Why World Bank President Jim Yong Kim is right to subject the Bank’s global business report to fresh scrutiny.
- By Christina ChangChristina Chang is the lead economic analyst for the Catholic Agency for Overseas Development (CAFOD).
The 2008 financial crisis highlighted long-standing reasons why the world needs to take a fresh look at how it does business. Unemployment has reached painful levels in many countries around the world. Multinational corporations use offshore jurisdictions to avoid billions in tax. Rampant inequality has become a hot-button issue.
For all these reasons, World Bank President Jim Yong Kim is right to conclude that the bank’s flagship Doing Business report needs a fresh look. According to the self-description on its website, Doing Business "assesses regulations affecting domestic firms in 185 economies and ranks the economies in 10 areas of business regulation." But recent developments in the global economy undermine the usefulness of such a tool for governments and analysts.
The idea of such an overview isn’t bad in itself. But the current version of the survey is based on outdated, one-size-fits-all assumptions that have lost their validity in the current environment. We understand today that less regulation isn’t necessarily better, and that local context is often just as important as the international competitive environment. Businesses should have the conditions they need to prosper, but they should also be encouraged to contribute to society (through paying taxes, for example). A desirable business environment supports growth in sectors that create jobs for poor men and women, rather than catering primarily to the needs of larger, formal, urban firms.
Just take the issue of jobs. The World Bank itself has been one of the leaders in the reassessment of economic thinking now underway around the world. The Bank’s 2013 World Development Report pointed out, for example, that many studies have tended to underestimate the importance of labor market regulations. But, in the past, Doing Business has praised deregulatory reforms in some countries that dismantled labor laws even when they entailed violations of the International Labor Organization’s standards. And it doesn’t seem to be businesses that are calling for these kinds of reforms. Only 3 percent of 45,000 firms surveyed in 106 developing countries in a recent IFC Jobs Study (January 2013) cited labor regulations as obstacles to job creation. The need to go back to the drawing board on labor regulation advice would seem obvious.
Thinking around corporate taxation has also shifted in recent years. In Africa, high tax rates are not a problem for investors. The big problem, in fact, has been getting investors (especially foreign ones) to pay any tax at all. Distorted tax regimes mean that a small bar owner in Ghana can end up paying more taxes than the major industrial brewery next door. This sort of approach leaves governments with little revenue to invest in much-needed essential services to support the development of local small businesses. What we need from the Bank is guidance that better matches realities such as these. Helping governments to put more equitable tax systems in place is more important than blindly driving down the total tax rate for corporations.
At this year’s Spring Meetings of the World Bank, governments endorsed President Kim’s new vision for the Bank of achieving shared prosperity and poverty eradication. As the Bank knows, the best way to tackle rising inequality and persisting poverty is by supporting small businesses. In its 2013 World Development Report the Bank itself acknowledged the crucial significance of self-employment and microenterprises in creating jobs and a more equitable distribution of wealth. The Bank’s independent evaluators recently launched a study into how well the institution serves entrepreneurs, in recognition of their importance. It is no longer tenable for a Doing Business team member to tell us (as they did back in 2010) that it did not matter if the project did not work for the majority of small businesses in developing countries as they were "not relevant" to economic transformation of those countries. In fact, small businesses account for 90 percent of jobs and 50 percent of GDP across developing countries.
Yet Doing Business does little to address the three key constraints most frequently mentioned by small businesses. First, the survey fails to mention the issue of corruption, a major problem for small entrepreneurs. Second, it says little that is relevant about access to credit. Take the case of Zambia. Doing Business gives this country an impressive number 12 ranking in the world on this criterion. Yet 98 percent of the small firms surveyed in Zambia by the Bank still cite access to credit as a constraint. Third, the survey takes a distorted view of the vital problem of property rights. Doing Business continues to prioritize formal titling and ease of title transfer — despite the growing recognition that such an approach can sometimes undermine the traditional community rights that are important to poor men and women’s livelihoods and facilitate land grabs.
Don’t get us wrong: we don’t want to see Doing Business scrapped. We know that a tool that helps governments to get the environment right for business is important. Our organization, the UK-based Catholic Agency for Overseas Development (CAFOD), works in some of the most deprived developing countries in the world to help poor men and women lift themselves out of poverty, keep their dignity, realize their potential, and contribute to the common good. We know from experience that giving people the tools and skills they need to start a business is only half the job. You’ll have little success if the business environment in which they operate is not conducive. A reformed Doing Business can help to start a discussion on investment climate reform and provide guidance for governments that is backed up by good data.
Doing Business started out as an exercise to collect easily available date on business regulations across countries. It is not designed, therefore, to tell you everything you need to know about a country’s business environment — or even what needs to change. It does not pretend to consider local context (which is important in determining what kind of reforms are appropriate), nor does it claim to give guidance on trade-offs that might be involved in decisions around types and levels of regulation or taxation. By itself, Doing Business is a poor tool for governments that are trying to decide what sorts of reforms are important or appropriate to their business environments. So when increasing numbers of leaders across Africa and beyond publicly state that their primary ambition is to move up the Doing Business rankings, it’s only right to wonder whether their priorities make sense.
That’s why we and other non-government organizations are asking for a reformed Doing Business, one that can be used alongside complementary tools such as enterprise surveys, which ask local businesses directly about their experiences and can thus tell a government far more about what sorts of reforms it needs to implement. We also ask the Bank to reconsider the practice of ranking countries according to their compliance with a universal checklist of preferred reforms; this approach tends to undermine objective discussion of what sorts of reforms make sense in a local context. Finally, we also have our doubts about the large media budget allocated to the project — money that is used to celebrate countries that have done the most to move up in the rankings, rather than those that have looked at what is needed locally.
In our experience, the Doing Business team is aware of these criticisms and of the need for corresponding change. Recent editions of the survey reference its limitations and place important qualifications on the use of the data (although gov
ernments and media still tend to pay more attention to the rankings). The Bank has suspended the Employing Workers Indicator, which encourages labor market deregulation (but has not yet abolished or reformed it). The Paying Taxes Indicator no longer encourages governments to reduce taxes to zero (although it still encourages them to be lowered).
The Bank is also looking at the possibility of adding a Getting Electricity Indicator, a new measure based on enterprise surveys that have highlighted the importance of this issue to local businesses. Most importantly, the team is also re-examining specific indicators according to their effectiveness in achieving desired economic objectives, such as poverty eradication. Presumably, if the data shows that an indicator isn’t helpful, the Bank will reform it or drop it. We are encouraged by this willingness to change, but much more needs to be done.
By lamenting the "uniquely democratic" debate around Doing Business, its self-appointed supporters are doing it a disservice. An independent review and a public debate are exactly what is needed. Much of the debate around Doing Business has become polarized and politicized, and internal Bank politics have been mixed into a debate already charged by national competition. This review is a timely and important exercise. Without it, Doing Business may well survive as an influential museum piece, but it will cease to be relevant to governments genuinely striving to develop their economies.