The Doing Business Report: a longstanding controversy

5 February by Gino Brunswijck

Source: akchabar.kg

Recent criticism of Chile’s ranking in the Doing Business Report (DBR) has once again put the report in the spotlight, with renewed calls for scrapping the highly controversial annual 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
publication. Over the years Eurodad has consistently demanded an end to the DBR because of its lack of scientific rigour and biased policy orientation.

The DBR has been published each year since 2002, ranking countries on 11 indicators which measure the ‘ease of doing business’. The indicators are intended to measure the impact of business regulations - such as registering property, paying taxes and trading Market activities
trading
Buying and selling of financial instruments such as shares, futures, derivatives, options, and warrants conducted in the hope of making a short-term profit.
across borders - on small and medium sized enterprises (SMEs). The report is highly influential and gets considerable media coverage. It has recorded nearly 3200 business reforms since first publication and it is widely used as a tool by policy makers.

Chile demonstrates the methodological weakness of the DBR

The media has had a field day over recent controversy between 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
and Chilean government. The bank’s then Chief Economist, Dr Paul Romer, has implied that Chile’s see-saw rankings (see graph) are purely down to changes in methodology, and do not reflect any real changes in the country’s business climate. He also claimed that political manipulation could have biased the ranking favourably towards one particular presidential administration, leading to the Chilean government to demand an official investigation. A few days later, Dr. Romer backtracked from his initial comments in a blog, but the public debate on the reliability of the DBR raged on and he stepped down a week later as Chief Economist of the World Bank.

Source: Center for Global Development: Justin Sandefur and Divyanshi Wadhwa, based on data from www.doingbusiness.org and World Bank “Doing Business” Reports, 2006-2018.

Once again, the DBR’s methodological rigour and its predisposed policy orientation are under scrutiny, with Eurodad and other civil society groups - as well as independent reviewers appointed by the Bank - calling for the rankings to be dropped. Rating countries by aggregating selective indicators introduces a degree of arbitrariness, as it weighs indicators according to what is ‘better’ for business. As the Independent Panel, headed by Trevor Manuel put it: “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 chosen methodologies have been controversial both inside and outside the Bank, leading over the years to numerous modifications - making a comparative analysis over time meaningless. This severely compromises the credibility of the index, since jumps up and down the ranking do not necessarily correspond to substantive regulatory changes in the business environment. Chile’s case is a prime example of why it should be abandoned.

DBR bias against strong regulation

The DBR puts strong emphasis on regulatory ‘hurdles’ or ‘obstacles’, while socio-economic and developmental benefits of regulation are largely ignored. The DBR claims to promote regulatory best practice - but as the Independent Evaluation Panel argues, since “(…) most of the indicators presume that less regulation is better, it is difficult to tell whether the top-ranked countries have good and efficient regulations or simply inadequate regulation.”

The report also attempts to measure the ‘administrative burden’ of paying taxes, using flawed sub-indicators such as the total tax rate and the number of payments, despite numerous calls to drop these sub-indicators from the overall index. Although the ‘Paying Taxes’ indicator is unsuitable for measuring development progress through improved tax collection, the Addis Tax Initiative uses DBR-country ratings.

Furthermore, the data is collected mainly from consulting, accounting and law firms based in urban and formal settings, and so risks being disconnected from the real needs of SMEs operating in informal or rural settings.

Concerns over DBR policy influence

The DBR exerts significant influence over policy makers, but as the Independent Panel notes, “It is important to remember that the report is intended to be a pure knowledge project. As such, its role is to inform policy, not to prescribe it or outline a normative position, which the rankings to some extent do.” Despite its dubious methodology, the DBR is widely used as a measure of private sector development by donor and recipient governments. For example, ‘improvement on DB ranking’ is included as a target in the national development plans of numerous developing countries (including, for example, Benin, Senegal, Ghana, Zambia and Ivory Coast). DBR benchmarking also features in donor-led initiatives such as the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. New Alliance on Food Security and Nutrition - including the country frameworks for Ghana, Ethiopia, Nigeria, and Tanzania.

However, the DBR is even used more extensively in economic decision-making within the framework of loan conditionality, or other channels of influence such as advisory services. This inherently locks countries into a set of policy prescriptions and prepares the ground for donor-induced regulatory reforms, as was the case when DBR-based reforms were included as conditions to a programmatic loan to Ukraine in 2014 (through the World Bank’s Development Policy Lending instrument), which in general provides budget support for policy reform. Before getting the money, Ukraine had to undertake a number of ’Prior Actions’, including passing laws to ease business and property registration, and reducing the number of permits. DBR indicators were used to benchmark these conditions, and the bias towards deregulation is obvious from the terms of a second loan to Ukraine in 2017, including the establishment of a ‘deregulation framework’.

Advisory services are also routinely used by donors to influence policy making in partner countries and to advance the DBR agenda. For example, the Country Partnership Framework (CPF) for Botswana - the basis of World Bank assistance to the country - anticipates Reimbursable Advisory Services. These are paid-for services including technical assistance, analytical services and implementation support, offered by the Bank at the request of middle and high-income countries. According to the CPF, “Botswana’s Doing Business ranking should improve as a result of the Reimbursable Advisory services.”

Finally, the IMF 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
routinely refers to the DBR rankings as part of their economic advice in its Article IV surveillance missions to low-income countries - including Zambia, Benin, Guinea-Bissau, Togo and South Sudan to name but a few. Article IV missions monitor the implementation of macro-economic and financial policies by the Fund’s members and offers them policy advice. Such IMF advice is highly influential on policy decisions, especially in potentially recurring borrowers such as low-income countries.

The DBR: long past its sell-by date

Despite longstanding criticism of the DBR from all sides, the World Bank has merely applied cosmetic changes to the methodology and has not remedied the fundamental flaws of the ranking method. Instead, the Bank has championed the unscientific DBR rankings, promoted by a high-profile communication strategy.

Clearly, the DBR is unreliable as an international policy instrument

As a result, the flawed rankings are increasingly influential on policy making and a donor-driven ‘one-size fits all’ approach. In addition, they currently stand accused of directly meddling in Chile’s domestic affairs. Clearly, the DBR is unreliable as an international policy instrument, and on top of that it compromises the principle of democratic ownership. Flawed since its inception, scrapping the DBR is well overdue.


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