10 Years of Age: Doing Business Faces Scrutiny
April 16, 2013
A New Zealander can set up a small business in a day. A Brazilian who legally wants to do the same requires over 100 days. Enforcing a simple contract in New Zealand is complicated enough: a matter of over 200 days. The Brazilian business is looking at over 700 days for the same result.
Small wonder that the informal economy in New Zealand amounts to approximately 10 percent of the economy whereas in Brazil some 40 percent of economic activity occurs on the fringes of the law. In too many places in the world people have little choice but to operate in the informal economy. Their existence is precarious, often at the mercy of bribe-seeking officials. The Tunisian street vendor, Mohamed Bouazizi, set himself on fire protesting harassment by officials; this famously sparked the Arab Spring. The case of many others like him remains dire.
For ten years the World Bank’s Doing Business report has shone a spotlight on the complications of official regulation for small and medium enterprises (SMEs) and records the written rules that governments make for SMEs. The facts are summarized in indicators that are comparable across countries and allow them to learn from each other. The focus on the complex area of regulation has supported reform all over the world—stronger protection of property & contracts and less complicated procedures. Importantly, this is reform spurred without large aid payments.
At the same time, indicators that can be compared across jurisdictions have made it possible systematically to study the effects of rulemaking. For the first time, impact evaluation can be considered for some regulatory reforms to isolate the effect of reform. Mexico was the first case, where different states at different times improved the ease of setting up businesses. States that reformed saw business registration increase as well as formal job creation. Competition spurred businesses to improve. Prices fell, creating benefits for consumers and employees. People are now more likely to succeed on the basis of rules rather than connections. The reforms give the Mohamed Bouazizis of this world a stab at success.
The very punch that Doing Business packs has prompted opposition. From the beginning several governments were unhappy. A typical initial reaction is anger and denial but the very unease stirred by Doing Business has led to reviews of problems and ultimately reform efforts. It has been a productive tension for citizens; every year over 200 reforms are recorded by Doing Business with over 2,000 logged in ten years. Apart from Venezuela and Zimbabwe, no country has made life harder for business under the measures captured by Doing Business. As an Indian newspaper put it, the politically optimal way to deal with the report is to “trash it in public and implement it in secret.”
Yet criticism persists. The new World Bank president, Jim Kim, has established a commission to review Doing Business and make recommendations for its future. All options are on the table. Critics claim the data are not robust, the relevance of the data for reform is questionable, and the rankings direct reform efforts to the wrong priorities.
Of course, it is true that Doing Business does not capture everything that matters for economic and broader human well-being. It is equally possible that reform efforts spurred by Doing Business may not be the most important to be undertaken at a particular point in time. As argued from the very inception of Doing Business, the indicators might usefully be compared to cholesterol measurement in medicine. It is only one measure of a patient’s health. Some patients with high cholesterol seem fine, others with low cholesterol may not be well as they suffer from other severe diseases. Yet the measure captures a risk factor—in the case of Doing Business one might say “what clogs the arteries of commerce”—and it is worth taking the measurement.
Jim Kim and his commission will test the will of the World Bank and its member governments to support a measurement system that does not answer all questions but represents a clear step forward. In 2008 the independent evaluation group of the World Bank recommended a series of improvements to the Doing Business method. It also recommended that more such efforts should sprout for the benefit of citizens everywhere. This is what we should be considering right now rather than arguing about the life of one of the World Bank’s most successful initiatives. Crippling Doing Business will only make it harder for the Mohammed Bouazizis of the world to make a living and easier for cronies to maintain privileged positions.
Michael Klein teaches at the Johns Hopkins School of Advanced International Studies(SAIS) and the Frankfurt School of Finance and Management. He was a vice-president at the World Bank and a co-founder of Doing Business. Daniel F. Runde is the Schreyer Chair and director of the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
Commentaries are produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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