The end of the doing business rankings

The Ease of Doing Business index was plagued with problems and deserves to be scrapped

Updated - September 21, 2021 01:11 am IST

Published - September 21, 2021 12:15 am IST

On September 16, the World Bank Group scrapped its flagship publication, the ‘Doing Business’ report. This report publishes the influential annual ranking of countries on the Ease of Doing Business (EDB) index . The Group acted on its commissioned study to examine the ethical issues flagged in preparing the 2018 and 2020 editions of the EDB index. The allegation surrounding Kristalina Georgieva, Managing Director of the International Monetary Fund, is the proximate reason for scrapping the publication. As Chief Executive Officer of the World Bank in 2018, Ms. Georgieva is accused of having exerted pressure on the internal team working on the Doing Business report to falsely boost China’s rank by doctoring the underlying data. Similarly, tensions were also reportedly brought to bear in the case of Saudi Arabia’s rank, among others.

How the index works

The World Bank’s decision has wide ramifications, as the index serves varied purposes. Many countries showcase improved ranking to signal market-friendly policies to attract foreign investments. National leaders often set EDB rank targets. This helps them measure domestic policies against global “best practices” and browbeat domestic critics. Prime Minister Narendra Modi, for instance, wanted his administration to ensure that India breaks into the top 50 ranks of the EDB index. Some countries seem to use their political heft to improve their rank, polish their international image and sway public opinion (as appears to be China’s case).

The EDB index ranks countries by the simplicity of rules framed for setting up and conducting businesses. Peruvian economist Hernando De Soto’s theory underpins the index. The theory claims that secure property rights with minimal state interventions are a precondition for a free market to flourish. Management consultants and corporate lawyers collect the information for the index on time required for regulatory compliance — as per the statute (de jure) and not as practised (de facto) — from select cities and larger firms.

Advanced countries usually hold the index’s top ranks. India ranked low, around 130-140, till 2014. However, it zoomed to the 63rd position in 2019-20 (see table). Showcasing the accomplishment, India has claimed success of the ‘Make in India’ campaign. The flagship initiative, launched in 2014, sought to raise the manufacturing sector’s share in GDP to 25% (from 16-17%) and create 100 million additional jobs by 2022 (later revised to 2025).

The success is absent on the ground, however (see table). The annual growth rate in GDP manufacturing (at constant prices) fell from 13.1% in 2015-16 to (-) 2.4% in 2019-20. Net FDI inflow to GDP ratio has fluctuated around 1.5%. The fixed investment to GDP ratio (at current prices) fell from 30.1% in 2014-15 to 26.9% in 2019-20. Why is there such a disconnect between the stellar rise in EDB index rank and economic outcomes?

The theory underlying the EDB index could be suspect, the measurement and data could be faulty, or both. For example, China’s phenomenal economic success, especially its agricultural performance (after the reforms in 1978), is perhaps the most unmistakable evidence demonstrating that lack of clarity of property rights may not be the binding constraint in a market economy. What matters is economic incentives. Measuring regulatory functions underlying the index could be tricky and subjective and possibly politically motivated as well, as the controversies surrounding the index seem to suggest. Instances of data manipulation brought to light by the independent investigating agency seems to vindicate such a view.

The EDB index also seems vulnerable to a tweaking of the underlying method. For instance, India’s improved ranking was reportedly an outcome of such an effort. When the index was re-estimated with unchanging procedures, the needle hardly moved. Similarly, Chile’s rank on the EDB index sharply rose when the conservative government was in power and went down when the socialists were ruling despite no changes in policies and procedures. This was reportedly the result of the fine-tuning of the methodology and had profound political implications. Former World Bank Chief Economist, and later Nobel Laureate, Paul Romer, publicly apologised to Chile’s socialist President for World Bank’s less-than-professional conduct in preparing the index.

Weakening labour regulations

Closer home, India has weaponised the mandate to improve the rank in the EDB index to whittle down labour laws and their enforcement and bring them close to the free-market ideal of ‘hire and fire’. Most States have emulated Maharashtra’s lead of administrative fiat, which renders labour laws toothless by dismantling official labour inspection systems and allowing employers to file self-regulation reports.

The government has farmed out critical safety regulations such as annual inspection and certification of industrial boilers to ‘third party’ private agencies (compliance reportedly honoured more in the breach than in observance).

The Labour Department’s inspection is now not mandated; it is optional only by prior intimation to employers. Such abdication of the government’s responsibility towards workers has reportedly affected industrial relations. The workers’ strike at Wistron’s iPhone assembly factory in Karnataka last year is an example. Further, severe industrial accidents are rising, damaging life and productive industrial assets. Though comprehensive data are lacking, available evidence indicates a sharp upturn in such accidents in recent years, which may be associated with the lack of independent inspections and employers’ self-reporting of labour law compliance.

The World Bank’s decision to scrap its annual publication Doing Business report is welcome. Investigations into “data irregularities” in preparing the EDB index, as brought out by the independent agency, seems to confirm many shortcomings repeatedly brought to light for years now. The index appears motivated to support the free-market ideal. It is dressed up under scientific garb and is underpinned by seemingly objective methods and data collection. Strong leaders (and motivated officials) seem to have used their position to manipulate the index to suit their political and ideological ends.

India claimed the success of its Make in India initiative by relying on its ranking on the EDB index without tangible evidence. It weaponised the index to weaken labour regulations. Handing over law enforcement to employers by self-reporting compliance seems to have increased industrial unrest and accidents. It perhaps calls for honest soul-searching as to what havoc a questionable benchmark can wreak.

R. Nagaraj is with the Centre for Development Studies, Thiruvnanthapuram

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