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The real value of the Doing Business reports

The real value of the Doing Business reports

The World Bank’s Doing Business (DB) project examines the ease with which companies are able to do business in 190 different countries. When it publishes a report, as it did on 25th October 2016, the world takes notice – the previous edition had over 1m page views within three weeks of going live.

There was good news for Africa. Twelve African countries were among the 29 across the world praised for the biggest improvements to their business environments. Kenya even made the top 10.

Sub-Saharan Africa received congratulations for enacting a quarter of the world’s business reforms this year, although the region continued to perform poorly on indicators such as getting electricity, trading across borders and dealing with construction permits. Mauritius took top place among African countries, at number 49 in the global ranking.

Writing in the Vanguard, Adnan Mohamed, Kenya’s cabinet secretary for industry, trade and cooperatives, claimed his country’s rise to 92nd place in the ranking was vindication of the government’s quest to create a “proficient and all-encompassing ethos for enterprise and business growth.”

In Nigeria, vice-presidential spokesman Laolu Akande said that being ranked 169th represented a halt to a falling trend and was a “positive indication” that the government’s economic policies were on course, but the Proshare website lamented: “While Nigeria dithers, 3 in 4 African countries improve business environment.”

Snapshot

However, opinion is divided on the true value of the reports. Some see their rich data as a valuable guide for policymakers and investors, providing a snapshot of the business environment in a country and easy comparison across economies. Others criticise them for having an unwarrented bias against regulation or being out of touch with the real world.

DB’s stated aim is to investigate “the regulations that enhance business activity and those that constrain it”, providing “objective measures of business regulations and their enforcement” across the world. To do so, it surveys governments, World Bank officials and thousands of experts, mainly lawyers and accountants – but not actual companies.

The experts are asked to estimate the times and costs that would be incurred by a standardised company located in the country’s main business city to accomplish a number of business goals.

Their replies are used to create scores for 11 indicators: getting electricity, dealing with construction permits, trading across borders, paying taxes, protecting minority investors, registering property, getting credit, resolving insolvency, enforcing contracts, labour market regulation and starting a busness.

The scores are based on what DB calls “distance to the frontier” (DTF), with the “frontier” being the best performance observed on each indicator across all economies over time. Scores for the indicators are aggregated into an overall DTF for the country.

These scores are used to rank countries (Rwanda’s DTF of 69.81 puts it behind Mauritius and above Morocco in the overall table). Because the score shows how far short the country falls from the “frontier”, set at 100 points, it also represents an absolute level of performance that can be tracked over time.

Built-in bias?

Writing in the Guardian in May 2013, Mark Weisbrot, co-director of the Centre for Economic and Policy Research in Washington, accused DB of having a “built-in bias against many regulations that people who care about the progress of humanity might see as important.” Governments anxious to secure investment or loans from the World Bank may be led to cut vital protections in areas such as employment, wages, health and safety and the environment.

In its 2017 report, DB denies promoting deregulation, claiming instead to support “smarter regulation”. It says that more regulation could lead to a higher score if it brings about a better business outcome.

The DB model is also condemned as out of touch with reality; by examining only the formal economy and assuming that all companies are aware of and complying with regulations, it is said to ignore the situation in countries where enforcement is weak, bribery is widespread, the playing field is unequal and the informal sector is enormous (and in Africa, the African Development Bank estimated that the informal sector accounted for 55% of GDP in 2013).

In contrast with DB’s estimates based on a theoretical company, the World Bank’s Enterprise Surveys obtain data from a wide range of real firms. In 2015 two economists compared DB’s findings with those of the Enterprise Surveys across 137 non-OECD countries. Mary Hallward-Driemeier and Lant Pritchett looked at three areas – the time taken to obtain a construction licence, start a business and import goods.

Hallward-Driemeier and Pritchett found that DB’s estimates of “legally required time” did not summarise “even modestly well” the experience of firms as reported by the Enterprise Surveys.

The Enterprise Surveys reported far lower median times than DB – around 30 days to obtain a construction permit in most countries, even in Zimbabwe, whose DB score was 566 days – but also highlighted huge variance within countries. A significant number of firms accomplished the tasks rapidly, with little variation across countries, while for the slowest firms times could be even longer than those reported by DB.

This is the product not of uniform non-compliance with legal requirements, say the authors, but of a “hugely tilted playing field”. Some firms are favoured and others “disfavoured” due to factors such as political connections, family ties, influence and corruption.

Such uneven appliance of the rules leads Hallward-Driemeier and Pritchett to question how far reforms that affect the DB indicators can make any difference to the investment climate firms actually experience.

No better alternative

In a blog on the institution’s website, World Bank economist Wolfgang Fengler defends DB’s resort to experts rather than real companies. Lawyers, he says, are a better source as firms do not go through the relevant transactions often and most of the relevant information is of a legal nature.

“While critics of the index make many valid points they are yet to come up with a better alternative,” he argues in the same post. “It takes a lot of effort and hard work to establish the right model, collect all the necessary data and then aggregate it into an index that everyone buys into. Doing Business has achieved it, despite some of its limitations.”

Charles Dietz

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