Chapter 2 | The Relevance of Doing Business: Is It “Doing the Right Things”?

National-level reforms, although often initially pursued in one or two leading cities captured by DB, are frequently extended to subnational levels. India developed its own subnational indicator system inspired by DB to encourage and reward reform competition among its states to make it easier and quicker for businesses to operate. From 2014, the government of India introduced the Business Reform Action Plan, overseen by the Department of Industrial Policy and Promotion. The Russian government developed key performance indicators inspired by DB, then introduced a subnational program of key performance indicators to encourage virtuous competition among provincial governors. The program was coordinated by a national nongovernmental organization, the Agency for Strategic Initiatives, which also generated standards to guide regional policy makers on how to improve the regional business environment and attract investment. In Morocco, the measured progress of DB reforms at the national level, combined with a national strategy of decentralization, spawned support for subnational indicators and reforms extending to the Marrakesh region and beyond.

Several country case studies revealed serious limitations to the DB indicators and agenda in capturing business environment reform priorities. In no case study did IEG find that the problem areas identified by DB were directly inconsistent with national development plans and objectives, but in many cases, they were not development priorities. In the cases of fragility, conflict, and violence countries, such as Afghanistan and the Democratic Republic of Congo, political stability and risk of conflict weighed heavily on businesses and constrained any potential supply response to regulatory reforms. In many other countries, including Morocco and Jordan, the lack of a level playing field for domestic SMEs meant that DB failed to capture the substantial disadvantages imposed on SMEs through advantages granted to favored foreign or domestic investors through tax advantages, access to special economic zones, preferential access to land or credit, or explicit subsidies. In several countries, state ownership also limited private sector opportunity in multiple sectors. In multiple countries, the presence of corruption, large informal sectors, or state capture weakened the relevance of DB indicators to binding business constraints. For example, in one country, despite a thorough streamlining of dealing with construction permits (DWCP), businesses reported that, at the end of the process, approval still required a meeting with an official who expected a bribe.

The relevance of the DB agenda is weaker in countries where structural or institutional factors act as binding constraints. For example, Rwanda could not address the disadvantages of being small or landlocked through DB reforms. Further, its 2019 CPSD pointed to a host of binding constraints more pressing than the DB agenda, including low skills (human capital), limited access to and high cost of energy, high transport and information and communication technology costs, restricted access to land, and an unlevel playing field for competition. In India, critical aspects of binding constraints cited by stakeholders or revealed in enterprise surveys lay outside the DB agenda, ranging from weak infrastructure to land and labor constraints. In Jordan, key constraints included massive unemployment and poverty, as well as income disparity and gender inequality. In China, a host of issues ranging from inefficient bureaucracy to bank debt figured among leading constraints cited by stakeholders and experts interviewed but mostly missed by the DB agenda.

In some countries, it is not clear whether the domestic SME focus of the DB agenda was the real focus of the reform efforts. In Jordan and Afghanistan, the reforms were being pursued largely with an audience of donors and potential foreign investors in mind. With some indicators, like protecting minority investors, it is not clear how well the base case assumptions map to the typical domestic SME, although the indicator may well resonate with a foreign investor. Rwanda pursued an improved external reputation to attract foreign investment, in part through the publicity of being a recurrent top reformer. Russia sought to burnish its international image while also aiming to improve the domestic business environment. Although appealing to additional audiences—whether domestic voters, foreign donors, or international investors—may be considered a benefit of DB reforms, it can also inspire strategic behavior, pursuing reforms that move indicators without yielding tangible benefits to domestic SMEs. How client countries use the indicators depends on their motivation and their capacity.

Over time, the DB agenda can lose its relevance for several reasons, when (i) non-DB constraints become binding after early DB reforms, (ii) pending DB reforms prove less tractable, and (iii) a DB indicator does not adapt to changes in the underlying business process or technology. First, over time, active reformers may have addressed the most pressing constraints measured by DB and move on to other policy priorities. This may explain why top 10 EoDB countries like New Zealand, Denmark, and the United States show a rate of one or fewer reforms per year from FY10 to FY20. Second, within each policy area, as the more tractable areas are addressed, the remaining DB agenda may rest with longer-term or politically more difficult reforms. India, like many other countries, progressed first on relatively easy procedural simplification in starting a business, paying taxes, trading across borders, and DWCP, which reduced the time and the costs involved. Reforms in more difficult areas involve legal processes, such as resolving insolvency, registering property, and enforcing contracts. Indicative of the long-term nature of these challenges, despite important reforms to improve its insolvency framework, business associations reported the persistence of slow, cumbersome, and inefficient resolution in court. Despite serious effort to improve its insolvency framework, business associations reported the persistence of slow, cumbersome, and inefficient resolution in court. Third, where DB indicators are not adapted, the reform agenda may shift away from them as the underlying technology or nature of the business area evolves. For example, progress in e-government may invalidate traditional measurements of number of procedures or assumptions about the time taken by each step in such contexts as starting a business and paying taxes. In getting credit, advances in use of big data and the emergence of digital financial services can reduce the relevance of existing credit information indicators.

Business Area Relevance of Doing Business

Indicators

The overall EoDB score serves as a general index of the overall regulatory environment. A low EoDB score corresponds generally to other indicators of administrative burden or weak regulatory quality. For example, statistical analysis shows a high correlation (77 percent) between the EoDB score and the World Economic Forum’s survey-based indicator of the burden of public administrative requirements perceived by business managers (figure 2.2).

The ordering of reform priorities using DB indicators and business enterprise surveys shows some alignment. Within the areas DB measures, IEG considered statistical evidence comparing the ordering of priorities indicated by DB scores to the ordering of priorities indicated by businesses responses to enterprise surveys. The IEG analysis matched four overlapping categories between DB and enterprise survey responses by country and year, namely tax administration, trade regulations, access to electricity, and access to finance. Based on 95 observations, the analysis found a perfect match in the ordering of priorities in 28 percent of cases, a close match (with only one single position difference in rank) in 41 percent of cases, and a mismatch of rankings in the remaining 31 percent of ratings. Differences in methodology and among the firms sampled in surveys versus those described in the DB base case assumptions may explain some of this deviation, but it points to the value of using multiple sources of evidence to guide reform priorities.

Figure 2.2.

Correlation between the

Doing Business

Ease of

Doing Business

Overall Score and the World Economic Forum Burden of Regulation Indicator

Source: Independent Evaluation Group, statistical analysis of Doing Business indicators.

Note: DB = Doing Business; WEF = World Economic Forum.

DB indicators do not capture well the real conditions experienced by businesses within each area covered by an indicator. IEG notes a low correlation between DB scores and how firms operating within countries report their experience. Regarding the DWCP indicator, there is only a 23 percent correlation between the DB measure of time to get a construction permit and the experience reported by firms in surveys. For the getting an electricity connection indicator, this correlation is only 10 percent. For both indicators, the DB indicators tend to overestimate time compared with actual firm experience. Regarding the time to import indicator, there is only a 42 percent correlation with firm experiences reported in surveys despite improved methodology since DB2016, an underestimate. Regarding the time to export indicator, the correlation of DB to enterprise survey responses is 35 percent, with DB again underestimating relative to survey responses.