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The Beauty of Numbers

Wolfgang Fengler's picture

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.”  

Accounting chartsNumbers 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.
 

Comments

Submitted by Franciska Eseenam on

Thanks for your really interesting article, it is genuily simple as well as duely informative. Congrats for the quality of the content! Best Regards

Submitted by Eric on

Good job on th topic you chose to exposit. However I think more should be done to consider the contentious issues raised by the critics. Though I am able to discuss this matter innmore detail I am not sure how interesting for you it would be to look at the issues of bias raised by the critics. Most important for me is how to reduce the level of subjectivity embedded in the perception surveys that underlie the indexes ultimately used for ranking these countries. How, for example, do you take into account the nature and strength of the government- private sector relations in any country and it's correlation with the level of political and economic freedom in any particular country in influencing the perception of those interviewed. Is there a way in which the actual monetary cost of these rankings can be included in the report , say for CODB 2015? Am available to discuss some of theses ideas further.
Eric

Submitted by Wolfgang on

Thanks Eric,

happy to discuss your points.

Doing Business does not sample firms for two main reasons. The first pertains to the frequency with which firms engage in the transactions captured in the indicators, which is generally low. For instance, a firm goes through the process of starting a business once in its existence while an incorporation lawyer may do several dozen such transactions in a year. Therefore, the experts providing information to Doing Business are better suited for assessing the process of starting a business than individual firms. Second, most of the information gathered through the Doing Business questionnaires is of a legal nature which firms are unlikely to be fully familiar with.

This method does demand a very rigorous review of the responses of more than 35000 experts around the world. Even if it was methodologically possible to sample firms directly, it would be practically near impossible to create meaningful ratings at the country level as one would need a huge random sample.

Wolfgang

Submitted by C Chang on

Those of us who support evidence-based policy making are heartened by the current emphasis on and investment in data. But as with all things, there are caveats:

1. Your data should measure what matters, otherwise we risk what's measured becoming what matters.
2. Data must be used wisely, particularly where causality is not proven, and should support not undermine other aspects of a good policy-making process, particularly consultation.
3. Data should be as robust as possible, cross-checked and honest about any short-comings.
According to a recent review by an expert panel appointed by World Bank President Jim Kim, Doing Business currently falls short on all three of these tests. (See their findings on www.dbrpanel.org and civil societies recommendations for change at http://www.cafod.org.uk/content/download/12931/99953/file/Doing%20Better.pdf).

A good tool to provide governments with information on whether their business environment is helping or hindering entrepreneurship and investment is invaluable. Doing Business could become that tool, but only if its supporters resist the urge to become defensive in the face of criticism and instead embrace the changes that are needed to make Doing Business a tool fit for purpose.

Submitted by Mike on

Very nice topic. I read recently that each business regulatory reform is associated with a 0.15 percent increase in growth rate of GDP. interesting finding, see here http://ideas.repec.org/a/eee/jjieco/v26y2012i3p285-307.html . Certainly, these numbers are beautiful, helping us in reform effort here in Ethiopia.

Submitted by Wolfgang on

Thanks much Mike,

Indeed a better business climate helps to reach higher levels of growth. Just think of Singapore which is now wealthier than most Western countries and always ranks among the top in DB.

Keep up the good work.

Wolfgang

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