Doing Business: Icebreaker – not Gospel

By Michael Klein

15 years of Doing Business

It takes less than a day in New Zealand to register a small business. It takes 230 days to do the same in Venezuela – that is, if one follows the law. There is a purpose to registration – notably identification for the tax and social security system.  Doing Business advocates sound rules, not their abolition.  Make the purpose simpler to achieve and people will comply more readily.  Business and job creation become easier. People can do business without paying bribes and without special connections. The informal sector shrinks. Safety nets can improve.  The Scandinavian countries are prime examples of how rules that are easy to use underpin both wealth creation and social safety nets. This illustrates what “Doing Business” is about.

By now the World Bank’s annual Doing Business report has been published for 15 years. It currently covers 190 countries.  Over the years it recorded 3,180 reforms worldwide.  Some 920 of these reforms have in part been triggered by the report.

The very fact that it is politically salient gives rise to periodic disputes, most recently in Chile.  The dispute has triggered broader debate. This note lays out my overall perspective on the report, which I helped launch in 2003 and oversaw until 2009.

To start with, a reminder of what Doing Business does.  In 11 indicator sets, the report records and codes formal rules that govern the life of business from entry to exit – how easy it is to register a firm, how complex to enforce a contract, and so on.  The data are based on the laws and regulations made by governments – not on expert assessments.  Details are available online for anyone who wishes to delve into the nitty-gritty.  The basic methodology of coding rules is state of the art and similar to the other main effort to capture official rules for businesses – the OECD’s Product Market Regulation indicators.

Doing Business Matters

Why does it matter?  Doing Business helps analyze basic institutions that underpin wealth creation and poverty reduction: first, rules that facilitate competition – the entry of new firms and the exit of underperforming firms – and, second, rules that allow businesses to invest and contract.

The Doing Business data are informative.  Peer-reviewed research underpinning the indicators shows their importance for matters like growth, employment creation, and the size of the informal economy.  The data characterize basic processes, for example, those used to enforce a contract.  It is not a priori clear that simpler enforcement leads to greater justice.  Research confronting the Doing Business indicators with perceptions of firms on fairness of outcomes suggests, however, that in fact “justice delayed, is justice denied”.   The data thus help understand how regulations relate to desired outcomes.

The official rules matter.  Lant Pritchett of Harvard and Mary Hallward-Driemeier of the World Bank confronted the Doing Business data with data from the World Bank’s enterprise surveys, which I also sponsored as a complement to Doing Business.  They found, unsurprisingly, that in real life firms do not always follow the law to the letter.  Yet, the key finding was that simpler rules for a given purpose make it more likely that the law guides firms.

At the same time it is obvious that the world is more complex than captured by the report.   The data do not constitute an investor attractiveness measure. They do not capture politics.  In fact, the report comes with its own “health warning”.  Those who think that fixing a few indicators will automatically lead to higher growth may be in for a disappointment.

Many data we use are imperfect.  GDP is a case in point.  Enrolment rates for education are rather imperfectly related to educational quality, and so on.  But the data help and are used in all sorts of ranking – witness the UNDP’s human Development Index.

The Doing Business Report is a diagnostic tool.  Like Cholesterol measurement in medicine it captures risk factors that matter.  Some people still do fine regardless, whereas others suffer even when their measure looks good.  So it is with economies.

Icebreaker

Informing debate.  Some 30 years ago I started working on analysis of markets and underlying institutions.  It was clear that good institutions matter.  When discussing with a government whether its rules for businesses were overly complex, it was hard to prove that things could be done more easily.  Who says that contract enforcement is taking too long?  Unsurprisingly, the defenders of the status quo argue in great detail that prevailing rules are the best they could possibly be.  Doing Business helps challenge such arguments by benchmarking performance.  It shows how other countries solve the same problem. It often reveals problems countries were not aware of.  It shows that things can be better.  It provides detailed ideas on what could be done.  It even provides contact persons in other countries with whom reform ideas can be discussed.

Providing perspective.  In 2006 I visited Ghana.  At the time a meeting of aid donors suggested that Ghana did not reform its business environment – pots of aid money were sitting around unused.  Ghanaian officials, however, claimed they were doing a lot.  Who to believe then?  As it happened, the Doing Business report of the year showed that Ghana was the third most active reformer of business environment rules worldwide.  The government “just did it” – without donor funded consultants.

Creating momentum. Without benchmarking and summarizing, the regulation agenda easily drowns in complexity.  Some 10 years ago, in Mexico private firms opposed a government reform of corporate governance.  They claimed it would make business harder.  The government argued its proposed law would improve markets.  Parliamentarians were confused.  Who is right – the bureaucrats or the people operating in the market?  A person in the government had the idea of using the Doing Business method to benchmark the draft law against other countries.  It turned out that the government proposal would bring corporate governance more in line with good practice. The objection by the private incumbents seemed based on preserving power, not enhancing transparency.  Doing business thus helped government win the parliamentary vote against vested business interests.

Benchmarking shines a light on matters that vested interests rather keep hidden.  Who cares if someone claims, that business registration processes are cumbersome in country A?  Interest rises when it is shown that other countries have simpler rules.  Political interest is really piqued when global rankings show country A looks worse than country B – particularly, if the latter is looked upon a bit askance in country A.  Political momentum is created without a penny of donor funding on the table.

There are those who argue that the global rankings of Doing Business should be dropped.   Indeed, the world is more complex than expressed in the rankings.  Yet, the aggregation of all the data is informative and it stimulates debate.  The challenge is to have a reasoned debate.  The disputes that I experienced typically led to eventual reform.

We also launched a companion project to Doing Business – “Women, Business and the Law.”  Most people debating Doing Business don’t even know about it.  It has escaped major disputes.  In retrospect, I wish we had devised a global ranking so that important issues of discrimination had a brighter spotlight too.

The way ahead

The agenda highlighted by Doing Business matters.  The data help diagnose issues.  The rankings create political momentum.  That leads to improvements.  In a nutshell, that is the case for the chosen approach.

What is to be done?  Implement well.  Make sure data mistakes are corrected and acknowledged when they happen.  Keep methodology changes to a minimum.  Explain the rankings well.  Help a sensible debate about reform unfold.  Use the report as a tool, not a gospel.

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