Warts and all, annual EoDB index was usefulOctober 1, 2021
In recent years if there was one study that many governments, policy makers and journalists eagerly look forward to in October, it was the World Bank’s annual Ease of Doing Business (EoDB) Index. For 17 years it ranked how 190 economies comparatively fared when it comes to the ease of starting, operating and even closing a business (as many as 12 areas of business activity are tracked). Leaders of many countries such as Russia, China and India have personally committed to show significant improvement in the rankings. Prime Minister Narendra Modi has set a target of India attaining a ranking that is below 50 (2019 ranking: 63).
To the shock of many, World Bank recently announced that it is discontinuing the EoDB report after an independent audit confirmed data irregularities and more worryingly, unethical conduct by its officials. Last year, when accusations surfaced about manipulation of ranking of some countries in the EoDB reports of 2018 and 2020, the World Bank had paused the EoDB 2021 report and announced a series of audits/reviews. The outcome was such that it chose to junk the exercise all together.
EoDB Index has had its share of critics and this is not the first scam involving it. But the ranking had its utility. No other study gives a comparative data on where 190 economies across the world stand when it comes to business friendliness. This huge exercise, World Bank claims that as many as 14,900 experts are involved in the process, does give investors a bird’s eye view of investment friendly destinations.
It is not just the investors who benefit from it. It helps governments, especially in emerging economies, know where their country stands, areas that need improvement and the best practices they can adopt. In other words, it helps governments design policy interventions to improve ease of doing business by benchmarking with the best in the world.
Take the case of India. Once PM Modi set his vision of bringing India’s ranking (it was 142 in 2014 when he took office) to below 50, policy makers began reforming areas where India fared particularly badly. For instance, resolving insolvency was a big pain point. India’s ranking for that parameter in 2015 was 137. This led to the Insolvency and Bankruptcy Code in 2016 and today India’s ranking on resolving insolvency criteria has improved to 52. Similarly, it fared badly (126th rank in 2015) when it came to trade facilitation. Series of reforms such as Single Window Interface for Facilitating Trade (SWIFT) ensued and today, the country has improved its rank to 68.
Agreed, EoDB is not the only tool that investors consider to take an investment call. They look at long-term market potential, cost competitiveness, macro-economic stability, quality of labour and strength of the financial sector. This explains why there is little correlation between the flow of foreign direct investment (FDI) and EoDB ranking (this column looked at this dichotomy more deeply in the issue dated March 26, 2021). India is the ninth largest recipient of FDI in 2019 despite an EoDB ranking of 63. China is the largest FDI recipient but is ranked 31 in EoDB index. New Zealand is the top ranked nation when it comes to ease of doing business but the FDI it gets a fraction of what India or China attracts.
Nevertheless, without a tool like EoDB, economies will not know where they fare poorly and where corrective actions are needed. India knows what to do going forward because the 2020 ranking flagged where it continues to lag — enforcing contracts (ranked 163) and registration of property (154), to name a few parameters.
While it is true that the credibility of the rankings has taken a beating due to the recent developments, killing it is not the right step. World Bank should, instead, use this as an opportunity to come up with a better index that is more refined with strong governance framework.
Firstly, the element of discretion should be eliminated. If media reports are to be believed, a lot of discretion was used to tweak the methodology to ensure China’s ranking improved significantly in the 2018 report. This included attempts to add data pertaining to HongKong and Taiwan into China’s and reduce the number of cities where data is sourced from two to one. But both, it is said, did not improve the ranking so other parameters were tweaked.
A strong governance framework is essential to ensure that the rankings are not susceptible to manipulation again. This can include strong checks and balances, a peer review process, whistle blower mechanism and external validation of the rankings. There are some who are of the view that World Bank should have made the rankings independent of it once it gained traction. By doing so it could have avoided the pressure that China put on it and all these controversies could have been avoided. Multi-lateral institutions have many interests and to avoid any conflict, it is better to keep the rankings, when re-launched, independent.
That apart, there are some methodology changes that can be made such as giving weightage for investor surveys. World Bank’s EoDB survey is very theoretical and is akin to a customer satisfaction survey without reaching out to the customers. This partly explains the lack of correlation between the ranking and flow of investments. Inputs from actual investors will also help even out attempts by countries to game the system by cherry-picking reforms with an eye on sharp improvement in ranking. Such attempts do not help the investors on the ground.
The data should also be more broad-based. In the case of India, the data is taken from just Mumbai and Delhi. They may not reflect the full picture as bulk of the manufacturing investments happen outside these two cities.
Despite its flaws, the EoDB index had its uses. The recent developments have exposed the shortcomings further. Rather than consigning it to the bin, the better solution would be to come out with a version that will help the investors and governments alike. That is the only way for the World Bank to remain true to its objective of improving the business climate across the world.