Doing Business: If It Ain’t Broke, Don’t Fix It

A few weeks ago, we published a piece that defended World Bank’s Doing Business project against its critics. At the time, we didn’t know much about the politics behind the attack on the project – namely that the initiative to review Doing Business had come from China, which ranks relatively low in the ranking.

Perhaps unwittingly, the Chinese government has been assisted in its effort to shut the project down by a spectrum of organizations skeptical of markets, including CAFOD, Christian Aid, Oxfam, or Save the Children. Most recently, Christina Chang, a lead economic analyst at CAFOD appears to react to our article on FP’s Democracy Lab:

By lamenting the “uniquely democratic” debate around Doing Business, its self-appointed supporters are doing it a disservice. An independent review and a public debate are exactly what is needed.

That is not exactly a charitable way of identifying our position. We say explicitly that the project can be improved and are perfectly willing to entertain some of the specific suggestions Ms. Chang makes in her article, including the idea that the costs of corruption to businesses should be explicitly captured by the project, that the measure of access to credit could be improved, and that infrastructure-related constraints to doing business (such as access to electricity) could improve the project’s accuracy.

What bothers us, however, is that the critics of the project are also trying to undermine the key elements of the survey – namely the measures of taxation and labor market regulation. A large body of evidence shows that corporate taxation and labor market regulation have real costs to businesses – a fact Ms. Chang downplays by saying that these do not come up frequently in enterprise surveys in the developing world. While surveys may serve as a useful complement to the analysis of objective data on institutions, it is not sensible to use them as a basis for discarding specific elements of the Doing Business report – especially if independent evidence indicates that these elements matter.

Also, the goal of measuring taxation and labor market regulation as a cost to business has little to do with advancing an agenda of radical tax cuts or deregulation - although we would argue that such agenda would yield significant welfare gains in many countries around the world - instead, it has to do with an understanding of the relevant policy trade-offs.

The most serious flaw of Ms. Chang’s article lies in a confusion between the problems afflicting crony capitalism in the West and the development of private markets in emerging economies around the world:

The 2008 financial crisis highlighted long-standing reasons why the world needs to take a fresh look at how it does business. Unemployment has reached painful levels in many countries around the world. Multinational corporations use offshore jurisdictions to avoid billions in tax. Rampant inequality has become a hot-button issue.

For all these reasons, World Bank President Jim Yong Kim is right to conclude that the bank’s flagship Doing Business report needs a fresh look.

Let’s ignore the claim that inequality is on the rise, which is not true globally, and focus on the fact that Ms. Chang argued that the economic problems of the developed West somehow justify rethinking a project that has mostly informed policymaking in low- and mid-income countries. That would make sense if the policy recommendations that can be supported by the Doing Business project were also connected with the factors that have been driving economic problems of the West, such as unemployment, or the financial crisis of 2008. Yet Ms. Chang offers us no evidence for such claim.

If anything, one can argue that the unemployment in Western countries is associated with heavy labor market regulation, that the existence of offshore jurisdictions helps curb confiscatory tax regimes in the West, and that the crisis 2008 was driven by government involvement in financial and housing markets, or perhaps by a failure of monetary policy. In other words, Ms. Chang is guilty exactly of what we identified as the main problem of the current discussions about the Doing Business project – namely that she picks up on a failure of a particular type of crony capitalism in the West and uses it – disingenuously, one is tempted to say – to attack free markets around the world.