We do not need a new Doing Business

Published on August 22, 2022


Following the Doing Business ranking data manipulation scandal, which was later confirmed by the internal institutional investigation, the World Bank decided to no longer publish this annual report on business regulation.

Over the past two decades, this report has provided an important description of the quality of business regulation in countries around the world and contributed to the implementation of many reforms that have made it easier to do business and accelerated growth rates.

With this in mind, do we need a new Doing Business?

What is doing business?

It is an annual ranking of the quality of corporate regulation that included no less than 190 economies around the world.

Before the creation of this index, the question of institutional quality was rarely raised in economics because there was no single measure of the quality of laws, although economists already knew that laws and other regulations certainly have economic consequences, especially in terms of economic efficiency. Put simply, countries with a more business-friendly environment will have higher economic growth rates.

Doing Business collected objective data on the ground from its partners, who were mostly law firms, audit and consulting firms, in the form of case studies. In this way, the actual administrative burdens faced by small and medium-sized enterprises were measured – i.e. not the legal time frame for a procedure, but how long it actually takes. Regulatory burdens were measured by the number of man-hours required to complete a procedure, the number of days it takes, and direct costs through fees and taxes paid.

The Doing Business observed 10 individual areas:

  1. Registration of new business
  2. Obtaining a building permit
  3. Making an electrical connection
  4. Registration of real estate
  5. To get a loan
  6. Protection of minority shareholders
  7. Payment of taxes
  8. Trade across borders
  9. Execution of the contract
  10. Bankruptcy settlement

Each of these areas was examined based on several indicators.

Registration of a new company involved e.g. measuring how many procedures were needed to create a new company, how many days this process took and how big the costs (fees and taxes) were for new companies (limited liability company). If this process did not require significant costs and if the individual procedures were demanding, the country scored well. The score ranged from 0 to 100; a high number of points meant a better trading environment. The country with the highest score received a maximum of 100 points, and the difference between the maximum and each country’s individual score was called the DTF (Distance to the border).

Why was it important to do business?

Until the development of this metric, the quality of regulation was measured by subjective criteria, such as the perception of business managers or economists. A significant example is the World Economic Forum’s Leaders’ Opinion Survey, where responses were drawn from the equally famous Global Competitiveness Report. But such measures are rather difficult to compare because they are vague and often influenced by the local context.

Regarding such measures, Tajikistan achieves, for example, results on the independence of the judiciary similar to Germany, but the situation is definitely worse there and confirmed by other studies. Therefore, it is more likely that in Tajikistan there is a problem with the sampling of respondents to these questions. Their answers may be influenced by the government being too optimistic about evaluating the work of the courts because they do not know how an independent judiciary actually works. This explanation for the results is more likely than the independence of the courts in Tajikistan from political influence or corruption compared to German courts.

Doing Business was therefore an excellent diagnostic tool, precisely because it made it possible to compare the quality of regulation in different countries, but it also clearly showed what is possible to achieve with reforms, i.e. ‘with political will and administrative effort, it is possible to significantly improve the situation, as others have already done it before. And perhaps most importantly, it made it possible to see exactly what needs to be changed – be it the number of necessary procedures, their duration, the amount of associated fees or something else entirely. Thanks to this, Doing Business became very popular, both among economists and investors, as well as among politicians – everyone wanted their country to be placed as high as possible on this list.

Do we really need Doing Business?

Unfortunately, it seems that the popularity of the Doing Business list was precisely what led to its downfall.

In short, if there is one benchmark that attract investors and improve the political image, everyone wants to escape as best as possible. This has also been facilitated by the nature of the Doing Business publication, as it is much easier to influence results than with other indicators of a more general nature. Here we actually clearly see what needs to be done to improve the ranking.

In practice, many of the reforms in the area of ​​improving the administrative environment and business regulation were therefore really only reforms in areas measured by Doing Business, while all others were neglected.

In short: “if the World Bank measures it, reform it, if it doesn’t measure it, leave it alone”.

Therefore, in practice, we also got somewhat absurd examples: Is the business environment in North Macedonia really better than in Germany? or in Thailand rather than the Netherlands, or in Serbia rather than Israel? Some countries like Serbia or Slovakia did not even hide their desire to move up the ranking: instead of the official working groups being called “groups for improving the business environment”, they were dubbed “groups for improving the country’s ranking on Doing Business list”.

Doing business has another problem: it implies a strong rule of law – that the laws are applied equally to everyone, without nepotism, corruption and other weaknesses in the administration. This is still an illusion in most countries, especially for those with low levels of legal independence and high levels of corruption. The founders of Doing Business tried to avoid this pitfall by using practical cases – but if you upset an important person in a country with weak institutions, the whole rule of law system will evaporate very quickly.

Finally – the importance attached to the ranking on the list led to political pressure to change the ranking of some important countries, which eventually created a scandal with the determination of the final results. Due to this scandal, it was decided to end this research and the publication of the report. In the internal investigation, it was found that the management of the World Bank had directly influenced the manipulation of the results in the case of China, because they hoped for an increase in funds for this country, while irregularities are also noted in the case of Saudi Arabia, the United Arab Emirates and Azerbaijan.

With all these issues in mind, it was time to act.

But removing this location entirely is not the smartest solution. We cannot hope that the World Bank or international institutions will solve this problem. Kristalina Georgijeva, who was accused in the internal report of being the person who directly requested the release of the data, became president of the International Monetary Fund.

Doing Business has proven to be really useful in implementing reforms: in many countries it no longer takes several months or thousands of dollars to register a new business (as was the case in many countries in Africa or Latin America), which forced a large number of entrepreneurs to operate on the black market. It is already possible to do this in a few days and at minimal cost. Since the beginning of the publication of this report, more than 3000 individual reforms have been registered. This wave of reforms made it easier to do business in 190 countries.

Therefore, a better solution is to fix Doing Business rather than stop publishing them.

However, the new version of the Doing Business list should be different from the previous one. He must answer the questions previously asked and guarantee that the data will not be manipulated.

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