Years ago, one-fourth of FT Alphaville was occasionally pestered by the PRs of various oil-soaked Gulf monarchies to write about their country’s stupendous advances in the World Bank’s Doing Business rankings.
We mostly politely declined and quietly rolled our eyes at the idea that it was easier to do business in, say, Russia than in Belgium, or the UAE than in Finland.
That the rankings turned out to have been manipulated by the Bank to boost the results of countries like China was about as shocking as finding out the pope is Catholic. That led to the rankings being suspended, and a new one (B-READY) is in the works.
But the broader issue is that many countries very nakedly gamed the various Doing Business inputs to make them appear better, with little tangible impact.
Supporters argued that even superficial efforts could still lead to positive changes, which is presumably why the World Bank has decided to revamp the methodology under a new name rather than aborting the whole idea.
However, a new paper just published by the Journal of Comparative Economics reckons that not only was there no link between a country’s Doing Business improvements and its economic vim — it actually had a negative effect in the short run.
Here’s the abstract, with FTAV’s emphasis:
We use the time series variation in the World Bank’s ‘‘distance to frontier’’ estimates of the ease of doing business to assess the effects of changes in this variable on real GDP per capita. The use of Vector Autoregression techniques allows us to identify shocks to the Doing Business scores that are initially uncorrelated with GDP, thus addressing an important endogeneity problem that affects the cross-sectional literature on this topic. We report a robust finding that improvements in Doing Business scores have at least a temporary negative impact on GDP and find little evidence for a positive effect in the years following these improvements.
The paper by Tamanna Adhikari and Karl Whelan (of the Central Bank of Ireland and University College Dublin respectively) comes up with two possible explanations for why Doing Business improvements was actually bad for near-term growth, one negative and one positive.
. . . One possibility is that the widespread focus in the developing world on the Doing Business indicators has perhaps had a negative effect, with those countries that have had the best improvements in their DTF scores being countries that have focused on box-ticking exercises to improve their ranking rather than substantive reforms.
Another possibility is that implementing improvements in business environment takes take time to have a positive impact — more time than the short time element in our analysis can pick up — and our findings are picking up some shorter-run disruptions that stem from reforms that ultimately have a positive effect.
The second explanation seems weak. If this was just a near-term cost of meaningful reforms you’d expect it to appear in the longer-term economic data (which can admittedly be hard to disentangle). But even the first could just be a statistical oddity.
It’s probably safer to assume that the Doing Business Rankings in practice mean little, and the new B-READY (another example of the unstoppable advance of the acronym) will be more of the same. For masochists, the World Bank finally published its new full methodology earlier this month.
