the BM throws the baby away and holds the bath water

A real earthquake in the community, as its drafting has mobilized more than 60 experts from the Bank and the contribution of more than 2,000 stakeholders covering 190 economies. The data collection covered more than 3000 corporate regulatory reforms.

For the beneficiaries of the contents of the report, the question is what the meaning of the Bank’s decision is. And this with regard to the relevance and credibility of the indicators of the old reports, or even of other activities. In addition to advice to partner countries; and what will happen with monitoring the business climate.

A recurring challenge to the relevance of Doing Business and repeated irregularities

The question of the relevance of the Doing Business indicators started with the publication of the first report. Some saw in this the reflection of a neoliberal conception of development.

This attitude is based on the fear that the more an economy is controlled and/or regulated, the worse the Doing Business indicators will be. It follows, of course, that it would rather be necessary to deregulate states and deprive countries of the tools to implement policies to direct investment and economic activity. This argument underestimates the importance of making transparent the public policy trade-off between the use of economic governance tools and their implications in terms of barriers to business development.

The controversy over the relevance of the indicators also concerns the methodology for aggregating the indicators and its implications for country rankings. The case of Chile in particular will be highlighted to cast doubt on the relevance and even credibility of these methods and their changes from one year to the next.

Indeed, what is noted in the case of Chile is the ranking that will experience an oscillation associated with the change of power between the socialist presidency (2006-2009 and then 2014-2017) and the conservative presidency. It should be noted that in the years when Chile’s overall ranking fell sharply, the score of the various Doing Business indicators for this country did not always fall. Or, if one has fallen, there is compensation by the other. This may give rise to the argument of the Bank’s experts that the fall in Chile’s ranking is justified by the greater aggressiveness of the other countries.

Paul M. Romer, Nobel Prize in Economics, will apologize in January 2018, following his departure from the Bank, to Chile and other countries affected by the changes in methodology underlying some of the evolution of the ranking. He will then explain that he does not question a (political) manipulation of the figures and that the method changes were justified.

According to him, the problem lies in the insufficient explanation of the meaning of the figures and the drop in the ranking. It is therefore not integrity that calls into question Prime Minister Romer’s criticism. An external audit report will also confirm that there is no evidence regarding the manipulation of numbers in the case of Chile.

It will be different for the cases of the 2018 and 2020 reports that led the World Bank to exit Doing Business on September 16, 2021, while it was still one of its flagship products. The Bank’s decision is to support multiple audit reports. The last and most decisive is the one she delivered on 15 September 2021 on behalf of the international law firm WilmerHale.

Previously, two internal but independent missions were carried out by the Bank, on the one hand the process of data collection and processing and on the other hand the identification of irregularities in the period 2016-2020. The results were published on December 8 and 16, 2020 respectively. The conclusions are final:

i) Porosity of the process from the assessment by the experts to the stage of publication of the report, meaning that illegal interventions would have taken place. ii) A total of four irregularities have been identified, one for the 2018 report on China and three others for the 2020 report on Saudi Arabia, Azerbaijan and the United Arab Emirates.

The Irregularities process was similar in 2018 and 2020. A version of the report – with scores and rankings – was compiled by the Doing Business expert team. An intervention by one or more senior officials of the Bank will lead to a revision which, according to the audits, does not justify either the methodology or the approach of the experts of the report.

The irregularities in the 2018 and 2020 reports show that a real breach has been detected in the reporting system. It is not so much the number of irregularities that matters, but the high rank of those responsible and their active or passive involvement.

The future of monitoring the quality of the relevant business climate

The irregularities found are serious. They even repeated themselves more lightly. However, the relevance of the issue of making the costs of administrative procedures more transparent for business, the central aim of Doing Business, is not in dispute. Even though there may be discussion about their raison d’être, especially about the need for instruments – administrative ones – for the coherence and effectiveness of each country’s economic policies. Based on this double observation, two options have been made available to the World Bank for the future of monitoring the quality of the business climate.

The first, suggested by the September 15 WilmerHale audit report. It concerns the measures that prevent such irregularities from recurring in the future. The auditor’s recommendations relate to the Bank’s procedures and culture.

According to the authors of the audit, four areas in particular need to be strengthened:

  • Formalize more procedures at the level of the Doing Business expert team;
  • Protect the product of these experts from any external intervention by the Bank’s management, including the failure to disclose the ranking prior to the publication of the report;
  • Make more information about the data used available to researchers and other stakeholders in a way that allows for large-scale, public verification;
  • Reducing the vulnerability of the expert team’s staff vis-à-vis the executive, while enhancing information about ethics and their practice.

The second option is that of the Bank itself. It ends Doing Business and promises to work on a new approach to monitoring the investment and business environment. The Bank’s extreme response could be explained by the fact that some of the authors of the irregularities – either through their active involvement or through their passive attitude – are at very high levels of World Bank responsibility. [1]. If that’s the motivation for his reaction, then that wouldn’t be nearly what’s needed. It would then be necessary to review all aspects of the Bank’s functioning – reliability of data and other decisions – and not limit it to what has happened in relation to Doing Business. That would be throwing the baby out and keeping the bath water.

A third option could have been considered to maintain the benefits of monitoring the business environment and to learn from the shift that has occurred. It is largely justified by the way that remains to be done in terms of the business climate. Data from 2020 shows that the average score of countries for multiple indicators is still a long way from that of the best country with the highest score. The shortfall in the quality of the business climate is all the more worrying in the case of the average of the countries of sub-Saharan Africa.

This is particularly the case for resolving insolvency, enforcing contracts, obtaining credit and protecting minority investors. For setting up a company, the average score and the maximum score are close to each other. In other words, the investor has a relative facility at the time of incorporation of the company, but would face difficulties in obtaining financing and in obtaining its rights in the event of a dispute.

This third option would then be to follow the recommendations of the WilmerHale report by taking prompt action. As we continue to publish the Doing Business report series. At the same time, fundamental adjustments will be made to the content of the monitoring of the business environment to bring it back to the central objective – such as assessing the weight of administrative procedures – rather than putting the issue of classification ahead of the rest.

This option would then consider several factors by gradually and rapidly introducing additional guidelines. One of the most important, to draw lessons from the case of Chile, concerns the broadening of the scope of business environment monitoring to take into account – if only through identification – elements that could offset the burden of administrative procedures and justify.

A second factor to consider is the weight of anything unproductive, which is not part of the usefulness of goods and services to consumers or the consistency of wealth itself. Even if these non-productive elements can be essential for wealth creation.

To complete the picture of the business environment, other factors also need to be assessed: the extent and nature of competition in the markets for goods and services; the weight of incentives and other direct or indirect support. To identify the sources of wealth creation from any other transfer or conservation operation.

At the level of interpretation, it will be important not to give the impression that it is about condemning the economic policies that can justify any of these measures. The aim will always be to report as transparently as possible about the contribution and costs of these situations.

Finally, it would be equally interesting to assess business practices. That is, both the reality of effective implementation of legal provisions on the one hand. For example, the applicability of court decisions for business disputes. And on the other hand, at the level of the nature and quality of business practices between companies, for example in terms of suppliers/customer relationships.

It is often at the level of the last link in the chain of application of regulations and trade relations that the obstacles to the proper functioning of the company arise.

Pending the implementation of the new approach, it is then advisable to ensure that the period in which the monitoring of the quality of the business climate is not extended is not extended. This keeps the baby safe after throwing out the bath water.

[1] Among the officials mentioned in the Wilmerhale report, we find the name of the general manager of the Bank, who later became general manager of the International Monetary Fund, that of one of the designers of Doing Business, a chief of staff to the president of the bank that later becomes responsible for the MENA region, etc.

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