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Relevant for: Indian Economy | Topic: Issues relating to Growth & Development - Demographic Economics & Various Indexes

A view of the World Bank headquarters.  

The World Bank has paused the publication of its ‘Doing Business’ report because of statistical irregularities. This provides us with an opportunity to examine this flawed survey. The index estimates the cost to business from regulations across areas including dealing with construction permits and paying taxes. But the rankings encourage countries to compete even on cutting vital regulations on health and environment.

Indeed, erratic procedures and delays hamper business in India and simplifying procedures brings economic benefits. But rash deregulation prompts a race to the bottom that the world can ill-afford during a climate and health crises. The World Bank’s independent evaluation group (2008) and an external independent panel (2013) together flagged 15 shortcomings in the index, many of which are still relevant.

Among the weaknesses are the lack of transparency and objectivity in scoring. For instance, questions have been raised on Russia’s leap in ranking from 120 out of 190 countries in 2012 to 62 in 2015. As a de jure criterion, the survey excludes the informal sector. Curiously, low scores for China and India were associated with high growth in FDI.

The biggest drawback is that the index sidesteps societal costs of deregulating pollution, worker safety, and health risks. China and India improved their scores sharply in 2019 and 2020, though the world’s first and third largest emitters increased carbon effluents significantly. Another 2020 Index ranked China 120, and India 168, out of 180 countries on the environment. Slack business safeguards produce tragic results. The 2013 collapse of the Rana Plaza garment factory in Bangladesh, the second deadliest industrial accident after the gas leak in Union Carbide, Bhopal, resulted from slipshod factory regulation. Brazil, India, and the U.S. have slashed environmental standards. These standards have further weakened during COVID-19. The reversal of effluent benchmarks for power plants and automobiles and the boost to fossil fuels in the U.S. has been breathtaking. Yet this has not hurt its Doing Business survey ranking (six in 2020). India’s Parliament is considering an Environment Impact Assessment, the draft of which is filled with dilutions of the environmental law.

Several indicators of the Doing Business survey presume that less regulation is better, but ignore the impact on health, ecology, worker protection and right to information. The 2008 global financial crisis resulted from too little banking supervision. Climate change is driven by lax emission control in China, the U.S., etc. The Centre and the States in India must take into consideration workers’ well-being while considering changes to labour laws, especially during the pandemic. Global lessons warn India of the pitfalls of diluting the 2005 Right to Information Act.

The survey assumes that lower tax rates are best, which overlooks each country’s fiscal requirements. For example, Maldives and Qatar scored high on paying taxes, but are not role models for India as most of their revenue relies on unique assets. The survey supports lighter rules and taxation to encourage shifts from informal to formal sectors. But formalisation per se may not create jobs and cutting obstacles to starting a business will not necessarily expand the formal economy when facing severe capital shortage and a low-skilled workforce. The survey neglects indicators of infrastructure, entrepreneurship, and competition. It is true that overloading with too many variables makes a survey unwieldy. But when a yardstick does not consider pollution abatement or labour standards, an overhaul is in order.

Putting the Doing Business project on hold gives the World Bank a chance to blend liberalisation of unhelpful barriers with fortification of needed regulations. A revamped indicator should reward, not penalise, investments in workers’ skills, health and safety, low polluting activities and climate resilience.

Vinod Thomas is Distinguished Fellow, Asian Institute of Management, Manila; and former Senior Vice President, Independent Evaluation, World Bank

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