Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

Lessons from the death of the ease of doing business index

Note4Students

From UPSC perspective, the following things are important :

Prelims level : EoDB ranking

Mains level : Paper 3- Issues with EoDB ranking

Context

The Ease of Doing Business Index (EoDB) came under attack on grounds that its data was modified in response to pressure from countries like China and Saudi Arabia. As a result of an independent audit, the index has now been abandoned by the Bank.

Methodology used in EoDB ranking

  • World Bank researchers developed the EoDB ranking system under the assumption that better laws and regulatory frameworks would increase the ease of doing business and improve economic performance.
  • It collected data from respondents in various countries regarding existing laws and regulations on multiple dimensions, validated them through internal scrutiny, and then combined them into an overall index that allowed us to rank countries.
  • Each dimension was weighted equally and added up to create a scale.

India specific issues with the EoDB ranking

  • If we want to create an internationally comparable index, we must ask similar questions.
  • Difference in level of development not taken into account: Yet, many of these questions may not be locally salient in economies at different levels of development.
  • For example, EoDB asked questions about the ease of getting an electric connection.
  • However, it is not getting a connection that is the problem, rather the reliability of electricity supply that hampers Indian industries.
  • In addition, most of the questions focused on hypothetical cases about limited liability companies.
  •  However, the World Bank’s own enterprise survey shows that 63 per cent of Indian enterprises are sole proprietorships and only 14 per cent are limited partnerships.
  •  Focusing on protecting minority owners’ rights in this tiny segment of Indian industries and using it to rank the business climate in India does not seem particularly useful.
  • The index placed tremendous faith in formalised systems while simultaneously disdaining bureaucratic structures embedded in this formalisation.

Why EoDB ranking was so significant?

  • A bigger problem is that EoDB had acquired such power that countries competed to improve their rankings.
  • Countries assume that their EoDB ranking will attract foreign investors.
  • Empirical evidence about this presumed impact is questionable.
  • There is indeed some evidence that the score on EoDB is associated with FDI, but this association exists mainly for more affluent countries.
  •  For instance, in 2020, China was the largest recipient of FDI despite ranking 85th on the EoDB.
  • One of the less visible parts of the EoDB exercise was the underlying political message.
  • Regulation, often treated synonymously with bureaucratic hurdles, is bad, and abandoning regulations will bring positive results.

Way forward

  • Should we try to reform the index or give up on it? The decision rests on the answer to two questions.
  • First, are there universally acceptable standards of sound economic practices that are applicable and measurable across diverse economies?
  • Second, if the indices are so powerful, should their construction be left to institutions like the World Bank that bring not just knowledge but also wield the heft of global economic power?

Consider the question “What are the advantages associated with Ease of Doing Business ranking? What are the issues with it?” 

Conclusion

The presumed economic consequences, as well as political benefits associated with improving the rankings, encouraged many countries to try and “game” the system by making superficial improvements on indicators that are being measured and, when that failed, by putting explicit pressure on the World Bank research team.

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