Why “Doing Business” Leads to Bad Policy

26 June 2009 at 8:16 am 3 comments

| Benito Arruñada |

In a post at the PSD blog, David Kaplan sees little difference between the “Doing Business” position and my own. He writes:

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. . . .

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.

I doubt that one can separate what DB measures and how it does it from how DB measures are used in the field. My main complaint, however, is different, namely that the DB method has often led to bad policy.

In the “Starting a Business” area, DB focuses narrowly on some costs (those paid by entrepreneurs at the formalization stage), while forgetting all other costs (e.g., costs paid by governments to build often-useless one-stop windows). More important, given that the method ignores the benefits of formalization, the DB method disregards the need to make business registers reliable. Thus, they often end up accelerating the production of useless paperwork. See for details on specific policies my 2009 paper on “How Doing Business Jeopardizes Institutional Reform.”

DB application and marketing have also caused trouble. For example, rankings are misleading when the method is applied differently in different countries. For example, the USA ranking, if correctly applied, would have brought the USA down in the DB Starting a Business index from positions 3-5, to positions 57-60 in DB 2008, and later to positions 94-98 in DB 2009.

Of course, measuring institutions is hard. Emphasis should lie in improving measurement methods. Unfortunately, DB has shown little willingness to learn from past mistakes and improve its methods. On the contrary, it has prematurely bet on having a policy impact, exploiting the proclivity of the media to cover rankings and the use that the MCC made of DB data to allocate aid money. However, as readers of this blog perfectly know, strong incentives work only when there are good measures of performance.

This has intensified another negative impact of DB: its simplistic policy advice and the exaggerated marketing of its rankings have discredited free-market policies. Free markets need reliable public institutions. By focusing on some of its costs without paying due attention to its functionality, DB has favored policies with misguided priorities, especially damaging in countries where such institutions are not working. For example, speeding up company registration should not be the priority when registration certificates are not valued by courts.

Entry filed under: Classical Liberalism, Former Guest Bloggers, Institutions, Public Policy / Political Economy. Tags: .

Slides from Foss-Klein PhD Course Journalists Duped Again

3 Comments Add your own

  • 1. Michael E. Marotta  |  28 June 2009 at 7:19 am

    Thank you for mentioning DOING BUSINESS.

    My undergraduate degree is in criminology. I am now about halfway through a master’s in social science. I took two cognate electives in global economics: international monetary systems and multinational enterprise. The latter relied heavily on UNCTAD’s World Investment Reports. I did not know about the World Bank’s Doing Business projects. So, again, thanks.

    One of my working areas is numismatics. I write a monthly column for the ANA. I edited my state society’s quarterly and I am now their webmaster. So, for me, economic news is just modern economic history. In a sense the World Bank is the globalist House of Fugger or Rothschild, but perhaps the essential difference is that at the WB no one personally profits or goes without.

  • 2. Christian von Drachenfels  |  2 July 2009 at 6:57 am

    Benito,

    thanks for this post. As you know I share your concerns about DB. However, I think we have to acknowledge that last years DB started to reflect to a certain extent on its limitations.

    Nevertheless, with regard to simplistic policy advice there is a “brilliant” example, which was recently posted on the DB Blog.
    The simple message presented there is here. This sounds very nice but taking a look at the argument of the post I’d like to question very much what the DB-Team is trying to sell us here.

    They refer to WEF’s Global Competitiveness Index (GCI) and argue: “economies rank best in the Doing Business are among the most competitive around the globe. In fact, 19 out of the 25 best performing economies from Doing Business 2008 and 17 from Doing Business 2009 are ranked among the 25 most competitive economies in the Global Competitiveness Report 2008-2009.”

    But actually the GCI consists – for good reason – of various other indicators and not just of the “institutions” pillar.
    Actually further comparing the ranking of 181 countries in Doing Business 2009 (DB) and the ranking of 134 countries in the GCI 08/09 it is easy to find cases, which from my point of view, rather seem to illustrate that DB cannot explain much with regard to economic development and competitiveness. Look at these discrepancies:
    India DB:122 GCI: 50
    China DB: 83 GCI: 30
    Costa Rica DB:117 GCI: 59
    Georgia DB: 15 GCI: 90

    Let me also point to another aspect. Take two other statements in the post:

    “Smart regulation is not about regulating less” and ”It is therefore not surprising that economies rank best in the Doing Business are among the most competitive around the globe.” We should remind ourselves that Doing Business actually ranks those economies top, which are regulating less – so DB is to a significant extent about regulating less.

    As it reads in the evaluation of the Independent Evaluation Group (p.6): “Seven of the 10 DB indicators exhibit a preference for less regulation—3 most notably: employing workers, paying taxes, and dealing with licenses.”

    Well, we’ll see what DB 2010 brings.

  • 3. Wade Channell  |  17 July 2009 at 10:00 am

    Benito:

    It seems to me from Kaplan’s comments that there is still popular confusion over what you are arguing. As one who originally did not understand your position but then came to appreciate it greatly, perhaps I can help.

    My understanding is that you are saying that the registration of a company or property is one event in a more complex system. Moreover, there are various types of systems, and these combine the different components of the overall registration in different ways. In some systems, for example, a great deal of work is done by private legal specialists (usually lawyers) who ensure compliance with various regulations, and after doing so, then register the company at the company registry. In another country, the registrar may actually provide the services that were done by the first country’s lawyer, then register. If you then compare the processes only at the point of registration – and not across the full system – you find one registrar to be much more “efficient” and less costly. If reforms are then undertaken to make the second registry work like the first, various components of the overall act will be eliminated, possibly damaging the value of registration.

    If this is the case, then the proper focus of the analysis is not at the level of registration, but at the overall chain of actions that must be taken from start to finish. Wnile it is clear that many registrars in the world have developed inefficient, rent-seeking, and unnecessary registration regimes, not all of the delays and costs necessarily reduce the value received. If one adds the costs of a New York lawyer (non-trivial) to New York State registration fees (trivial), it may be that the total cost of registration is not so different from some of the seemingly more expensive registration charges that drive rankings on Doing Business.

    I’m looking forward to your ongoing findings on these matters, as I think you’ve raised an exceedingly important issue.

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