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Ease of Doing Business Index
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The Ease of Doing Business Index is an index created by the World Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights. Empirical research funded by the World Bank to justify their work claims to show that the effect of improving these regulations on economic growth is strong.
"Empirical research is needed to establish the optimal level of business regulation—for example, what the duration of court procedures should be and what the optimal degree of social protection is.
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Encyclopedia
The Ease of Doing Business Index is an index created by the World Bank. Higher rankings indicate better, usually simpler, regulations for businesses and stronger protections of property rights. Empirical research funded by the World Bank to justify their work claims to show that the effect of improving these regulations on economic growth is strong.
"Empirical research is needed to establish the optimal level of business regulation—for example, what the duration of court procedures should be and what the optimal degree of social protection is. The indicators compiled in the Doing Business project allow such research to take place. Since the start of the project in November 2001, more than 800 academic papers have used one or more indicators constructed in Doing Business and the related background papers by its authors."
Methodology
The index is based on the study of laws and regulations, with the input and verification by more than 5,000 government officials, lawyers, business consultants, accountants and other professionals who routinely advise on or administer legal and regulatory requirements.
The Ease of Doing Business index is meant to measure regulations directly affecting businesses and does not directly measure more general conditions such as a nation's proximity to large markets, quality of infrastructure, inflation, or crime. A nation's ranking on the index is based on the average of 10 subindices:
- Starting a business - Procedures, time, cost and minimum capital to open a new business
- Dealing with licenses - Procedures, time and cost of business inspections and licensing (construction industry)
- Hiring and firing workers - Difficulty of hiring index, rigidity of hours of index, difficulty of firing index, hiring cost and firing cost
- Registering property - Procedures, time and cost to register commercial real estate
- Getting credit - Strength of legal rights index, depth of credit information index
- Protecting investors - Indices on the extent of disclosure, extent of director liability and ease of shareholder suits
- Paying taxes - Number of taxes paid, hours per year spent preparing tax returns and total tax payable as share of gross profit
- Trading across borders - Number of documents, number of signatures and time necessary to export and import
- Enforcing contracts - Procedures, time and cost to enforce a debt contract
- Closing a business - Time and cost to close down a business, and recovery rate
Looking at one example, Australia, the best performing nation on the first subindex "Starting a business", there are 2 procedures required to start a business and taking on average 2 days to complete. The official cost is 0.8% of the Gross National Income per capita. There are no minimum capital required. In Guinea-Bissau, the second worst performing nation on the first subindex, there are 17 procedures required to start a business taking 233 days to complete. The official cost is 255.5% of the gross national income per capita. A minimum capital of 1006.6% of the gross national income per capita is required.
While fewer and simpler regulations often imply higher rankings, this is not always the case. Protecting the rights of creditors and investors, as well as establishing or upgrading property and credit registries, may mean that more regulation is needed.
Research and influence
More than 800 academic papers have used data from the index. The effect of improving regulations on economic growth is very strong. Moving from the worst one-fourth of nations to the best one-fourth implies a 2.3 percentage point increase in annual growth.
The various subcomponents of the index in themselves provide concrete suggestions for improvement. Many of them may be relatively easy to implement and uncontroversial (except perhaps among corrupt officials who may gain from onerous regulations requiring bribes to bypass). As such, the index has influenced many nations to improve their regulations. Several have explicitly targeted to reach a minimum position on the index, for example the top 25 list. Between April 2006 and June 2007 there were 200 reforms in 98 economies. The 10 top reformers were Egypt, Croatia, Ghana, FYR Macedonia, Georgia, Colombia, Saudi Arabia, Kenya, China, and Bulgaria. Several nations did the opposite. They include Venezuela and Zimbabwe.
The correlations between the subindices are low, which suggest that countries rarely score universally well or universally badly on the indicators. In other words, there is usually much room for partial reform even in the best ranking nations.
The annual Reformers' Club event brings together individuals from top reformer countries who have been instrumental in initiating and implementing business environment reform. These reformers are acknowledged for their success in improving the ease of doing business in their country. and case studies are available online.
Somewhat similar annual reports are the Indices of Economic Freedom and the Global Competitiveness Report. They, especially the later, look at many more factors that affect economic growth, like inflation and infrastructure. These factors may however be more subjective and diffuse since many are measured using surveys and they may be more difficult to change quickly compared to regulations.
Criticism
The Doing Business methodology regarding labor regulations has been criticized because of the support for flexible employment regulations. For instance, the easier it is to dismiss a worker for economic reasons in a country, the more one goes up in the rankings. The Employing Workers index was revised in Doing Business 2008 to be in full compliance with the 188 ILO conventions. A country can have all ILO conventions ratified and still rank #1 on the Ease of Employing Workers.
A study commissioned by the Norwegian government alleges methodological weaknesses, an uncertainty in the ability of the indicators to capture the underlying business climate, and a general worry that many countries may find it easier to change their ranking in Doing Business than to change the underlying business environment..
The tax indicator, that ranks tax havens and oil-producers highly for having no corporate taxes, has been widely condemned as misleading and potentially damaging to developing countries - Douglas North, the founder of new institutional economics, points out that developed countries spend 30-40% of their GDP on providing the necessary public goods such as public security and health that are essential for the private sector to do business.
Practical experience and academic research suggests a long list of reasons - aside from those mentioned in the small print of the Doing Business website - why caution is needed in promulgating the unquestioned use of Doing Business to advice developing country governments on the design of regulatory reform programmes. The list of ten points provided below is by no means exhaustive, but underscores the need to be cautious in using Doing Business.
1. Evidence from successful reformers such as Hungary, Mexico, South Korea and throughout the OECD suggests that building a conducive investment climate takes more than simply removing immediate constraints – it requires systemic reform. Though they can be welcome, one-off reforms will rarely have a long-lasting impact on the confidence of the private sector to invest in a country. Successful reform is not just about cutting the immediate red tape (i.e. tackling the “symptoms” or “stock” of existing regulations) but about addressing the “causes” - the institutional factors that led to these obstacles in the first place. Successful regulatory reform is about tackling systemic problems. This requires systemic solutions, which is fundamentally about improving governance and the functioning of the state i.e. the process by which policies and decisions are made, who is consulted, the criteria on which policies are made, how transparent they are, and the accountability mechanisms with the private sector and wider civil society. Because the Doing Business indicators are built from individual inputs, they give undue attention to a few trees in the forest rather than the health of the whole forest. Hence, as a means of designing a national reform strategy for the business environment, the Doing Business approach is neither intuitively satisfying, nor conforms to the approach taken by successful reformers.
2. The Doing Business indicators do not measure net changes but instead focus only on costs, ignoring the potentially beneficial effects of the regulatory function. As the latest research shows, by disregarding the social benefits of regulation, the recipe for simplification ends up being little more than an attempt to cut back formalities without taking into account the value of the services being offered. For example, in business registration reform, the Doing Business indicators completely disregard the benefits that the formalisation system provides in the future for both private firms and government departments and the negative effects that low-quality formalisation may have in terms of future transaction costs. In fact, there are now several examples emerging which show that in practice, reforms informed by Doing Business, instead of eliminating procedures, work to just compress and speed up procedures, and often end up producing new bureaucratic structures, introduce new parallel procedures and new legal figures, and do not improve the quality of information (for example, entering or leaving public registers). In addition, it is pertinent to note that the Doing Business method only covers the compulsory initial costs of regulatory barriers, ignoring the often large investments required in information technology and expensive consultancy services to re-engineer procedures. It is instructive to note that the most advanced countries working on regulatory reform have taken a broad social welfare approach to measuring regulatory improvements to assess the net social gain from the regulatory function of the government. Whilst this is hard to measure, one way of doing so is to focus on the specific impacts that the regulatory and administrative environment have on business decisions. For example, successful regulatory reform could be determined by “reform that increases the return on investment in the private sector by reducing, on net, regulatory risks and/or regulatory costs.” To see the power of this approach vis-ŕ-vis Doing Business, imagine that a tax driver in Nairobi needs 12 separate permits to drive from the city center to the airport. Investors in a taxi service must consider the cumulative effects of all 12, plus any new ones that might be added in future. Business environment reforms that eliminate 6 low-cost permits can be overcome by the addition of one high-cost permit or by enforcement changes in the other six. The Doing Business methodology is incapable of picking up the magnitude and complexity of these issues for incentives to invest.
3. The most successful reformers did not use indicators of business costs to set the priorities and goals of regulatory reform. Rather, they were heavily influenced by indicators of macro economic performance. This is because indicators of business costs are not sophisticated and flexible enough to push forward a broad-based program aimed at net reductions of regulatory costs and risks i.e. changes that actually influence business behaviour. As a result of this, “the narrower, bottom-up indicators increasingly used to set reform agendas may have a very different effect on results and sustainability.” (FIAS working paper, 2006)
4. Doing Business focuses the mindset on minimising regulation rather than optimising it. Is less regulation always better? The simple answer to this is no. Rather the goal is to ensure the optimal level of regulation. To see this, one simply has to consider the following cases to realise that certain circumstances require more not less effective regulation. For example, better regulations and procedures were required to regulate the accountancy profession after spectacular frauds at major companies in recent years, they were required to protect the commons from pollution, and to regulate natural monopolies preventing them from abusing their power, and finally to get better private property rights in lawless countries emerging from civil war. As such, it is quite difficult to maintain with confidence Doing Businesses assertion that “heavier regulation brings bad outcomes” (Doing Business, 2004) or even that a systemic relationship exists between the degree of regulation and economic performance.
5. The Doing Business indicators were developed using a highly dubious procedure. Hence, the indirect costs of the Doing Business project resulting from the adoption of defective policies could be huge as they are gradually built into new aid conditionalities. In economics, hypotheses are usually tested on the basis of pre-existing information, so it is possible that different researchers use the same data to test alternative hypotheses; this then guides the emergence of policy and best-practice guidelines. In the case of the Doing Business reports, however, the procedure has been completely different. For example, for “starting up a business.” First, a pilot study was carried out - data was collected and some hypotheses were compared. A scientific article was then published, and policy was proposed on the basis of only these preliminary results. Since then, the World Bank has continued collecting data of the same type and publishing them annually, in a project led by the authors of the pilot study. This reorganisation of the research sequence entails the risk that the measurement of institutional performance remains subject to highly questionable policy recommendations. The indirect cost of the Doing Business project resulting from the adoption of defective policies could therefore be huge.
6. Many countries are redesigning their policies with the express aim of achieving higher scores in the Doing Business rankings, which is unlikely to lead to any improvement in the environment for doing business and could undermine the foundations for systemic reform. Since the end of 2006, Doing Business has been giving publicity not only to the countries with the best ratings but also to those obtaining the lowest ratings. In some cases, altering the indicator has become an end in itself and, since an indicator is inevitably incomplete and imperfect, many of the remedies adopted are little more than window-dressing e.g. the procedures that are easy to eliminate are neither numerous nor very important. This risk increases in developing countries, where it is widely believed that a higher position in the ranking will attract foreign investment. However, since such an improvement is unlikely to reflect any real improvement in the institutional environment for firms, the expected foreign investment is unlikely to materialise, possibly resulting in a general lack of confidence in real institutional reform. Not only are developing countries tending to simply carry out window-dressing with regard to the functioning of their institutions but countries are racing to restructure their institutional reforms to include simplification of business formalization, regardless of whether it is a priority for reform. In turn, Doing Business often praises reforms in this direction without taking into account the frequently poor results.
7. A Manichean view of economic reality. In the pilot study on the Doing Business project, the Doing Business team concluded that politicians and bureaucrats introduce regulations on business formalization for their own benefit and not to serve the public interest. This black and white view of economic reality is wrong because the two hypotheses (rent-seeking and public interest) are neither mutually exclusive nor incompatible. On the one hand, a certain degree of regulation of formalization is in the public interest. And it may be that there is no single optimal degree but rather that this optimum varies from country to country in line with their institutional, demographic and economic characteristics.
8. The Doing Business indicators completely ignore the reality that every country’s best solution will depend on the demand for the services. For example, a higher average cost in a country whose system functions at a lower scale does not necessarily indicate that its system is less efficient. Its institutions may be functioning efficiently, but at a lower scale and perhaps with different technology. And vice versa, a richer country may show lower average costs only as a result of the scale, even though its system is inefficient. By emphasising the reduction of unit average costs, Doing Business falls into the same old trap as some managerial accounting systems, which led firms to choose capital-intensive technologies and to produce excessively large batches of products. Moreover, Doing Business, only estimates the costs paid by users, but not the fixed costs of creating and starting up new systems.
9. At a very basic level, most of the criteria used in the Doing Business reports are open to criticism and debate. In the complex issues surrounding the operation of a business, economic theory does not always present clear-cut answers. One economic model may suggest a particular measure of the performance of a legal system, but another model may suggest a different measure. Ultimately the performance of a legal system should be an empirical question. For example, what is the effect of a given legal structure on the performance of the economy? But the World Bank’s reports do not attempt to do this. Instead they quantify legal systems rather than evaluating the performance of the systems in terms of economic outcomes in their countries of origin.
10. The Doing Business indicators are based on some implicit weighting scheme which may or may not correspond to the actual importance of each indicator/constraint for the particular country in question.
Ranking
Ranking of all nations from 2008 report (2006/04-2007/06):
| Rank | Country |
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| 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 |  | | 9 | | | 10 | | | 11 | | | 12 | | | 13 | | | 14 | | | 15 | | | 16 | | | 17 | | | 18 | | | 19 | | | 20 | | | 21 | | | 22 | | | 23 | | | 24 | | | 25 | | | 26 | | | 27 | | | 28 | | | 29 | | | 30 | | | 31 | | | 32 | | | 33 | | | 34 | | | 35 | | | 36 | | | 37 | | | 38 | | | 39 | | | 40 | | | 41 | | | 42 | | | 43 | | | 44 | | | 45 | | | 46 | | | 47 | | | 48 | | | 49 | | | 50 | | | 51 | | | 52 | | | 53 | | | 54 | | | 55 | | | 56 | | | 57 | | | 58 | | | 59 | | | 60 | | | 61 | | | 62 | | | 63 | | | 64 | | | 65 | | | 66 | | | 67 | | | 68 | | | 69 | | | 70 | | | 71 | | | 72 | | | 73 | | | 74 | | | 75 | | | 76 | | | 77 | | | 78 | | | 79 | | | 80 | | | 81 | | | 82 | | | 83 | | | 84 | | | 85 | | | 86 | | | 87 | | | 88 | | | 89 | | | 90 | | | 91 | | | 92 | | | 93 | | | 94 | | | 95 | | | 96 | | | 97 | | | 98 | | | 99 | | | 100 | | | 101 | | | 102 | | | 103 | | | 104 | | | 105 | | | 106 | | | 107 | | | 108 | | | 109 | | | 110 | | | 111 | | | 112 | | | 113 | | | 114 | | | 115 | | | 116 | | | 117 | | | 118 | | | 119 | | | 120 | | | 121 | | | 122 | | | 123 | | | 124 | | | 125 | | | 126 | | | 127 | | | 128 | | | 129 | | | 130 | | | 131 | | | 132 | | | 133 | | | 134 | | | 135 | | | 136 | | | 137 | | | 138 | | | 139 | | | 140 | | | 141 | | | 142 | | | 143 | | | 144 | | | 145 | | | 146 | | | 147 | | | 148 | | | 149 | | | 150 | | | 151 | | | 152 | | | 153 | | | 154 | | | 155 | | | 156 | | | 157 | | | 158 | | | 159 | | | 160 | | | 161 | | | 162 | | | 163 | | | 164 | | | 165 | | | 166 | | | 167 | | | 168 | | | 169 | | | 170 | | | 171 | | | 172 | | | 173 | | | 174 | | | 175 | | | 176 | | | 177 | | | 178 | | |
See also
External links
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