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FINANCE: World Bank Watchdog Thrashes ‘Doing Business’ Index

Abid Aslam

WASHINGTON, Jun 14 2008 (IPS) - The World Bank’s flagship effort to promote business-led economic growth is ideologically stilted and of little practical use, says the lending agency’s in-house watchdog.

At issue is the Doing Business Index, in which the bank’s private unit, the International Finance Corporation (IFC), ranks 178 countries on how conducive they are to private enterprise. Those that make it easiest to start and run a private enterprise, as measured by 10 indicators, earn the highest marks.

So flawed is the exercise, launched in 2004 as what the bank calls a major “knowledge product”, that one executive director at the lending agency has suggested that the new critique be included as part of the Doing Business report so users would know not to take the rankings too seriously.

Even so, developing and former Soviet economies in particular perform legal and political contortions to improve their ranking in hopes of boosting foreign investment and with the expectation – stoked by the bank – that increased business activity will translate into faster economic growth.

The bank’s Internal Evaluation Group (IEG), in a report released late Thursday, said the Doing Business (DB) survey is prejudiced in favour of deregulation, overstates its conclusions, and shows “no statistically significant relationship” between its indicators and broader economic growth, much less improvements in national well-being.

“The regulatory framework – the part of the business environment that DB measures – has been shown to be associated with firm performance,” the IEG report acknowledged, “but its association with macroeconomic outcomes is less clear.”

“Since regulations generate social benefits as well as private costs, what is good for an individual firm is not necessarily good for the economy or society as a whole,” the report added.

Yet, it said, seven of the survey’s 10 indicators “presume that lessening regulation is always desirable, whether a country starts with a little or a lot of regulation.”

In consequence, “it is difficult to tell whether the top ranked countries have good and efficient regulations or simply inadequate regulation,” the IEG found.

World Bank management disagreed.

“This is incorrect,” managers said in a written response to the IEG report. “Six of the 10 indicators reward countries for having more regulation or a simplified way of implementing existing regulation.”

During a separate and rare questioning by the bank’s executive board, however, managers said this applied to regulations protecting investors and business property.

In contrast, according to the IEG, the index appears to penalise countries choosing to protect workers.

“The controversial ’employing workers’ indicator is consistent with the letter of relevant International Labour Organisation (ILO) conventions, but not always their spirit, insofar as it gives lower scores to countries that have chosen policies for greater job protection,” the report said.

Bank managers, in their written rebuttal, turned a blind eye to the criticism.

“The evaluation contains a number of important conclusions that management finds most helpful,” managers wrote. “Specifically, these include: The conclusion that the DB ’employing workers’ index complies with the core labour standards and all other relevant conventions of the International Labour Organisation.”

The IEG highlighted several technical issues it said undermined the integrity and credibility of Doing Business.

The number and diversity of sources of information used in rating and ranking countries must be increased and their data validated more systematically, it said.

“The data are provided by few informants, with some data points for a country generated by just one or two firms,” the IEG found. “Of particular concern is the ‘paying taxes’ indicator – DB relies exclusively on a single firm to provide both the underlying methodology and the data for 142 countries.”

The bank also must disclose to users the number and types of informants used for each indicator and the changes that bank staff make to the data. “DB needs to adequately explain to users the possibilities for errors and biases,” the IEG said.

It found that on the bank’s Doing Business Web site, which is used widely, some 40 percent of the data points used to construct the 2007 Ease of Doing Business Ranking were changed after they were posted without making note of the changes and their effects on the country rankings.

“For the sake of transparency, and especially to help the many researchers who use these data, the Web site should disclose all data corrections and changes as they are made and explain their implications for the rankings,” said Victoria Elliott, lead author of the evaluation.

Bank managers said they were seeking to increase the number of informants and to clarify the purposes and limitations of Doing Business.

If improved, the IEG said, the annual survey could prove a useful tool for sparking debate about the changes countries can make to spur the private sector. It cautioned against using the index of country rankings to make decisions about how to allocate resources, however – a view supported by some members of the executive board.

“Policy use of the indicators for reform must be informed by the knowledge that they partially measure the costs to business of certain regulations, and not any benefits,” the IEG concluded, “and that factors not measured by DB are essential to the investment climate in a country.”

The bank’s executive board does not normally meet to discuss IEG reports but held four-hour talks on the latest critique, an indication of the importance but also the controversy the institution attaches to Doing Business. The bank plans to launch a similar index aimed at encouraging and steering changes in agriculture.