Bank's indicators put to test

Monday, July 1

The World Bank-IFC 'Doing Business' indicators have grown rapidly in international significance since being launched four years ago. They have come to be regarded as a leading source of insight into the relative quality of countries' business environments, and, according to the Bank, have been cited in over 800 academic articles.

Now, for the first time, the World Bank has published an independent evaluation of the indicators. Its findings are likely to prove controversial, both within and outside the Bank Group, given that it raises several significant questions around the 'flagship' product:

One key area in which the report urges caution about the indicators is in terms of the policy impact they do and should have:

• Country contexts. Although the indicators can clearly feed into policy debates, they are too narrow to have a direct impact on decisionmakers' choices among policy options, or to influence the design and scope of chosen policies. The DB indicators are unable to tie questions of regulatory change to specific macroeconomic outcomes or country contexts more generally.

• Business constraints. Even in the narrower field of addressing constraints to business, the impact of the DB indicators on firms' decision-making is limited by the fact that many key constraints -- eg corruption, infrastructure quality, political stability or human capital -- are not covered.

• Implementation. The indicators assess regulations and laws rather than their implementation; in many developing countries, there is a big gap between the two.

• Ranking pursuit? The evaluation finds no evidence that national governments have undertaken superficial policy changes or distorted policy priorities simply to raise their DB ranking. (Opponents of the DB indicators had argued that such an unwarranted impact had been occurring.)

The report provides a large number of recommendations, most of which are related to specific methodological improvements. However, despite the heavy criticism, the risk of the report generating a backlash against the Doing Business indicators among analysts and decisionmakers who use them is minimal, given that there is no alternative available that combines similar levels of user-friendliness and brand recognition. Indeed, in the longer term, the indicators' value as a tool will rise as they are made more robust.