Lessons from the death of the ease of doing business index

Synopsis: This article explains issues and problems associated with the Ease of Doing Business report, why it gained so much importance, and should we reform the index or bring a new one in its place?

Introduction

The Ease of Doing Business Index (EoDB) is dead. The flagship product created by the World Bank came under attack on grounds that its data was modified in response to pressure from countries like China and Saudi Arabia. As a result of an independent audit, the index has now been abandoned by the Bank.

Why the EoDB index report was developed?

World Bank researchers developed the EoDB ranking system under the assumption that better laws and regulatory frameworks would increase the ease of doing business and improve economic performance.

What were some issues with the EoDB report?

– EoDB was a crude measure that poorly captured the business climates of complex and informal economies like India. Most of the questions focused on hypothetical cases about limited liability companies. However, the World Bank’s own enterprise survey shows that 63% of Indian enterprises are sole proprietorships and only 14% are limited partnerships. Once we include unregistered enterprises, this number is likely to be even smaller. Thus, focusing on protecting minority owners’ rights in this tiny segment of Indian industries and using it to rank the business climate in India does not seem particularly useful.

– A bigger problem is that it had acquired such power that countries competed to improve their rankings. Why does the index matter so much that countries stoop to pressure the World Bank to improve their rankings? For example, India ranks 139th out of 149 on the World Happiness Index, yet we pay little attention to it while climbing the ranks on the EoDB ladder has been made an explicit policy goal.

– The presumed economic consequences, as well as political benefits associated with improving the rankings, encouraged many countries to try and “game” the system. They made superficial improvements on indicators that were being measured and, when that failed, by putting explicit pressure on the World Bank research team as the current debacle shows.

Why countries competed to rank better on EoDB index?

The answer lies in the potential consequences of ranking. Countries assumed that their EoDB ranking will attract foreign investors.

Since foreign investors often have no real way of assessing the underlying business climate in any country they may use the rankings as a signal in making their investment choices. Empirical evidence about this presumed impact is questionable.

There is indeed some evidence that the score on EoDB is associated with FDI, but this association exists mainly for more affluent countries. Studies show that this association is weak for poorer countries.

For instance, in 2020, China was the largest recipient of FDI despite ranking 85th on the EoDB.

Should we try to reform the index or give up on it?

The decision rests on the answer to two questions.

First, are there universally acceptable standards of sound economic practices that are applicable and measurable across diverse economies?

Second, if the indices are so powerful, should their construction be left to institutions like the World Bank that bring not just knowledge but also wield the heft of global economic power?

Source: This post is based on the article “Lessons from the death of the ease of doing business index” published in The Indian Express on 5th Oct 2021.