Interventionist Assumptions in the World Bank’s “Doing Business” Index: Part 1

This is Part 1 of a two-part series on the World Bank’s Doing Business Report. In this entry, I discuss the World Bank’s implicit embrace of occupational licensing restrictions. In the next entry, I will discuss the World Bank’s dim view of private, contractarian approaches to corporate governance. 

 

I. Introduction

The World Bank’s annual Doing Business Report represents an invaluable resource to researchers, policymakers, entrepreneurs and investors. It comprehensively ranks how well each country in the world has managed to achieve John Adam’s elusive aphorism:  “the rule of law, not of man”. Its findings are cited thousands of times each year by academics and are directly incorporated into regression models to form the basis of a substantial empirical literature spanning developmental economics to comparative political economy. It is subsequently relied on by other similar projects, such as the Fraser Institute’s Economic Freedom index as a part of its own ranking methodology.

Which is why its flaws matter. While the Report generally ranks relatively laissez-faire economies with an efficient and uncorrupt civil service ahead of kleptocratic kludgeocracies, it nonetheless incorporates several interventionist assumptions into its measure of the ease of doing business. I will explore several such examples below. For instance, the Report rewards countries with a higher score on their Dealing with Construction Permits index if they have a stringent, government-administered occupational licensing and permitting regime for architects and construction projects. In the “Protecting Minority Investors” category, the Report similarly punishes countries if they even allow for corporate governance structures other than the Platonic Form envisioned by the World Bank. In this instance, it privileges a mandatory, anticontractarian approach to corporate law over the enabling, contractarian approach.  How does preventing parties from Coasian bargaining around contractual defaults so as to achieve a Pareto-improving outcome increase the ease with which they do business?      

Before we examine these interventionist assumptions, let’s begin with how the Report measures ease of doing business. First, it creates a series of index variables (e.g. protecting minority shareholders, labor market regulations) comprising multiple indicia, and then aggregates these variables into a single Ease of Doing Business score for each country. Many of these are unobjectionable:

“The time necessary for the judge to issue a written final judgment once the evidence period has closed.” [Contract Enforcement]; “Whether unmarried men and unmarried women have equal ownership rights to property. A score of -1 is assigned if there are unequal ownership rights to property; 0 if there is equality.” [Registering Property].

II. Dealing with Construction Permits

Yet in several categories, the World Bank has decided that the more government requirements needed before a given transaction is authorized, the better. The main culprit here is the “Building Quality Control” subcategory of the “Dealing with Construction Permits” index, weighted as 25% of that index. The three separate sub-sub-categories of “Building Quality Control” are Quality Control Before/During/After Construction. Higher scores are awarded to countries that require either direct approval by a government entity, or approval from a “licensed” engineer and/or architect to review the plans/building, but only if that license is granted by “the national association of architects or engineers (or its equivalent)”. In other words, in a country with an unrestricted, competitive market for safety appraisals, allowing builders to contract with the top-rated such firm counts for naught unless that firm has been officially sanctioned by the occupational guild or by the government itself.

So as to remove any doubt about the entry-restricting credentialism embraced by this occupational licensing framework, it is given its own sub-index, the “Professional Certification Index.” The highest possible score is awarded if:

National or state regulations mandate that the professional must have a minimum number of years of practical experience, must have a university degree (a minimum of a bachelor’s) in architecture or engineering, and must also either be a registered member of the national order (association) of architects or engineers or pass a qualification exam.

Lower scores are meted out for less stringent (read: arbitrary and restrictive) requirements.