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Reframing the debate

Benito Arruñada is guest blogging at Organizations and Markets. His first post states:

One of my recent research areas is the cost of business formalization. In particular, I have criticized the World Bank’s Doing Business project for the narrow focus of its “Starting a Business” indicator on reducing the initial costs of incorporating companies (Arruñada, 2007,  2009), which disregards the more important role of business registers as a source of reliable information for judges, which is essential for reducing transaction costs in future business dealings.

Part of Professor Arruñada’s argument is that the Doing Business indicators do not capture all the relevant components of the business environment. The writers of the Doing Business 2009 report agree. They state:

Doing Business does not measure all aspects of the business environment that matter to firms or investors—or all factors that affect competitiveness. It does not, for example, measure security, macroeconomic stability, corruption, the labor skills of the population, the underlying strength of institutions or the quality of infrastructure. Nor does it focus on regulations specific to foreign investment.

So far the two sides don’t sound that different. So what is the argument about?

I believe that the debate is not mainly about what Doing Business measures. Really, the debate is about how these measures are used in shaping public policy. Critics of Doing Business are concerned that countries will ignore the above warnings and only reform in areas that are measured in Doing Business.

Are the critics right? Do governments only adopt reforms that show up in the Doing Business rankings? Or could it be that governments simply use Doing Business as a source of valuable information with the goal of adopting any reform that would be good for their countries?

Comments

Submitted by lot on
There is a full group at the bank whose job is to consult governments on how to improve their ranking in the "Doing Business" reports. Their mere existence answers your question. Moreover, one of the main criticisms I have heard is that the Doing Business rankings are based not on a representative sample of firms but the perceptions of law firms regarding the costs facing hypothetical companies of a size way above the average size of firms in developing countries.

Submitted by David Kaplan on
Thanks for the comments. Lot: There is some justification for using the perceptions of law firms. I'll try to post on that some time. Benito: You say "the DB method disregards the need to make business registers reliable." All I have is a personal example from my only operations trip in my two years at the World Bank. Cape Verde has set up a one-stop shop for registering a business. Influenced by your work, I pushed them on the question of how this affected the quality of the business registry. They swore that using better IT technology made the process both quicker (which DB measures) and more reliable (which DB does not measure).

If governments are only adopting reforms that show up in the Doing Business rankings, well then we have highly incapable governments. Governments should know that it takes more for successful economic policy making. I reckon that the Bank conveys this message as well. But, what about the role of the media? Many reports on investment climate, competitiveness etc. are reducing complexity so that they can come up with comparable results and present them in an easily accessible ranking. From what I have seen, reports on these rankings are often misleading by e.g. not explaining the limitations of such rankings and instead comparing economies, which are simply incomparable. I think projects like DB have to make sure that their rankings are interpreted with care. Indeed last year's edition addressed limitations in the introduction. I am, however, wondering in how far the impressive marketing of DB is able to communicate these complexities? Anyway, we should consider that some governments might face strong demand to "do sth about DB!", which is triggered by inappropriate media coverage. I don't want to suggest that media coverage is always inappropriate and of course often pressure on governments to reform is a good thing...so let me point to our own work on the Doing Business project, as a result of our research we came up with more nuanced "7 theses on DB": http://tinyurl.com/lg8wzn

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