To say that the World Bank’s Doing Business Report was influential would be an understatement. Academics, journalists and investors alike closely followed it. Governments saw it as a way to attract foreign investment and gain access to institutional funding. The report gave top-ranked countries global visibility and placed a heavy emphasis on the “top reformers”. This visibility stoked competition among countries as they jostled to implement reforms to climb the rankings. Globally, over 3,800 policy changes were made related to the report. The report gave small, lesser-known countries like Rwanda a rare opportunity for global visibility. It also incentivised countries to game the rankings by tweaking regulations that best helped them climb rankings rather than sustainably improving their long-term business climate. Issues with the rankings Despite its influence, the report was riddled with many technical flaws regarding what it measures, what it doesn’t, and how it is perceived. What it measures and what it doesn’t First, it only measures the cost of regulations, not their benefits. It measures scores on indicators as a ‘distance to the frontier’ – the gap between a country’s performance and the ‘best’ regulatory practice globally. This way it assumes that less regulation is always better. While less is clearly better for some indicators (e.g., delays in registering a business), the optimal policy is far less clear for others (e.g., the optimal corporate tax rate). The report would give top scores to a near-zero corporate tax rate, which is not possible – or desirable – for countries that are not tax havens or oil-exporters. It even neglects positive government functions that promote a good business environment, including essential public goods such as transport and communications infrastructure, a skilled workforce, and law & order. Finally, it sidesteps societal costs of deregulating pollution, worker safety, and health risks. Second, it measures the cost of full compliance to formal rules (de jure), not the reality on the ground (de facto). A firm’s experiences often differ from what the law captures. Often big firms bend the rules and shadowy firms evade them, especially in countries where informal networks and bribes help circumvent laws. Kaushik Basu, a former chief economist at the Bank who oversaw the Doing Business Report from 2012 to 2016, estimates that about two-thirds of the ranking depends on de jure rules. Third, it considers the hypothetical case of a firm of a given size, location, and other characteristics – typically a small or medium domestic manufacturing enterprise located in the largest business city in the country and not engaged in trade. This methodology neglects the diversity of firms and their compliance burdens within and across countries. Additionally, it completely excludes the informal sector, which forms a majority of Rwandan firms. It uses surveys of experts (and, where relevant, legal documents) rather than actual business owners. These are justified for practicality, cost, and international comparability purposes but come at the cost of accuracy and realism. Fourth, though the index is supposed to measure a country’s overall business environment, it really only covers government regulation. It excludes other areas that impact the business environment such as infrastructure, entrepreneurship, competition, macroeconomic conditions and policies, employment, crime, corruption, political stability, consumption, and inequality. Fifth, an aggregate index based on arbitrary weights holds little meaning. Using separate indicators to evaluate policy is far more useful. There are three major faults with using an aggregate index: the assumption that less regulation is better, low confidence in an aggregate of a small set of contributors, and the tendency for small changes to trigger significant jumps in country rankings. For instance, India jumped from 142nd in 2015 to 63rd in 2020 through tweaks in its regulations. Paul Romer, chief economist at the Bank from 2016 to 2018, claimed that most changes in country rankings from 2014-18 came from repeated methodological changes in the index, not actual business reforms. Thus, country rankings in the aggregate index should be interpreted with caution. How it is interpreted Most indicators in the report are a simple proxy for often complex concepts. When these measures became a target, they cease to be a good measure. Annette Brown recounts that when she supported multiple USAID projects during the early days of the World Bank rankings, the objective was to reduce the number of days to register a business, regardless of the real barriers to business formalisation. The report was often misinterpreted. Kaushik Basu said that he had to take great pain to explain to countries that the report was about doing business. Besides a high ranking, an economy’s health also depended on fairness and social justice. However, the report’s huge influence made it difficult to persuade countries that other things mattered besides business. Though business-friendly regulations and the level of FDI are correlated, the report reiterates that it is a misuse of the rankings to portray them as a measure of an economy’s attractiveness to FDI as it measures the scores for a hypothetical domestic firm. The way forward In the absence of this report, Rwanda faces two immediate questions: i) how to design policy and what to base it on and; ii) how to market the country and its progress for business and foreign investment. Policy design should be based on a more comprehensive and holistic analysis of the business climate. For a more comprehensive analysis, use the report where relevant and plug its gaps through research and analysis. Pair the findings from the report, which measures formal rules, with that of the Enterprise Survey, which captures what firms actually experience. Since the report’s analysis rests on a hypothetical firm, expand the analysis to diverse firms–by size, sector, and location–including international firms and those in the informal sector. Additionally, consider factors that are not used in the report but are still vital for the business climate. For more holistic policy analysis, evaluate laws and policies - and not just measure them - for both their cost and their benefits. This approach incorporating business climate, fairness, and social inclusion could be aligned with Rwanda’s national strategy or with the UN SDGs. This broad approach would likely also bring other stakeholders along. On the second question, one possibility for Rwanda is to develop its own index. However, since the World Bank scandal intensely damaged the credibility of doing business, any new index will face an uphill battle proving its integrity and credibility. Transparent data collection, methodology, and political independence might help but would likely still take time. It is also possible to use multiple other existing indices, which may not have the report’s influence but together still give a meaningful picture to a potential investor. The writer is a Competitiveness Analyst. The views expressed in this article are of the writer.
