Easy Business

I am a fan of composite indices trying to compare nations. There are great measures for items such as human development, child welfare and education effectiveness, usually developed by the UN or another world body. They cause plenty of controversy, and are sometimes carefully ignored by embarrassed politicians, but other times they can change the world. The PISA educational rankings are one such example, where now many countries try to shape policy to move up the rankings and where there is a far greater international debate and sharing of good practice than ever occurred before.

The World Bank’s index about the ease of doing business can claim similar success. The project started in 2001, and has gained increasing acceptance ever since, now forming part of accepted wisdom for many government policies in large parts of the world.

Today I looked up the components, and they seem eminently sensible. There are ten: how simple starting a new business is; gaining construction permits; getting electricity; registering property; getting credit; protecting investors; paying taxes; cross border trade; enforcing contracts; and bankruptcy.

For many indicators, improvement will surely do good and have few unintended negative consequences. Why should it take more than a couple of weeks to get the paperwork together to get started? Removing bottlenecks to trade, power or money can only be good. And businesses will surely invest more if their legal ground is not unduly shaky.

One or two measures are more nuanced. Take tax. Part of the metric looks at the hours required to be tax compliant, which is only good. But what about the total tax burden on the business? Yes, lower taxes would be good for business investment, but at what cost? Either the state would have to tax individuals more to compensate, or reduce spending, often on civic or welfare programs. The consequence may be more harmful than the benefit to the overall economy, and certainly to the citizens.

Originally, the index had an additional category about flexible labour laws, which was so controversial that it was dropped. The Economist frequently lobbies for countries to make hiring and firing easier. Again, the benefit is clear, as firms will take more people on if they see lower risks. But the cost in that case is clear as well, in the form of lost rights for workers and potential abuse by managers, for example via zero hours contracts. Eventually, after a lot of fuss from trade union organizations, the category was dropped.

This story tells a lot about what the index has become. It is hard to imagine trade unions campaigning so hard if the index was not seen as driving policy. The evidence is also clear when you look in detail at the packages agreed by nations requiring loans: conditions are applied that seem closely linked to the ease of doing business index. It is no coincidence that countries like Spain and Portugal have moved up through the rankings (while France and Italy have not).

A closer look at country league tables gives some cause for concern. Take Georgia, which managed to be promoted from 98^th to 38^th in one year, and in 2008 even made it to 8th. Now, I don’t know an awful lot about doing business in Georgia, though actually I do know a little bit. I am sure things have improved. But the top ten? Corruption used to be so endemic there that it stretches credulity that such rapid progress could be possible. Most likely, the concerted goal of the government has been to improve the ranking. That is not quite the same as improving the business climate, as the metrics can only ever be a proxy. When such a campaign can generate so spectacular a result, in my mind it only gives cause to challenge just how effective a proxy the ranking is.

The USA usually scores about 4^th in the global rankings. Now, it is clear that the USA is a good country to do business. But I can also see some major downsides. And I wonder whether the chosen metrics really tell the whole story.

Several of the rankings relate to legal security, for example enforcing a contract. There is no doubt that the US legal system is very comprehensive. What is also certain is that the climate is highly litigious – just watching the ambulance chasing ads on TV tells you that. As a consequence, enforcing a contract is no doubt pursued fairly and professionally. But the flip side is that more money and time are spent paying lawyers than in other markets. My guess is that the US will score in the index, but less well in reality. I am sure the small company I am associated with is not the only one that has balked at setting up a formal legal US operation for fear of prohibitive increases in legal costs and risks. A smarter index would take account of this somehow.

Another example is the health care premium. US employer taxes are low, but that does not make employer cost surcharges low, as healthcare premia are so high. It is an effective tax on employment, but it will not show up in any index.

What if healthcare cost did show up in the index? It could work both ways. A good outcome would be a more concerted effort by US employers to lobby to reduce the costs, without reducing benefits. The cynic in me suggests employers would take the other path, the one that seeks to reduce their obligations to employees. We see this already as states compete with each other to scale down the statuary benefits from accident insurance cover for employees.

It might be taking cynicism too far to ponder whether the choice of metric and the consequent good ranking for the US has any connection with the head of the World Bank and most of its staff being American, furthermore Americans with connections to lobbyists and Wall Street. I was amused to note this month that the Chinese have set up their own competitor to the World Bank, after years of fruitless lobbying for a more equitable power balance in the existing institution. Even more noteworthy was that most Europeans have for once risked displeasing the hegemon and have pledged support to the new Chinese institution.

Even discounting much of my more cynical thoughts, there are plenty of lessons in the tale of the ease of doing business index.

First, such indices are usually good. They can tell you a lot about your own country. There are worse ways to vote than to follow the parties that treat international indicators seriously (and not just ones they carefully select) and try to find policies to improve. The ease of business index is a good example of one that has had net global benefit. The paperwork to open a business has probably simplified in over a hundred countries as a direct result of the index.

Next, exercise some caution. If a country can leap sixty places in one year the index is probably too easy to game. Look out for unintended consequences of chosen metrics. Even more, look out an agenda of those promoting the index, and of indices that simply promote established dogma rather than seeking genuine learning.

Then, promote new indices. They can make a difference. The UN millennial goals are good examples, since they spawned indices that then spawned action. Why not an index for promoting respectful employment? Underemployment blights many countries, and solutions might be to hand. I could see sub-measures in education, apprenticeships, costs to employ, flexible but not inhumane contracts, avoidance of nepotism, incentives to work, childcare affordability and so on. These would cross the political spectrum, but might generate a cocktail that worked better than the sum of its parts. I’m sure there could be others too.