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Business News/ Politics / Policy/  Is our obsession with the World Bank’s ease of doing business rankings justified?

Is our obsession with the World Bank’s ease of doing business rankings justified?

Ease of doing business rankings seem to have very little influence on economic performance of countries

The World Bank puts out rankings of countries for everything from quality of roads to how many days it takes to open a business. Photo: BloombergPremium
The World Bank puts out rankings of countries for everything from quality of roads to how many days it takes to open a business. Photo: Bloomberg

After being ranked 130 among 190 countries on World Bank’s Ease of Doing Business rankings for 2017 released last year, the Narendra Modi-led government has set itself the target of catapulting India to the 90th rank in this year’s rankings. These pursuits are part of an aggressive bid to improve India’s image as a business-friendly economy in the eyes of global investors.

While the intent behind this image make-over is laudable, it is worth asking what influence such rankings have on investment decisions and economic performance of major economies around the world. In principle, the rankings ought to function as a guide for investors who have funds to invest and need to decide where to put their money. But the reality is quite different.

Take the example of China, widely regarded as the biggest economic success story in recent history. The country has never even figured among the top 50 countries (it is ranked 78 among 190 countries in 2017 rankings) in the Ease of Doing Business rankings but has consistently attracted investments from all around the globe. In the latest rankings, Bhutan and Tunisia rank ahead of China.

China’s is not an isolated example. A look at the rankings of major emerging markets during the period 2010-15 shows that there is hardly any relationship between foreign direct investments (FDI) and the ease of doing business rankings. The same is the case if we examine trends in growth and the average rankings of these economies. The only pattern is the lack of any pattern.

What explains this disconnect between the ease of doing business rankings and real economic performance? One explanation provided by a 2016 IIM Bangalore working paper by Vivek Moorthy and A. Arul Jason is that the ease of doing business rankings cannot capture the real cost of doing business in countries with a large unorganized sector where costs of production are often lower.

How ease of doing business rankings impact the actual functioning of an economy is the matter of a global debate today, and while the debate is far from settled, the striking absence of any correlation between economic performance and score on the World Bank’s index should make us pause, and consider whether it is better to focus on structural reforms or long-term investments in human and physical infrastructure. Such improvements may help us improve our rankings as well but that should at best be a byproduct rather than a target of public policy.

As writer and analyst Ruchir Sharma warns in his book, The Rise and Fall of Nations: The Rules of Change in Post-Crisis World, targeting such rankings is no guarantee of attracting real investments.

“The World Bank... puts out rankings of countries for everything from quality of roads to how many days it takes to open a business, and these rankings have become very popular," writes Sharma. “That creates a problem, as more than a few countries have started hiring consultants to help them raise their rankings (another example of Goodhart’s law in action). In 2012 President Vladimir Putin set a goal of raising Russia’s rank for ‘ease of doing business’ from 120 to top 20 within six years, and he soon saw results. By 2015, Russia was ranked at 51, more than thirty places ahead of China, and sixty places ahead of Brazil and India. That raised a question: If it was so easy to do business in Russia, why wasn’t anyone doing business there? Moscow in 2015 is increasingly hostile to and isolated from international business, far more so than China or Brazil or India. To the extent possible, I try to avoid relying on numbers that are vulnerable to political manipulation and marketing."

Here’s the ultimate spoiler. The methodology used by the World Bank keeps changing, and changes over the past couple of years were such that it is no longer possible to compare rankings of 2016 and 2017 with those of the past, according to a World Bank spokesperson. This seems to suggest that in subsequent revisions, the rankings may change once again in a manner in which current rankings are once again rendered incomparable. Therefore, it is unlikely that investors are likely to put much faith in such a volatile indicator, and especially one that is so vulnerable to “political manipulation", in the words of Sharma.

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Published: 13 Apr 2017, 09:00 AM IST
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