Pacific Money | Economy

Why the World Bank Torched its ‘Ease of Doing Business’ Ranking

In addition to encouraging bad economic policy-making, the ranking incentivized nations to game the system.

James Guild
Why the World Bank Torched its ‘Ease of Doing Business’ Ranking

World Bank President David R. Malpass.

Credit: Flickr/World Bank Photo Collection

In August, the World Bank suspended its Doing Business Report due to what it referred to as a “number of irregularities.” According to Bloomberg, since 2003 the report has ranked 190 economies “based on how easy it is to do business there, taking into account trading regulations, property rights, contract enforcement, investment laws, the availability of credit and a number of other factors.” Moving up in the rankings is often cited by developing country governments as evidence that their economies are modernizing and growing. Narendra Modi had been pushing hard for India to make the Top 50 by 2022, for instance.

But measuring something as nebulous as “doing business” is fraught with methodological and ideological peril. It tends to reduce the complexity of economic activity to a few quantifiable metrics with a libertarian bias, such as the time it takes to get a business license or the number of regulations in a particular sector, ignoring deeper structural, social or political issues – as well as the benefits of certain regulations. As with global university rankings, once governments know how the reports are compiled, they have an incentive to game the system, making cosmetic changes that will improve their place in the ranking without actually reforming anything significant about the business environment.

It also creates an incentive for countries to pursue economic policies that conform with the World Bank’s vision of economic development: eliminating regulations and barriers to investment, pushing for market-friendly reforms, reducing labor protections, etc. This development pathway is not always appropriate in every instance, but if a country wants to move up in the rankings, it may feel pressure to push through sweeping reforms to land ownership, investment regulations and labor laws that are not properly thought out or which result in unintended consequences.

The passage of Indonesia’s controversial “Omnibus Bill” on job creation this week is one such example. The bill contains a grab-bag of market-friendly reforms that are intended to make it easier to invest and do business in the country, changes that would likely have boosted Indonesia up the Doing Business Ranking, if it was still in operation. At the same time, the bill is being strongly opposed by labor unions and civil society groups, which argue that it heavily favors powerful business interests at the expense of workers, human rights and the environment.

There is no explicit link between the passage of this bill and the World Bank’s Ease of Doing Business rankings. But for nearly two decades, many of Indonesia’s government officials and policy-makers have been socialized to view market-friendly reforms that eliminate regulations, reduce the power of workers and open the economy to foreign investment as the preferred engine of economic growth. Much of that ideology flows directly from policies encouraged by the World Bank and the International Monetary Fund.

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The flaws in the Ease of Doing Business rankings have been clear for several years. The Bank’s Chief Economist, Paul Romer, resigned in 2018 and apologized to the nation of Chile, after the latter fell down the rankings due to a change in methodology (as well as possible political biases at the World Bank) rather than any substantive change in its business environment. Modi and India have likewise been criticized for gaming the system, obsessing over moving up in the rankings rather than pushing for real and lasting structural reforms.

In August, the flawed ranking system apparently made the move into full-blown fraud, which is what led to its suspension. According to the Wall Street Journal, data from China, Azerbaijan, the UAE and Saudi Arabia appeared to have been deliberately altered. That was the final straw for the World Bank. The ranking has since been suspended, and it is uncertain whether it will return.

In any event, the rise and fall of the Doing Business Report is a good lesson in the limits of applying standardized rankings to heterogeneous units like countries and their business environments. A one-size-fits-all approach to measuring and understanding economic growth and development, especially one based on the ideological priors of particular institutions and stakeholders, is always likely to contain some fatal flaws. And this is something with which the government of Indonesia, along with the World Bank, is quickly becoming familiar.