Pitfalls of using a single metric to assess business-friendliness

| Updated on September 02, 2020 Published on September 02, 2020

The controversy surrounding the World Bank’s Ease of Doing Business Rankings must serve as a warning sign for India

The World Bank’s sudden decision to pause one of its mostly widely cited flagship reports, the annual Ease of Doing Business (EODB) ranking, pending a review, has sent shockwaves through the global business community as well as governments that have extensively used these reports to showcase their business-friendliness. The Bank’s cryptic statement that the review became necessary because it had spotted a number of data irregularities in its 2017 and 2019 reports which were inconsistent with its methodology, is hardly reassuring either to global investors, who used these reports as a ready reckoner, or researchers, who relied on them for policy prescriptions. Government officials, who have been leveraging the quantum jump in India’s EODB rankings from 142 to 63 in the last five years to woo foreign investors, are seeking to downplay this fiasco by saying that India isn’t among the four countries where the Bank has flagged data irregularities. But given that the EODB ranks for the last five years are now likely to be reshuffled and the credibility of the entire exercise has been dented, India must recognise that EODB ranks may be of limited utility in bolstering its business-friendly credentials from here on.

The EODB reports have been no stranger to controversy in the past. In 2018, the World Bank Chief Economist stirred up a hornet’s nest by apologising for methodological changes that led to Chile and other countries slipping several places without any marked change in their business climate. This highlighted how the Bank’s periodic chopping and changing of its ranking criteria results in constantly shifting goalposts for countries looking to improve. Each of these revisions has also triggered changes in back-data that have reduced the comparability of country ranks over time. The utility of the survey is also hampered by its limited sample size, where a cherry-picked panel of lawyers, consultants, accountants and government officials from just one or two mega-cities are interviewed about their experience with 10 parameters, to arrive at an EODB score for an entire country. In a country like India, where proprietorships outside the cities make up the bulk of enterprise, the report can often be out of touch with ground realities. India’s EODB rank has leapfrogged even as small and micro enterprises continue to complain of rent-seeking, red tape and tax terrorism by an officialdom that renders doing business a nightmare.

It is about time global investors stopped looking for a catch-all metric to gauge such a complex variable as the ease of doing business in a country and relied on more localised on-ground assessments. The government too needs to double down on the hard groundwork needed to mitigate the myriad pain points encountered by the local entrepreneur looking to start up and run an enterprise. Doing this would automatically advertise India’s business-friendly credentials to the world without it having to rely on external agencies for validation.

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Published on September 02, 2020
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