Why “Doing Business” Leads to Bad Policy
| 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.