OPINION

Recalculating ease of doing business

Country rankings may have been influenced by politics

What is the controversy?

Earlier this month, the World Bank announced that it would revise the methodology it uses to calculate the ease of doing business index, a move that is expected to affect the rankings of countries in the last four years. As its name suggests, the index ranks countries based on how welcoming they are to businesses, as measured by criteria like the number of days it takes to start a business or obtain a licence. The decision to revise the methodology comes after the Bank’s chief economist Paul Romer raised concerns that the rankings could have been influenced by politics. Incidentally, India recorded its best-ever improvement in the latest ease of doing business rankings.

Why is it significant?

The ease of doing business index has become a popular tool tracked by governments trying to show the world that they offer a favourable investment climate for private businessmen. This stands true despite the fact that many countries, such as India, have expressed their displeasure in the past over their own standing in the rankings. Mr. Romer’s comments, however, mark the first time that a top official at the Bank itself has admitted to the possibility of political influence over the rankings. In an interview with the Wall Street Journal , Mr. Romer stated that he could no longer defend the integrity of changes made to the methodology used to rank countries. Meanwhile, some critics have pointed to Chile which has seen its ranking fluctuate widely based more on the ideology of the government in power than on underlying business conditions.

What are the other issues?

A common criticism of the ranking is that it limits its sample size to just a few major cities, thus projecting an imperfect picture of overall business conditions. Others have wondered if governments may be gaming the rankings by tailoring their policies to specifically fit the World Bank’s criteria instead of trying to enact wider structural reforms. Another criticism is whether the bank is right to measure a country’s business environment based on written legal rules rather than investigating the actual ground conditions in which businesses operate. Many businesses, for example, may be able to bribe their way out of bad rules.

In fact, in their 2010 paper “How Business is Done and the ‘Doing Business’ Indicators”, Mary Hallward-Driemeier and Lant Pritchett found that there was significant variation between World Bank’s surveys and actual business conditions.

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