One of my first assignments in the World Bank, some 13 years ago, was in a small and complicated country, better known for coups and mercenaries than for statistical capacity. Before I set off to the Comoro Islands, my then manager (now an established World Bank Vice-president) gave me the following priceless advice: “When you get there, make sure to get a lot of data. It may be difficult to get and sometimes even flawed, but data has one great advantage: It cuts through a lot of crap.”
Numbers are indeed beautiful. They can help bring clarity to our lives and save us time as well as resources. But raw data can be messy and you also need a good system for deciding which numbers to use and how to interpret them. Last week’s launch of the 2014 Doing Business rankings reminded me of the advice my then boss had given me. Doing Business started from the premise that companies are the backbone of any economy but that investors often lacked knowledge of the conditions in “frontier economies”. With the benefit of an annual assessment of the business environment in each country, investors could make more informed decisions. As for policy makers, they could more easily attract investors, provided they made a genuine effort in cutting red tape and supporting businesses.
Over the years, the Doing Business team has put together one of the most thorough systems of collecting, analyzing and aggregating data on the business environment across the world. The dataset now covers an impressive 189 countries, including many small states like Comoros, for which data are often scarce. The countries are rated across ten dimensions: Starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. The ratings are aggregated and converted into one single index according to which countries are ranked.
The countries I now cover – Albania, Bosnia & Herzegovina, Kosovo, FYR Macedonia, Montenegro, Serbia – are performing reasonably well but would still need to improve further to attract major international businesses (see figure 1). One of this year’s positive surprises is Kosovo, which is being recognized as a “top reformer”. Macedonia is also consistently ranked in the top group. However, Bosnia & Herzegovina, remains at a pitiful 131st rank, between Bangladesh and Uganda.
The example of Western Balkan economies shows that, with sustained effort, even small countries with a difficult past can position themselves as possible investment destinations. At the same time, halting or even slowing the pace of reform is not an option. Most Western Balkan countries still have a 30-40 percent gap to the top performers, many of which are from Eastern Europe and thus natural competitors.
Some countries were disappointed with their rankings and even expressed concern to the World Bank about disclosing them. Their criticism is often directed at the methodology. They take issue with how the data are collected and the topics selected; they also point out that some countries “game the system” by targeting those reforms that will help them improve their ranking rather than truly responding to investor needs.
In fairness, finding ways to capture the ease of doing business is no easy task. Does it make sense to focus on how long it takes to open a business, how difficult it is to construct a building or how many taxes one needs to pay – and how professional are those officials collecting them? It would be tempting to look directly at actual investments but that would be misleading because there are many other factors –beyond sound policies- that drive investment decisions (such as the size of the economy and the growth prospects of the market).
The beauty of Doing Business is that it focusses on areas governments can actually improve. It makes it also extremely clear where a country stands and how it could progress in making easier to do business. There is a trade-off though: the index provides a clear big picture snapshot, but is washes away nuances and doesn’t do justice to countries that may perform well at a more granular level.
While critics of the index make many valid points they are yet to come up with a better alternative. It takes a lot of effort and hard work to establish the right model, collect all the necessary data and then aggregate it into an index that everyone buys into. Doing Business has achieved it, despite some of its limitations. Moreover, the solution cannot consist in going back to impressionistic assessments and no comparability. Breaking life down to numbers involves simplifying it which is both good (because it makes complexity manageable) and bad (because some flavor inevitably is lost). This is probably why Doing Business is at the same time such a powerful tool and disliked instrument.