How a scam unravelled the "Ease of Doing Business" index

The shocking collapse of the Ease of Doing Business rank is a lesson for many.

  How a scam unravelled the "Ease of Doing Business" index

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Read more on - Polity | Economy | Schemes | S&T | Environment

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• A scam: On September 16, 2021, the World Bank Group scrapped its flagship publication, the ‘Doing Business’ report. It is an influential annual ranking of countries on the Ease of Doing Business (EDB) index. The WB group acted on its commissioned study to examine the ethical issues flagged in preparing the 2018 and 2020 editions of the EDB index.
• Allegations: The allegation surrounding Ms. Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), was the immediate reason for scrapping the publication. As Chief Executive Officer of the World Bank in 2018, Ms. Georgieva is accused of having exerted pressure on the internal team working on the Doing Business report to falsely boost China’s rank by doctoring the underlying data. Similarly, tensions were also reportedly brought to bear in the case of Saudi Arabia’s rank, among others.
• The index's working: The World Bank’s decision has wide ramifications, as the index serves varied purposes.

1. Countries showcase improved ranking to signal market-friendly policies to attract foreign investments.
2. National leaders often set EDB rank targets, like in India. (PM Modi wanted to ensure that India breaks into the top 50 ranks of the EDB index)
3. This helps them measure domestic policies against global “best practices” and browbeat domestic critics. Some countries seem to use their political heft to improve their rank, polish their international image and sway public opinion (as appears to be China’s case).
4. The EDB index ranks countries by the simplicity of rules framed for setting up and conducting businesses.

• Peru's contribution: Peruvian economist Hernando De Soto’s theory underpins the index. The theory claims that secure property rights with minimal state interventions are a precondition for a free market to flourish. Management consultants and corporate lawyers collect the information for the index on time required for regulatory compliance — as per the statute (de jure) and not as practised (de facto) — from select cities and larger firms.
• Indian case: Advanced countries held the index’s top ranks. India ranked low, around 130-140, till 2014, and zoomed to the 63rd position in 2019-20. India claimed success of the ‘Make in India’ campaign, launched in 2014, to raise the manufacturing sector’s share in GDP to 25% (from 16-17%) and create 100 million additional jobs by 2022 (later revised to 2025). The success was absent on the ground.

1. The annual growth rate in GDP manufacturing (at constant prices) fell from 13.1% in 2015-16 to (-) 2.4% in 2019-20.
2. Net FDI inflow to GDP ratio has fluctuated around 1.5%. The fixed investment to GDP ratio (at current prices) fell from 30.1% in 2014-15 to 26.9% in 2019-20. A natural question is why would there be such a disconnect between the stellar rise in EDB index rank and economic outcomes?

• The gaps: The theory underlying the EDB index itself could be wrong, or the measurement and data could be faulty, or both.

1. China’s phenomenal economic success, especially its agricultural performance (after the reforms in 1978), is perhaps the most unmistakable evidence demonstrating that lack of clarity of property rights may not be the binding constraint in a market economy.
2. What matters is economic incentives. Measuring regulatory functions underlying the index could be tricky and subjective and possibly politically motivated as well, as the controversies surrounding the index seem to suggest.
3. The EDB index also seems vulnerable to a tweaking of the underlying method. India’s improved ranking was reportedly an outcome of such an effort as when the index was re-estimated with unchanging procedures, the needle hardly moved!
4. Chile’s rank on the EDB index sharply rose when the conservative government was in power and went down when the socialists were ruling despite no changes in policies and procedures. This was the result of the fine-tuning of the methodology and had profound political implications.
5. As a result, former World Bank Chief Economist, and later Nobel Laureate, Paul Romer, publicly apologised to Chile’s socialist President for World Bank’s less-than-professional conduct in preparing the index.

• The dark side: There are allegations that to improve this ranking, India has relaxed some critical labour law regulations, and even farmed out critical safety regulations such as annual inspection and certification of industrial boilers to ‘third party’ private agencies. The Labour Department’s inspection is now not mandated; it is optional only by prior intimation to employers. Such abdication of the government’s responsibility towards workers leads to incidents like the workers’ strike at Wistron’s iPhone assembly factory in Karnataka in 2020.
• Summary: The World Bank’s decision to scrap its annual publication Doing Business report is being welcomed by those who claim it was a way to push the free-market ideal, dressed up under a scientific garb and underpinned by seemingly objective methods and data collection.
• EXAM QUESTIONS: (1) Explain the collapse of World Bank's Ease of Doing Business index. What went wrong? (2) Present arguments in support of, and against, the idea of the Ease of Doing Business index by World Bank.

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