Posted on August 22, 2022
After the Doing Business ranking data manipulation scandal, which was later confirmed by the internal institutional investigation, the World Bank decided to stop publishing this annual report on corporate regulation.
Over the past two decades, this report has provided an important account of the quality of business regulation in countries around the world and has contributed to the implementation of many reforms that have made business easier and accelerated economic growth.
With this in mind, do we need a new Doing Business?
What is business?
It is an annual ranking of the quality of business regulation covering no less than 190 economies around the world.
Prior to the creation of this index, the issue of institutional quality was rarely addressed in economics because there was no single measure of the quality of laws, although economists already knew that laws and other regulations certainly have economic consequences, especially with related to economic efficiency. Simply put, countries with a more business-friendly climate will have higher economic growth rates.
Doing Business collected objective data on the spot from its partners, who were mainly law firms, audit and consultancy firms, in the form of case studies. In this way, the actual administrative burden for small and medium-sized enterprises was measured, i.e. not the legal term for a procedure, but how long it actually lasts. Regulatory burden was measured by the number of man hours required to complete a procedure, the number of days it takes and the direct costs through fees and taxes paid.
The Doing Business observed 10 separate areas:
- Registration of a new company
- Obtaining a building permit
- Getting an electrical connection
- Real Estate Registration
- Getting a loan
- Protection of minority shareholders
- Payment of taxes
- Trade across borders
- Performance of the contract
- Bankruptcy settlement
Each of these areas has been examined using multiple indicators.
For example, registering a new company included how many procedures were needed to set up a new company, how many days this process took, and how much the costs (fees and taxes) were for new companies (limited liability company). If this process did not involve significant costs and if the individual procedures were not demanding, the country scored well. The scores ranged from 0 to 100; a high number of points meant a better trading environment. The country with the highest score was given the maximum of 100 points, and the difference between the maximum score and each country’s individual score was called DTF (Distance to border).
Why was business important?
Until the development of this measure, the quality of regulation was measured by subjective criteria, such as the perception of business leaders or economists. An important example is the World Economic Forum’s Leaders’ Opinion Survey, which drew the answers for the equally famous Global Competitiveness Report. But such measures are quite difficult to compare because they are vague and often influenced by the local context.
For example, Tajikistan is achieving similar results as in Germany with regard to such measures, but the situation there is certainly worse, as confirmed by other studies. Therefore, it is more likely that in Tajikistan there is a problem with the sample of respondents to these questions. Their reactions may be influenced by the government’s over-optimism in judging the work of the courts because they don’t know how an independent judiciary works. This explanation of the results is more likely than the independence of courts in Tajikistan from political influence or corruption compared to German courts.
Doing Business was therefore an excellent diagnostic tool precisely because it was able to compare the quality of regulations in different countries, but it also clearly showed what is possible with reforms, namely ‘with political will and administrative effort it is possible to significantly improve the situation, as others have done so before. And perhaps most importantly, it made it possible to see exactly what needs to be changed – be it the number of procedures needed, their duration, the amount of associated fees or something else entirely. This made Doing Business very popular among economists, investors and politicians alike – everyone wanted their country to be as high as possible on this list.
Do we really need business?
Unfortunately, it seems that the popularity of the Doing Business list has led to its demise.
Simply put, if there is a benchmark that attracts investors and improves the political image, everyone wants to get away with that as best they can. This has been made possible in part by the nature of the Doing Business publication, as it is much easier to influence the results than with other indicators of a more general nature. Here we see clearly what needs to be done to improve the ranking.
In practice, therefore, many of the reforms in improving the administrative environment and business regulation were really only reforms in areas measured by Doing Business, while neglecting all others.
In short: “if the World Bank measures it, reform it, if it doesn’t measure it, leave it alone”.
That’s why we got some absurd examples in practice: Is the business climate in North Macedonia really better than in Germany? or in Thailand instead of the Netherlands, or in Serbia instead of Israel? Some countries, such as Serbia or Slovakia, did not even hide their desire to move up the rankings: instead of calling the official working groups “groups for improving the business environment”, they became “groups for improving the position of the country on the Doing Business list”.
Doing business has another problem: it involves a strong rule of law – that the laws are applied equally to everyone, without favoritism, corruption and other weaknesses in the administration. This is still an illusion in most countries, especially for countries with low levels of judicial independence and high levels of corruption. The founders of Doing Business tried to avoid this trap by using real-life cases – but if you disturb someone important in a country with weak institutions, the entire justice system evaporates very quickly.
Finally, the importance attached to the ranking in the list led to political pressure to change the rankings of some important countries, which eventually led to a scandal with the determination of the final results. Due to this scandal, it was decided to end this investigation and the publication of the report. The internal investigation found that World Bank management had directly influenced the manipulation of the results in the case of China, hoping to increase funds for that country, while also finding irregularities in the case of Saudi Arabia, the United States and the United States. Arab Emirates and Azerbaijan.
With all these issues in mind, it was time to act.
But removing this ranking completely is not the smartest solution. We cannot hope that the World Bank or international institutions will solve this problem. Kristalina Georgijeva, accused in the internal report of being the person who directly requested the disclosure of data, became the president of the International Monetary Fund.
Doing Business has proven to be very helpful in implementing reforms: in many countries it no longer takes several months or thousands of dollars to register a new business (as was the case in many countries in Africa or Latin America), leaving a large number of entrepreneurs operating on the black market. It is already possible to do this in a few days and with minimal costs. More than 3000 individual reforms have been registered since the publication of this report. This wave of reforms made it easier to do business in 190 countries.
Therefore, it is a better solution to correct Doing Business instead of not publishing them anymore.
However, the new version of the Doing Business list should be different from the previous one. He must answer the questions asked earlier and guarantee that the data is not manipulated.