For many of us, it’s hard to imagine a world without the World Bank’s “Ease of Doing Business” index. Over the past two decades, the ranking of how friendly countries were to investors became indispensable to columnists, economists and emerging-market politicians. But the annual report is now dead, following an external investigation of apparent “data irregularities” in the rankings.
Its demise is, in fact, a blessing. The index and accompanying report — and, indeed, the entire mindset from which they sprang — seem like relics of a bygone age. The late 1990s and early 2000s, when they were born, represented the high point of a trend in economics associated most of all with the Harvard economist Andrei Shleifer and his collaborators, in which official constraints on entrepreneurship and competition were thought to offer broad insights into societies, economies and growth.
Most of us were convinced that globalization would swiftly reward those countries where investments could be made quickly and protected effectively. Laggard nations would face pressure to lower barriers to entry if they wanted to compete.
Perhaps inevitably, countries found it faster and easier to game the system than to undertake such difficult reforms. If you want to be charitable about it, you could say that the index fell victim to its own success: The more that people read into the rankings, the more determined emerging-economy politicians and bureaucrats were to show quick progress.
Pressure from China appears ultimately to have spurred the index’s cancellation. The investigation speaks of meetings to encourage “methodological changes to the report that might boost China’s ranking,” possibly helped along by leaders from the World Bank involved in delicate negotiations with Beijing. After the changes, China’s position in 2018 rose seven places from 85th to 78th. (Investigators also found that the report’s drafters had looked for ways to “boost Saudi Arabia’s score,” perhaps because Bank officials also hoped for significant revenue from advising the Saudi government.)
On the one hand, this is a harbinger of what’s likely to occur as Beijing’s bureaucrats begin to occupy positions of greater influence in multilateral institutions. Increasingly, China’s officially mandated sense of grievance will drive these institutions’ operations and choices.
On the other hand, the tussle between Beijing’s public-relations army and the World Bank’s economists only underscores why the index was always problematic. If China is really only the 85th best place in the world to do business, why did it grab the lion’s share of foreign direct investment into the emerging world for the two decades the index was in operation?
The fact is that the index itself was incredibly limited in scope. It didn’t actually measure improvements in business-friendliness on the ground. Instead, it relied on analysis of reforms on paper, as well as a few interviews with pillars of various national establishments.
India’s ranking, for example, could be pushed up simply by changing the speed at which — on paper — the authorities in Delhi and Mumbai were meant to grant new electricity connections to businesses. This number didn’t reflect how long it took for those businesses to hook up the power, the bribes they had to pay to do so, or the dozens of other forms, procedures and requirements they had to navigate before using that electricity.
India’s bureaucrats, in fact, spent several years happily gaming the index in order to bolster the government’s reformist image. Worse, that effort seemed to be assisted by changes in the index’s design that appeared to give the country a 30-point boost in its rankings, from 130 to 100; researchers at the Center for Global Development found that a more consistent approach would have maintained India’s rank between 2013 and 2018 at around 113 or 114.
Similarly mysterious methodological changes infuriated the Bank’s former chief economist Paul Romer. In 2018, he accused the report of unfairly smearing the economic record of a left-wing administration in Chile.
My point is not that the World Bank is open to influence by well-connected insiders; I’m not sure why that should surprise anyone. The real problem is that its flagship index was so easily manipulated in response to that influence. If purely cosmetic changes could produce such big shifts in position, then the index itself should never have been invested with so much meaning.
The heyday of the Doing Business index was a time of naive optimism, expressed perfectly in the notion that capital could calculate where it would earn a suitable risk-return profile simply by looking at a table. Getting investment and structural reform right is a whole lot harder than that, as the World Bank should have been the first to admit.
Sharma is a columnist with bloomberg.com