Finance: Research, Policy and Anecdotes

The Doing Business database has come again into the headlines, but again for the wrong reasons.  Some five years ago, there was quite a heavy discussion, which resulted in a task force recommending reforms and which led me to write this Vox column.   

It is the Chief Economist of the World Bank who seems to have started the latest controversy by focusing on the changes in the ranking of a specific country, Chile, where he notices a rather interesting correlation of these changes with political changes: the ranking goes up during the most recent right-wing administration (2010-2014) and goes down during left-wing administration (2014-2018). A few days afterwards he all but retracted his accusations, blaming communication failures.  Interestingly, the Independent Review Committee recommended in 2013 (among others) to drop the aggregate rankings.

I do not want to comment on the politics of this controversy (neither the Chilean aspect nor the internal WB aspect), though I can imagine quite some serious conversations at 1818 H Street on this matter (and how it was made public).  On the other hand, it is good that these things are being discussed openly.  Supporters of rankings point to positive effects on political discussion and the necessary reform impetus they can provide. On the other hand, and as has become clear with this latest controversy, changes in rankings can be explained by all kind of factors, including changes in the methodology. One interesting metric provided by the Doing Business database can be useful in the context of the discussion: the distance to the frontier (DTF) which indicates how far a country is away from global “best practice”, and which – as in the case of Chile – is not necessarily correlated with the ranking.   More importantly, however, is that the frontier might not necessarily be “best practice” in all circumstances; whether it is or not is ultimately an empirical question.

This controversy brings me back to the main point of my earlier Vox column. The Doing Business database is an extremely useful and rich data source for researchers and analysts.  The rankings, however, have to be taken, with lots of grain. As pointed out by others (here and here), there is also a high standard error around these rankings, a country that ranks 42nd does not necessarily have a worse business environment than a country that ranks 40th.   

I think it is really time to move completely away from any country ranking but rather limit the Doing Business report to data and distance to the frontier for individual areas.  Obviously, the authors of the DB database (and the World Bank) cannot prevent others from using the raw data to construct rankings, but it should not be the World Bank Group that takes the initiative on this.

17. Jan, 2018