral institution, to be promoting a conservative anti-regulation agenda in its “flagship” report and attempting to discredit governments that don’t agree with it.


Author

Peter Bakvis

Director, ITUC/Global Unions – Washington Office


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