Wrong Turn Ahead? Why World Bank Should Have A Rethink On Doing Business Rankings

Nilanjan Ghosh
·7-min read

Flora Sonkin and Bhumika Muchhala came up with a scathing critique of World Bank’s Doing Business rankings in a recent article. Their article clearly reveals the two-facedness of the institution, which on one hand talks of “green, inclusive, and resilient development” to tackle COVID-19 or the “pandemic of inequality”, and on the other hand, puts forth “… skewed policy prescriptions that obstruct developing countries’ pandemic recovery efforts and constrain their resilience to future crises”. In fact, this article by Sonkin et al. clearly brings out the age-old conservation-development conflict that has often torn policymaking of nations.

Ever since its first publication in 2004, the Bank’s annual Doing Business publication became treated as a report card for political dispensations and policymakers across the globe. The publication entails ranking of 190-odd economies of the world on how easily and smoothly one can setup and conduct business in a particular nation. Quite evidently, economy with lower regulatory restrictions (social security, environment, etc.) score well in terms of this index, thereby, alluring foreign investors. According to Sonkin et al., there seem to be two assumptions that create the premise of this ranking. The first is that Foreign Direct Investments (FDI) will lead to growth. The second is that there will be trickle-down impact of growth that will lead to poverty alleviation. While the first assumption definitely has substantial empirical basis, the second assumption emphatically gets negated on two grounds: 1) From the newer perspectives of development thinking that delinks growth from equity and distribution, 2) from empirical evidences, especially from the Global South. It is quite surprising to find a multilateral development finance institution to base any theory on the basis of an assumption whose futility has been proven around half a century ago.

Sonkin et al. writes, “… With the Doing Business index, the Bank made itself both the referee and the rule maker of its global benchmarking and investor-friendly policy reforms exercise. Governments that want to signal to the world that they are open for international business, race each other to cut red tape and win a place on the Bank’s “top ten improvers” list. But this regulatory race to the bottom erodes worker and environmental protections in the meantime. The reports’ recommendations have concrete effects on shaping policy in developing countries”. Citing examples from many developing economies including India, Sonkin et al. categorically mentions that “…the Doing Business report discourages welfare and environmental protection”. Combining all these, it can be inferred that the Doing Business report projects a very reductionist basis of development for nations to adopt. This prompts the developing nations to think of business from a sheer rent-seeking perspective, and is absolutely in contrary to the notion of “welfare state”—something that the pandemic-ridden world needs.

Further, can businesses flourish without having broader social and environmental concerns? The answer is a big NO! This gets reflected in Porter and Kramer’s theory of Creating Shared Value (CSV)—a process by which companies could bring business and society back together by generating economic value in a way that also produces value for society by addressing its challenges. A shared value approach reconnects company success with social progress. This also has built in itself the concern of long-term bottom lines of the organisation.

A victim or perpetrator: Case of India

The successive National Democratic Alliance (NDA) governments promoted “competitive federalism” among the Indian states with the apparent objective to improve the nation’s rank in World Bank’s Ease of Doing Business (EoDB) ranking. The initial recommendations from the Prime Minister’s Office on 98 reform measures in 2014, based on the 10 business topics tracked and monitored by the World Bank’s doing business report, was later extended to 340 points encompassing a Business Reform Action Plan (BRAP) for the Indian states. This was construed as pertaining to “58 regulatory processes spread across 10 reform areas that cover lifecycle of a business”.

There are two clear concerns against this. First, such indicators neither call for reducing the “transaction costs” of doing business from the governance perspective, nor adequately capture the on-ground conditions of doing business, as has been pointed out by a recent publication by the Asia Competitiveness Institute (ACI), National University of Singapore. Second, in no way, these conditions can adequately represent the overall business environment that can woo investors. There are no considerations of history and political environments of an economy that generally have massive bearing on business environment. For example, at a sub-national level in India, the hostile business environments prevailing in the 34 years of rule of the Left Front in West Bengal left the state languishing, despite late attempts toward revival by Chief Minister Buddhadeb Bhattacharya. The situation has not improved much despite the present West Bengal government’s performance in BRAP implementation. On the other hand, despite Odisha’s inclement natural conditions and Maoist threats in certain corners, the stable federal government has been able to attract private investment, thereby, converting underdeveloped districts to engines of development.

Given the same, the Asian Competitiveness Institute, National University of Singapore, has come up with its own ranking on ease of doing business on the basis of three broad parameters: Attractiveness to investors, business friendliness, and competitiveness policies. This is definitely a substantial improvement over the World Bank’s one!

An ORF research finds a direct causality of Sustainable Development Goals (SDGs) with business competitiveness and flow of investments. In fact, SDG’s are largely embedded in the notion of “Inclusive Wealth” propounded by United Nations Environment Programme (UNEP). Inclusive wealth, a measure designed to address whether a society is on a sustainable development trajectory, is delineated as the aggregate value of all capital assets defined in the forms manufactured or physical capital, human capital, natural capital, and social capital. This needs to be deciphered as a dynamic notion where incremental changes in inclusive wealth indicate an enhanced social-ecological capacity to support better standards of living in the future. As per the Inclusive Wealth Report 2018 covering 140 countries, the inclusive wealth (IW) in 135 countries was higher in 2014 as compared to those in 1990. It also finds that the global growth rate of IW over the concerned period was 44 percent, implying an average annual growth rate of 1.8 percent. The lack of sustainability of global growth can be noted from the fact that during the same period, the global GDP grew at 3.4 percent annually, almost at twice the annual growth rate of IW. This is also because the negative wealth effects of a decline in natural capital have been offset by growth in human and physical capital.

The four capitals talked of in the IW also feature in the SDGs, and a weighted SDG index that entails various measures of social equity, economic progress, and ecological sustainability can reflect on the enabling business conditions. Almost all the SDGs are embedded in one form of capital or the other, i.e., human (SDGs 1 – 5: Reflecting on poverty, hunger, health, education, and gender equality), physical (SDGs 8 and 9: Employment, growth, industry, innovation, and infrastructure), natural (SDGs 14 and 15: Life below water and land respectively) and social (SDGs 10 and 16: Social institutional variables etc.). In one sense, weighted indices based on SDG’s reflect on various factor market conditions (including physical capital, labour, land or natural capital, and social parameters) that can help businesses to flourish.

Concurring with Sonkin and Muchhala’s proposal, there is enough case for the World Bank to do away with the doing business indicators, or improve the same substantially by making the index more holistic, grounded, and representative of governance parameters. Else, it is leading many developing nations like India in the wrong direction by being only concerned with a few economic variables without realising the bigger social and environmental costs that the economy has to incur. As such, the “growth fetishism” of the developing world has made the broader goal of human progress on the basis of parameters of equity, efficiency, and sustainability largely blurred.

The views expressed above belong to the author(s). This article was first published in ORF.

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