Earlier this year, the World Bank asked me and five academic colleagues to develop recommendations on how to improve the methodology of its annual report. To do business report, which ranked countries based on the quality of their trade regulations and overall business environment.
The report had been a lightning rod for controversy since its inception in 2003. Although it generated glowing coverage in the global economic media, it was also the subject of constant criticism for its bias seen as anti-regulatory, anti-union and anti-tax.
On September 1, we submitted our final recommendations, calling for a major overhaul of Doing Business, including ending the practice of ranking countries. Two weeks later, the World Bank announced that it was abandoning the report altogether after a separate investigation by an external law firm concluded that the data had been deliberately manipulated to change the rankings of some countries, including those of China and Saudi Arabia.
Aside from the debate about what really happened in the past, the end of Doing Business has important consequences. We have no doubt that the world needs a tool to measure countries’ conditions for business development and attractiveness for foreign direct investment, and that the data from such a project is very relevant to the both for researchers and for business and government leaders.
The World Bank has already declared its intention to continue working on business climate issues. But to recover in this arena, it will need to overcome a deep trust deficit and take drastic steps to restore public confidence in its data. Our ideas on how to fix Doing Business could now serve as minimum criteria that any new effort in this area should meet.
First, the World Bank should not create a new index to rank countries, like Doing Business did. Such aggregate indices are inevitably arbitrary, and rankings invoke normative judgments that go far beyond the available evidence. Even before the recent data manipulation scandal, it was clear that the methodology behind many individual Doing Business metrics needed to be revised.
The main problem was that Doing Business did not actually survey companies, nor measure the real costs of doing business for a representative set of small and medium enterprises. Instead, she relied on the subjective judgments of a small group of experts, who were asked to assess the costs of regulation for a hypothetical company that was often quite unrepresentative in many countries assessed by the bank. The emphasis on of swear evaluations should be replaced by de facto conditions.
Luckily, separate World Bank surveys have periodically asked executives of actual businesses some of the same questions Doing Business asks: about how long it takes to register a business, get a building permit, clear goods, etc. It turned out that the companies’ own responses had nothing to do with those of the experts at Doing Business. If there is a successor to Doing Business, it must be based on real data, not assumptions.
A second set of issues concerns assumptions about the right policies or regulations, which are implicit in any ranking of the business environment. For some indicators, such as delays in registering a business, less is clearly better. But for others, like the corporate tax rate, the optimal policy is the subject of vigorous academic debate.
The tax issue has become increasingly sensitive for the Doing Business report in recent years. As 130 countries finalized their plans this year for a global minimum corporate tax rate, the index continued to encourage a race to the bottom in corporate taxation.
Third, any serious attempt to measure a country’s business environment must take into account government efforts to correct market failures and deliver essential public goods. But the World Bank’s broad view of how to promote a good business climate, as embodied in the Doing Business Index, suffered from serious blind spots. In order for the private sector to prosper, apparently, the government needed most of all to step down.
This view ignored public investments in basic infrastructure such as roads, telecommunications networks, and power grids, all of which are fundamental to doing business but were completely missing from the report. There was also no reference to crime prevention and public order, a skilled workforce or investment in research and development.
Finally, there is the question of the credibility of the data. Greater transparency would be a good start. The raw data underlying the Doing Business report was never publicly available, so the analysis could not be replicated independently. An excessive focus on rankings and lack of access to data has resulted in a product vulnerable to political pressures and data haggling.
But transparency rules can never guarantee against deliberate manipulation. Ultimately, the World Bank will have to convince data users that it has built a functioning firewall between its analytical work and its lending operations. To this end, the Bank should abandon the practice of selling advisory services on how to improve the results of the statistics it measures directly.
The demise of Doing Business offers the World Bank an opportunity to regain its intellectual leadership in global development through a renewed commitment to collect and analyze credible data. Saying that the scandal was unfortunate but that the methodology was correct will not be enough.
Doing Business rankings – which are the result of aggregating indices – have always been questionable, as they did not provide an accurate picture of conditions on the ground and left no room for critical public investments, reasonable taxes, or necessary regulations. . Any future effort to assess the business environment in member countries will need to address these gaps.
This commentary is also signed by the other members of the external review committee for Doing Business: Laura Alfaro, Alan J. Auerbach, Takatoshi Ito, Sebnem Kalemli-Özcan and Justin Sandefur.
– Mauricio Cárdenas, former Minister of Finance of Colombia, is a visiting scholar at the Center on Global Energy Policy at Columbia University. © Project Syndicate, 2021www.project-syndicate.org