Will India’s jump in ease of doing business rankings foster economic growth?

Among the 190 countries surveyed in World Bank’s Doing Business 2018 report, India saw the biggest rise in its ranking. While the rise in India’s ease of doing business rank from 130th in 2017 to 100th in 2018 is welcome, there are three key reasons why it may not necessarily mean a turnaround in investment and economic growth.

Firstly, the improvement in the ranking often is not sustained over the long term. For example, consider the period between 2007 and 2009. Out of the 10 countries that improved their ranking the most in those three years, seven now rank worse than what they did in the 2009 report.

According to the World Bank, the ranks are not strictly comparable across years because the methodology changes often, with new parameters being added to the study in successive years. For example, since the 2016 edition, the indicator on ease of getting electricity began to include indicators on reliability of supply, price of electricity, and transparency of tariffs. However, what this also means is that under a future ranking system based on an altered methodology, even India may slip in rankings without any material change in regulations or business environment.

Secondly, even if the improvement sustains, it does not necessarily lead to higher economic growth or greater foreign direct investment (FDI) inflows, an analysis of 10 major economies which saw large improvements in their ease of doing business rankings shows. These economies are those with gross domestic product (GDP) worth at least $200 billion as of 2016 which saw the largest jumps in rank between the period 2007-09 and 2018. Improvement is measured in terms of the difference between the worst ranking between 2007 and 2009 and the latest rank.

Many of the above economies, despite climbing several places in their ease of doing business rankings, have not seen much improvement in growth or FDI inflows. On some of these economies, such as Russia, Turkey and Egypt, investor sentiment has substantially deteriorated. Standard & Poor’s recently included Turkey and Egypt in its list of “fragile five” economies along with Argentina, Pakistan and Qatar. Of course, external factors, beyond the control of policymakers, have also played a role in dampening the outlook on these economies. Egypt and Turkey have grappled with political instability while Russia had to tackle sanctions and the impact of falling oil prices. But this goes to show that ease of doing business rankings seldom determine a country’s economic fortunes.

Even in the absence of such external misfortunes, it remains debatable whether a pro-business reform stance necessarily leads to higher growth. John Cochrane, a fellow at the Hoover Institution at Stanford University and an influential economist on the right in the US, has often argued that easing regulations is a much more potent weapon to re-energize the American economy, compared to any imaginable monetary or fiscal stimulus. His views have been challenged, most notably by Berkeley economist Bradford DeLong who criticized Cochrane’s analysis as being crucially dependent on making unreasonable extrapolation from a weak correlation.

The debate prompted Princeton undergraduate student Evan Soltas to systematically analyse the impact of big reforms in a particular year on economic growth in subsequent years, for different countries. He found little impact of such reforms on growth and termed them ‘economically neutral’. He argued that enacting pro-business reforms could not be a substitute for deeper structural reforms, such as those targeting the state of education, health, transportation, power, and sanitation infrastructure.

As an earlier Plain Facts columnpointed out, there is absolutely no correlation between economic growth and ease of doing business rankings. Others have argued that there is indeed a link between per-capita incomes and ease of doing business rankings. But such correlations do not mean that ease of doing business has led to high per capita incomes. The link between per capita incomes and ease of doing business rankings may simply reflect the fact that on average, countries that prosper tend to have stronger institutions which tend to lead to a host of positive outcomes, including relative ease of doing business.

As Soltas argues, countries with illiberal policies towards business “probably have other problems that restrain economic development, but countries that change those policies in a sharply pro-business direction don’t necessarily solve all those deeper problems in the same sweep”.

Thus, the historical experience of other countries and the academic debate on the subject cautions us against being euphoric over the measured improvement in India’s doing business indicators.

Finally, what weakens the case for the ease of doing business rankings is that they capture de jure processes rather than de facto realities on ground, as has been argued recently by Matthew Lillehaugen and Milan Vaishnav, fellows at the Carnegie Endowment for International Peace.

The World Bank’s Doing Business 2018 report reflects the assessment of experts such as lawyers and accountants, with respect to rules and regulations. However, their assessment might be at variance with what enterprises actually experience on ground. To illustrate, the time taken to start a business in India—in both Mumbai and Delhi—is purportedly around 30 days, according to World Bank’s ease of doing business reports for the last three years. But, the enterprise-level survey conducted by NITI Aayog and IDFC Institute in 2016 showed that the average time taken to start a business in India was more than 100 days.

Even start-ups, i.e. firms which began operations during or after 2014, said that the time taken to start a business was 85 days in 2016, much above the 30-day period suggested by the Doing Business reports for the same period.

The combined weight of the evidence suggests that the recent improvement in ease of doing business rankings may not mean much for India.