Unease about the ease of doing business: countries can build their own reform matrices and impact assessment
By Mallika Mahajan & Pawan Kumar Sinha
“Magic mirror on the wall, who is the most beautiful of all?” – a snow-white line characterizes country reactions whenever the World Bank (the Bank) releases its Ease of Doing Business (EODB) report. The authors have previously written that the methodology of the EODB report is more in the de jure area than the de facto area (bit.ly/36V7HEg). Unquestionably, however, the EODB report had a global ripple effect. Governments or their oppositions capitalized on favorable or unfavorable rank. The goal of policy makers was to design policies that would improve their ranking.
The EODB ranking determined aid and investment flows into countries. This stimulated, in the words of Høyland et al, “rank-seeking behavior”. It is exactly this behavior that caused the data irregularities in EODB 2018 and EODB 2020.
An independent law firm investigated the circumstances and motivations that led to the data irregularities in the EODB 2018 and EODB 2020. Preliminary findings from the EODB 2018 revealed that China fell seven places from compared to the previous year’s report to rank 85. Various methodologies to improve China’s ranking were discussed. One of the methods discussed was to include data from Taiwan, China and Hong Kong SAR, China in the China data. By including Hong Kong SAR, China’s ranking in the 2018 EODB would rise to 70, eight places higher than the previous year. However, this idea was rejected for “political reasons”. Another method discussed was to use the highest score of the two cities included in China’s data (Beijing and Shanghai) rather than a weighted average as was usually the case for countries whose data is collected in two cities. However, it would increase the ranking of China and other peer countries. It was ultimately decided to unlock the report’s underlying data tables and assign higher scores to China for all three indicators of starting a business, legal rights: getting credit and paying taxes. These changes pushed China’s scores and ranking up seven places to 78, the same ranking the country had in the 2017 EODB. China’s pressure worked because at that time the Bank was consumed by a capital increase campaign. The Bank would be in “very big trouble” if the campaign had not achieved its objectives.
Reimbursable Advisory Services (RAS) contracts played a central role in the EODB 2020 Irregularities. request from member countries. RAS projects focus on a wide variety of topics related to economic development. Some RAS projects focus on improving the economic conditions underlying the indicators that make up the EODB report. This was clearly a conflict of interest situation. Saudi Arabia had executed a series of significant RAS contracts with the Bank, some of which focused on issues relevant to the EODB report. By elevating Saudi Arabia to the top spot on the list of top improvers, the Bank would demonstrate the effectiveness of its efforts and validate the amount of money Saudi Arabia had spent on RAS projects. In August 2019, the Doing Business team generated a draft of its list of top improvers for the EODB 2020 which places Jordan as the top reformer with Saudi Arabia ranking second. On September 30, the Doing Business team changed Saudi Arabia’s data to improve the country’s ranking ahead of Jordan. The Legal Rights Index score increased from 3 to 4, adding a point regarding the treatment of debts. The team also reduced the time to comply with the new value added tax.
The Bank’s action, which catalyzed the independent investigation into the data irregularities by an outside law firm, is undoubtedly commendable and reassuring. However, the irregularities and ethical issues raised by the investigation had undermined the legitimacy of the EODB report. In September 2021, the Bank announced its decision to end the EODB report. Houndmouth’s lyrics sum up the situation, “you’re gone but you’re not forgotten,…you flipped the script, and you twisted the plot…I remember when your neon was burning so bright and pink”. The Bank is currently working on a compendium of indicators to assess the business and investment climate of economies around the world until the launch of the new Enabling Environment for Business project.
The interim period should not cause a torschlusspanik (fear) of closing the door in countries willing to invite FDI and ODA. Countries can construct their own matrices for reform and their impact assessment. India‘s Department of Industrial Policy and Promotion is already undertaking such an exercise for states and UTs. This can be expanded to include central government reform programs. The business units of Indian missions abroad, staffed by business experts/academics, can use these matrices to market India to foreign companies. The authors are convinced that with their own benchmarks and without the “tyranny” of international ranking systems, India could emerge as a more attractive destination for foreign companies.
The authors are respectively, Chief Commissioner, CBIC, and Director, International Anti-Corruption Academy, Austria