Don't throw the 'Doing Business' baby out with the bath water

Don't throw the 'Doing Business' baby out with the bath water
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The World Bank’s “Doing Business” report is arguably one of the most impactful publications in global development over the last 20 years, but the United States needs to lead an effort to fix and protect the underlying indicators. “Doing Business” plays a significant role in driving reform that generates economic growth and entrepreneurial incentive around the globe. It is well known in policy and economic circles and has spurred thousands of microeconomic reforms, saving firms billions of hours in red tape, reducing chances for corruption and improving the enabling conditions for startups all over the world. 

“Doing Business” gets more attention than anything the World Bank Group does. When the Doing Business rankings are released, it is front page news in nearly every country.

The success and attention of “Doing Business” has attracted enemies and critics. In turn, “Doing Business” has adjusted in the face of constructive criticism. Last month, however, the World Bank Group revealed serious allegations that a handful of the 190 countries have had their data tampered with, in a favorable way. These allegations need to be addressed, the findings of the inquiry should be transparent and broadly shared, and new process controls should be implemented so that “Doing Business” can continue.

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The U.S. Congress and the Trump administration should actively work to make these fixes and restart “Doing Business” — because of its ability to spur much needed business reform.

The benefits

As stated by the World Bank Group, the “Doing Business” project provides objective measures of business regulations and their enforcement across almost 200 economies and selected cities at the subnational and regional level. The project uses 11 specific indicators that assess the business landscape of a representative city or region in a country, identifying more efficient regulations and benchmarks for reform when necessary. The specific indicators include: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, ease of paying taxes, enforcing contracts, trading across borders, resolving insolvency, and contracting with the government.

Academics, journalists, private sector practitioners, policymakers and other researchers concerned about the global business community use these indicators to comparatively understand the challenges for starting business in various regions. For example, “Doing Business” may analyze the steps necessary to launch, run and close a McDonald’s franchise in Minnesota versus similar steps in Moldova, the Maldives and Mali. “Doing Business” focuses on “formal” enterprises — a business that is registered with the government, pays taxes, follows labor, civil rights and environmental laws, and can access bank capital. The project ranks each of the accessed regions and provides analysis on which areas have progressed, regressed or remained stagnant with their economies.

The results of the “Doing Business” project are real and tangible, but hard to demonstrate visually. Since the 2003-2004 report, 178 economies have implemented 722 reforms captured by the ‘starting a business’ indicators. These economies have specifically focused on reducing or eliminating barriers to entry. The “Doing Business 2020” report, which is the latest, captures 294 regulatory reforms that have been implemented between May 2018 and May 2019. The report shares conclusively that 115 economies have made it easier to do business.

“Doing Business” has influenced the economic landscape of countries around the world. Studies have shown that when countries make it easier to start a formal business, more businesses are created. It is in everyone’s interest to have more formal companies operating in developing countries because most jobs are in the private sector and formal companies are the companies — along with individuals — that pay the taxes that are used for improving education, health and citizen security.

“Doing Business” also reduces the opportunities for corruption. The latest report highlights that countries who do well economically are also noted for their higher levels of entrepreneurial activity and lower levels of corruption. The report also shares that there are significant opportunities for corruption where there’s excessive “red tape” and extensive interactions between private sector actors and regulatory agencies. Therefore, “Doing Business” states that its top 20 best-performing economies on the ‘Transparency International's Corruption Perceptions Index’ average fewer requirements necessary to start a business and obtain a building permit.

Recent allegations

On Aug. 27, the World Bank announced that it was pausing publication of the “Doing Business” report, and rightly so. The decision came after allegations of inconsistencies in the data that went into the reports from 2017 and 2019. These inconsistencies reportedly affected the rankings of four countries: China, Saudi Arabia, Azerbaijan and the UAE, though the allegations call into question the legitimacy of the entire publication. As Michael Klein, the former Senior Vice President of the World Bank Group, aptly put it: “Method can be debated. Data integrity cannot.

The Doing Business report’s success as a tool — and the intense competition it generates across nations — means that it has always been fiercely contested. Both the report’s detractors and its defenders recognize that the influence that “Doing Business” has globally increased the incentive to manipulate its data. Indeed, this is not the first scandal the report has faced. In 2003, the very first year of the “Doing Business” publication, a prominent French public figure involved in the report’s data collection stated that the data that went into the report was incorrect. Upon investigation, the data was found to be correct; however, at the time, just as now, the individual’s claim was regarded with the utmost seriousness, because all parties involved knew how high the stakes were. 

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The fix

What is to be done? First, at the end of the investigation, the World Bank should be clear about what went wrong, why, and how. Failing to do so would only further erode trust in the publication and the process that goes into it. Second, the World Bank should publish a transparent set of steps it will take to fix the problem. These steps could involve an annual external review to ensure the report’s data integrity going forward, incorporating modern data management platforms that offer greater transparency into the handling and processing of data, or leveraging other AI-based technologies to make the collection of data more automated.

What the World Bank should not do is end “Doing Business.” That would throw the baby out with the bathwater.

This most recent scandal has shown that “Doing Business” and its process are vulnerable and imperfect — and that it is possible for unscrupulous actors to try and take advantage of these vulnerabilities to artificially boost a country’s score. This dynamic, however, should be taken as a confirmation of the report’s value. The fallout that ensues should be used as an opportunity to strengthen the integrity of the publication going forward.

“Doing Business” has been arguably one of the most important innovations in international development in the last 20 years. Because of its success, a wide variety of actors in the development field rely on it to pursue their own work, including bilateral and multilateral development institutions, local governments and civil society and aid agencies.

Most importantly — and too easily forgotten — is the core client of the report: businesses themselves. The report promotes the creation of fairer and more equitable business environments.

A fair playing field most benefits the marginalized enterprises: women-run enterprises, small-businesses, and entrepreneurs fighting to compete with big companies. “Doing Business” helps ensure that these businesses get a fair chance to grow and prosper.

Promoting the integrity of “Doing Business” safeguards the integrity and viability of clients, and no matter how the World Bank proceeds, this consideration should be paramount.

Daniel F. Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.