While Singapore, New Zealand, Hong Kong, Denmark and South Korea are again the top five countries in the world to do business, developing countries are catching up.
Eighty percent of the countries the World Bank studied for its annual Doing Business report — with all income groups represented — showed improvements in their business regulations last year, but only a third moved up in their rankings.
“As you move up the ranks, it becomes increasingly difficult to make improvements,” said Augusto Lopez-Claros, director of global indicators and analysis at the World Bank, noting the importance of strengthening other areas, such as education, in improving the business environment.
Despite being home to some of the world’s poorest countries and most cumbersome business regulations, five sub-Saharan African countries are among the 10 with the most improvements from 2013 to 2014: Benin, the Democratic Republic of the Congo, the Ivory Coast, Senegal and Togo. More than 70 percent of economies in sub-Saharan Africa carried out at least one regulatory reform over the past year. In addition, the region saw 39 reforms reducing both the cost and complexity of regulatory procedures and 36 reforms strengthening legal institutions.
There has been a “strong convergence” across economies since 2005 as well, according to Lopez-Claros.
“While we don’t want to overstate the convergence, it is important to see the improvements [over the years],” he said.
An overview of the number of days to start a business for the worst quartile and the best three quartiles in both 2005 and 2014 shows these significant strides — and the narrowing gap across different indicators in various economies.
In 2005, it would take an average of 116 days to start a business in countries in the worst quartile. This improved to a still-lengthy average of 44 days in 2014. Meanwhile, for the countries in the best three quartiles, it would take an average of 29 days to start a business in 2005. This was shortened to an average of just 15 days in 2014.
Revised methodology for 2015 rankings
In a video teleconference simultaneously held at the World Bank’s Washington, D.C., office, as well as its offices in Laos, Malaysia, the Philippines and Thailand, the principal authors of the report explained why they introduced methodological changes to the 2015 rankings.
For the past 11 years, the World Bank used an aggregate measure called the Ease of Doing Business index, which ranked countries according to their average percentiles based on the different indicators: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders and enforcing contracts.
“We had been using until last year an ordinal ranking,” Lopez-Claros said. “For quite some time already, we’ve felt that there were some limitations to this methodology.”
Ordinal ranking involves some loss of information, which makes it difficult to track a country’s progress over time, according to Lopez-Claros. He pointed out that, based on the original methodology, an economy could, for instance, drop in the Doing Business rankings even with improvements in its regulations.
To address the weaknesses of this methodology, the World Bank used the distance-to-frontier measure, which shows the gap between a country’s performance and the best performance for each indicator, for the 2015 rankings.
While the distance-to-frontier score and the percentile rank have a high correlation — the two rankings are 99 percent correlated, according to the World Bank — the former paints a better picture of the ease of doing business because it shows how far apart the different economies are.
“We’re finding that countries are benchmarking themselves against the Singapores and New Zealands of the world,” Lopez-Claros said. “They’re not just looking to their own region. Instead they’re looking at the best practices — and this is encouraging.”
In 11 economies with populations exceeding 100 million, data for the two largest cities were collected. Rita Ramalho, manager of the Doing Business project, noted that there were few differences between cities within the same economies in indicators that measure the strength of legal institutions, which generally apply to the whole country. In some indicators, such as getting credit and protecting minority investors, these differences even cancel out.
The larger gaps between cities within the same country can be seen in the processes of starting a business, acquiring construction permits and getting electricity — procedures where local regulations have a larger role.
Meanwhile, resolving insolvency — in particular, the strength of the legal framework for liquidation and reorganization proceedings — was also added as an indicator.
The scope of indicators themselves was also broadened. For example, the “protecting minority investors” indicator has been expanded to include shareholders’ rights in corporate governance, while “getting credit” has been revised to feature the strength of legal rights and the depth of credit information.
According to Ramalho, next year’s Doing Business report will also measure the quality of building regulations, the reliability of electricity supply, the quality of the land administration system, the post-filing procedure for paying taxes and the quality of the judicial administration system.
Check back in the next few days to read our analysis of which developing countries have improved the most based on the new Doing Business methodology.
Read more development aid news online, and subscribe to The Development Newswire to receive top international development headlines from the world’s leading donors, news sources and opinion leaders — emailed to you FREE every business day.