Years ago, a quarter of FT Alphaville was occasionally harassed by the PRs of several oil-soaked Gulf monarchies to write about their country’s awe-inspiring progress on the World Bank’s Doing Business rankings.
We usually politely declined, quietly rolling our eyes at the idea that it was easier to do business in, say, Russia than Belgium, or the UAE than Finland.
That the rankings were found to have been manipulated by the Bank to improve the results of countries like China was about as shocking as discovering that the pope is Catholic. That led to the ranking being suspended and a new one (B-READY) is in the works.
But the broader issue is that many countries have very openly played the various Doing Business inputs to make them seem better, with little tangible impact.
Proponents argued that even superficial efforts can still lead to positive changes, which is probably why the World Bank decided to revamp the methodology under a new name rather than tearing down the whole idea.
However, a new paper just published by the Journal of Comparative Economics argues that not only was there no correlation between a country’s Doing Business improvements and its economic vitality – it actually had a negative short-term effect.
Here’s the summary, with an emphasis on FTAV:
We use the time series variation in the World Bank’s ‘distance to border’ estimates of ease of doing business to assess the effects of changes in this variable on real GDP per capita. The use of Vector Autoregression techniques allows us to identify shocks in the Doing Business scores that are initially uncorrelated with GDP, addressing an important endogeneity problem that influences the cross-sectional literature on this topic. We report a robust finding that improvements in Doing Business scores have at least a temporary negative effect on GDP and find little evidence of a positive effect in the years following these improvements.
The paper by Tamanna Adhikari and Karl Whelan (of the Central Bank of Ireland and University College Dublin, respectively) proposes two possible explanations for why Doing Business improvements were actually bad for short-term growth, one negative and one positive.
. . . One possibility is that the widespread focus in the developing world on the Doing Business indicators may have had a negative effect, with the countries that have shown the best improvements in their DTF scores being countries that have focused on ticking off the boxes. boxes to improve their ranking. instead of substantive reforms.
Another possibility is that it takes time for business climate improvements to have a positive impact – more time than the short-time element in our analysis can pick up – and our findings pick up on some near-term disruptions that resulting from reforms that have finally taken place have a positive effect.
The second explanation seems weak. If these were just the short-term costs of meaningful reform, you’d expect it to show up in longer-term economic data (which are admittedly difficult to disentangle). But even the former could just be a statistical oddity.
It is probably safer to assume that the Doing Business Rankings mean little in practice, and that the new B-READY (another example of the acronym’s unstoppable rise) will be more of the same. For masochists, the World Bank finally published its new full methodology earlier this month.
