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The World Bank’s Doing Business index has been both conceptually and operationally suspect since its inception in 2003, but mainstream economists have only recently started to criticise it. The Bank has already been forced to suspend publication of the index, owing to “irregularities” in its data. The latest brouhaha concerns straightforward number fudging.
Followers of Doing Business focus on a country’s rank rather than the value of the index, and the standings generate huge media coverage every year. Even academic researchers have (wrongly) used the rankings as indicators of government support for private investment. As a result, governments vie to improve their country’s ranking in the hope of attracting more foreign investment and boosting their domestic credibility.
Policymakers have sometimes resorted to desperate – and effective – measures to game the system. The index is supposed to measure a country’s overall business environment, but it really covers only government regulation – except for the tax indicator, which includes taxes as share of gross profit. It leaves out some regulations that affect businesses such as financial, environmental, and intellectual-property rules.
More important, the index does not measure all aspects of the business environment that matter to companies or investors, including macroeconomic conditions and policies, employment, crime, corruption, political stability, consumption, inequality, and poverty.
Moreover, the index gives no consideration to the benefits of these regulations and whether they create a better overall business environment. Likewise, Doing Business regards taxes only as a cost and not as a source of revenue that can be used to deliver important economic benefits such as modern infrastructure and an educated workforce.
The overall thrust of Doing Business is thus anti-regulatory: the fewer regulations a country has, the better it performs on the index. The inclusion of the tax rate in the underlying indicators is so egregious that two independent evaluations commissioned by the World Bank suggested leaving it out. It “has encouraged countries to take part in the ‘deregulation experience’, including reductions in employment protection, lower social-security contributions (denominated as ‘labour tax’), and lesser corporate taxation”.
The World Bank owes the developing world a debt of contrition for all the harm this misleading and problematic tool has already caused.