Every year, the World Bank compares the business environment in 190 countries in its Ease of Doing Business Report. In 2018, India jumped 23 ranks to attain the 77th rank in “Ease of Doing Business" much to the delight of policymakers and the ruling government. But this improvement in ranking may not do much for the economy, suggests a recent study by Sabyasachi Kar and others.

The authors highlight that the World Bank report, which rates countries on their regulatory environment for business, measures a country’s performance based on what would happen if existing regulations and policies were applied as written. This view, they argue, assumes that firms get regulatory clearances according to a country’s rules, with little deviations from these rules in practice. It also assumes that the state authorities responsible for implementation carry out due diligence before giving regulatory clearances to firms.

But the actual experience of investors on the ground depends less on formal rules and more on factors like their relationship with those in power and other actions like bribes and lobbying. Investors, thus, operate in what the authors call a “deals environment" rather than a rule-based environment. For instance, the authors find that in several countries many firms receive construction permits far faster than what the indicator in the World Bank reports suggests. This relationship between ‘rules’ and ‘deals’ depends on the state’s ability to implement existing rules and regulations. In environments where there is weak state capability and rules aren’t enforced well, firms rely on making quick deals. And in states where there is stringent rule enforcement, deals are slower. As a result, the authors suggest that improvements in Ease of Doing Business rankings may not actually boost investment. Instead, appropriate reform will depend both on the level of stringency of rules in a country and the level of state capability.

Also Read: Doing business in a deals world: The doubly false premise of rules reform

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