Opinion: The real problem in the World Bank’s Doing Business indicator

Closely followed by policymakers and the business community worldwide, the Doing Business report from the World Bank Group has faced a series of controversies and high drama. Following data inaccuracies reported in June 2020, World Bank management initially “paused” the report.

When a subsequent review revealed allegations of fixing data to favor China and Saudi Arabia, management announced on Sept.16, 2021, its decision to “discontinue” the report. The latest events have carried large reputational risks by calling into question the institution’s long-standing tradition of protecting the integrity of research.

The public turmoil surrounding the Doing Business report, however, masks an even more fundamental problem. This indicator, which ranks 190 countries on the ease of doing business, is based on a mistaken premise that less regulation is always better, presumably because it can boost short-term growth of the gross domestic product.

True, removing unnecessary controls and cutting red tape can raise GDP in the short term. But the damages inherent in this “gross” measure of domestic product call for regulations, for instance, for worker safety, health care, and environmental protection.

A flawed metric

Concerns ranging from the data sources to the analytical framework have been raised before, including in a report by the World Bank’s independent evaluation group in 2008. But hailed by the Wall Street Journal as “a flagship publication,” the indicator continued to be based on the mistaken premise that inducing governments to deregulate is invariably the right thing to do since doing so enhances short-term GDP growth.

However, in a world facing the existential challenges of galloping inequality and environmental destruction, the quality of economic growth is arguably more important than its quantity. Seven of the 10 indicators of the World Bank survey posit that less regulation is better, ignoring the value of sound social and environmental standards.

The way the indicator was constructed also assumed that the lower the tax rate, the better. This flies in the face of evidence at a time when the world faces a massive deficit in the production of public goods that crucially rely on government funding.

Admittedly, a country can score high on both business and environmental friendliness. For instance, Denmark was ranked fourth on Doing Business and first on the Environmental Performance Index in 2020. But the problem is that countries can also move up the ranking ladder through deregulation even when shedding regulations can be very damaging to society and the environment.

To be sure, government policy is multidimensional. Other international indexes — such as the World Economic Forum’s Global Competitiveness Index, and the Transparency International’s Corruption Perceptions Index — track various dimensions of the business environment.

The Organisation for Economic Co-operation and Development has developed ease of doing business of its own — the Regulatory Restrictiveness Index — as removing unnecessary controls and delays encourages entrepreneurship. This can indeed be beneficial to society. But not if it is done at the expense of financial probity, worker safety, health care, environmental protection — as has been evident globally.

The financial crisis of 2008-2009 resulted from too little regulation of business and banking. The lack of preparedness for the COVID-19 pandemic can be linked to unwise deregulation or budget cuts in health. And unregulated carbon emissions continue to exacerbate climate change.

In the United States, former President Donald Trump's administration expanded the use of fossil fuels and reversed emission standards for power plants and automobiles. Despite those rollbacks, the U.S. Doing Business ranking moved from eighth in 2019 to sixth overall in 2020.

In lower-income countries too, the Doing Business rankings have put pressure to cut regulations across the board to attract foreign direct investment in polluting industries. China and India saw sharp improvements in Doing Business scores in 2019 and 2020 even though they were the world’s first- and third-largest carbon emitters and had increased carbon effluents in the two preceding years. Ranking improvements help attract polluting industries from the global north.

Toward a better framework

The World Bank took the lead in developing safeguard policies to guide its own operations toward social and environmental sustainability. They were subsequently adapted to guide private corporations toward socially responsible business practices: the Equator Principles. This was a major contribution to sound policymaking and it would behoove the World Bank to put the same principles to work in its regulatory policy advice.

If the Doing Business report is one day relaunched, it is likely that the statistical irregularities and political pressures that have blighted the 2018 and 2020 reports will be dealt with. But this would not be nearly enough. Sticking with the logic of the current framework would do more harm than good at a time when the world can ill afford signals that help to boost short-term economic growth at an unacceptable environmental and social cost, let alone the damaging prospect of reduced long-term growth.

A revised framework should consider both the cost to business of regulatory policies and their potential socio-environmental benefits. Thus, it would be appropriate for the World Bank to sponsor a Sustainable Business Policy Index that would be consistent with the Sustainable Development Goals.

Complementing other measures, such an index would shed light on policies for economic growth that stress environmental and social sustainability. Tables that rank countries on sustainability already exist and the World Bank’s dashboards help track performance, but a Sustainable Business Policy Index would be authoritative on policy and influential in the corporate world.

Well-designed and effectively promoted, it could turn into a much-needed addition to the World Bank’s tool kit for sustainable business policy.

Three features are essential in such a revised measure. One is to focus on a longer-than-usual time frame for assessing progress, rather than using short term reference points for economic growth.

The second is to be clear about the crucial difference between private business interests and those of society at large, among other things, future generations, climate justice, and planetary health. Third, there should be a clear recognition of the need for a desirable level and quality of regulation.

With an indicator targeting environmentally and socially sustainable business, the World Bank would be well-positioned to encourage a race to the top through sustainable growth, rather than applaud a race to the bottom, as Doing Business did, through damaging growth that is a huge global concern in these fraught times.