The World Bank’s Ease of Doing Business Indicators: A Different Perspective
In September, the World Bank announced that it will terminate its “Ease of Doing Business Rankings” (EDBR). The EDBR is a database of rankings created by World Bank officials to provide foreign direct investors with information about the practical aspects of a host country’s investment climate. Since its inception in 2003, many companies have relied on data points such as the “ease of obtaining construction permits”and the process of “establishing a legal entity” to make important decisions in cross-border transactions. In 2021, serious concerns have emerged about the way in which the Bank determines the rankings. More specifically, credible sources revealed that Chinese officials encouraged Bank officials to change the index’s methodology so their scores would improve. This development-along with some host governments’ decisions to change aspects of the investment climate in order to receive better scores- has triggered criticism from the media and has compelled the Bank to terminate the index. This article takes the less popular position of supporting the rankings by demonstrating some of the unwarranted criticisms and providing an alternative perspective from which to consider its usefulness.
Unwarranted criticism of the database
Example #1: Misrepresenting the methodology and its conclusion
- Media Criticism: According to Bloomberg, rankings only account for the laws and regulations affecting foreign investors that are on the books /“on paper”, but they do not sufficiently account for the extent to which they are enforced. In fact, the article said that the report only interviews a “few people.”1
- Correction: The EDBR indicators review more than the relevant regulations and laws. The methodology relies on data from “surveys of over 12,500 expert contributors (lawyers, accountants, etc.) in 190 countries who deal with business regulations in their day-to-day work.”2 In fact, the primary function of this exercise is to reflect the actual experience that business people have with the ways in which such laws and regulations are applied or enforced.
Example #2: Unwarranted challenge of the usefulness of the rankings
- Media criticism: The same Bloomberg article also minimized the extent to which decision makers rely on these rankings. The author cited the discrepancy between the index’s overall ranking for China and its actual ranking among host countries for inbound FDI: “if China is really only the 85th best place in the world to do business, why did it grab the lion’s share of foreign direct investment into the emerging world for the two decades the index was in operation.”3 In demonstrating that China is still able to attract significant FDI in spite of its low position on the rankings, the author suggests that the rankings aren’t that helpful or significant.
- Correction: Nobody who is familiar with the rankings suggests that expansion decisions and other FDI strategies are based exclusively on this data. The rankings are one of many data points on which sophisticated decision makers rely. Feasibility studies, economic and political risk forecasting, and reliance on other rankings are three examples of other data sources that are frequently used. In China’s case, it is able to attract a significant number of FDI projects in spite of the rankings because it is the largest domestic market, it has a stable political climate, and inexpensive skilled labor.
Why the rankings should be continued
While there are many data sources that rank investment climates, the EDBR indicators is the most credible source of information on the practical aspects of doing business in foreign countries. The fact that some governments have changed their protocols to receive better scores reveals the extent to which investors rely on these rankings. It is evidence that investors use the index as an important source of data in making important FDI decisions. The World Bank is the only credible source for ranking the more basic aspects of doing business in foreign countries. (e.g. electricity access, days wait to get a permit, etc.). Although these data points might seem trivial in the big scheme of things, delays in receiving construction permits or insufficient access to electricity can have serious and enduring consequences on FDI projects. The transgressions of a few government officials and the Bank employees they try to influence should not penalize those investors who want to make nuanced business decisions.
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1 Sharma, Mihir https://www.bloomberg.com/opinion/articles/2021-09-19/world-bank-s-ease-of-doing-business-list-deserved-to-die
3 Sharma, Mihir https://www.bloomberg.com/opinion/articles/2021-09-19/world-bank-s-ease-of-doing-business-list-deserved-to-die