Ease of Doing Business

A Critical Appraisal

Ease of Doing Business
Ease of Doing Business

The Ease of Doing Business report is released by World Bank’s private arm International Finance Corporation. It is an objective measurement of business regulation and their enforcement across 190 countries. The report draws huge attention. According to the World Bank, the Ease of Doing Business rankings have influenced nations to carry out changes in their regulatory framework. The World Bank boasts of more than 3500 reforms carried out globally since the inception of this ranking, which made it easier to do business in many countries. According to World Bank “Those who score well on Doing Business tend to benefit from higher levels of entrepreneurial activity and lowers level of corruption”.

Methodology

The World Bank uses two types of methodologies for evaluating the countries

  1. Ranking of countries based on 11 indicators
  2. Report based on Feedback from beneficiaries (Perception Survey)

The ranking tries to capture all important dimensions of the regulatory environment of a business or firms.

The next component is the perception survey through which actual implementation of reforms on ground are judged by communicating with all the stakeholders like members from the private sectors, government officials, etc.

India’s Journey in Ease of Doing Business 

In the last five years India’s performance has been excellent, it has managed to climb 79 spots. Major reforms like GST (Goods and Service Tax), Insolvency and Bankruptcy Code has helped India to move up in the ranking. It is second only to China among the BRICS Nation and first among South Asian Countries. It has continuously featured among the top ten improved countries in the ranking for two years.

Though it has improved its rankings in most of the parameters, in parameters such as starting business, paying taxes, enforcing contracts, registering property it has failed to improve much. Besides experts are of the view that in spite of India’s improvement in the ranking, the benefits of the same is still to be felt on the ground. The MSME sector and the real estate sector, both of which contribute highly to the country’s GDP and employment, are still to feel the positive impact of India’s performance in Ease of Doing Business ranking.

Problem with the methodology of Ease of Doing Business Ranking

Though the World Bank’s Ease of Doing Business ranking have gained much popularity, it is not free from criticism. Specially in terms of its methodology. Critics question that, can the Ease of Doing Business report be used for measuring economic success of a country?  Last year World Bank’s chief economists pointed out that frequent changes in the methodology raises questions about the integrity of ranking system. He also alleged that political motivation of the World Bank staff was behind the change of methodology, which was aimed at discrediting or giving a wrong impression about the business environment of Chile under a socialist government. According to an independent evaluation carried by World Bank in 2008 serious methodological flaws were found out in the ranking system. Questions were also raised regarding the sample size (small sample size even to the extent of limiting size to one firm) to judge the business environment in the country. It also pointed out the opaqueness in data collection.

Critics also pointed out the Doing Business indicator overlook social benefits of regulation in favor of private companies or business firms. The Ease of Doing Business report has also found lot of criticism from civil society for promoting private business over other human rights like labor rights, environmental rights, etc.

Now if we take the case of India, the rise in Ease Of Doing Business ranking has come with a huge social cost, like India has gained most in the resolving insolvency indicator from 108 to 52, the rise comes with deep haircuts taken by the private sector banks. According to a report, the banks with Insolvency and Bankruptcy Code are taking a huge amount of haircut (57% haircut in the year 2017-2018) which results in capital evasion of banks and as the capital of the banks come from normal public, the burden indirectly falls on public. Environmental norms and regulation are also being curtained to favor Industrialists and ease of regulations to rise up in the ranking like the provisions for obtaining clearance for development projects in the buffer zone of sanctuaries was done away with. Same situation is with the labor laws- to improve the scores in parameter, India is slowly de-regulating labor sector by combining several labor laws into four codes and compromising on labor security. An empirical evidence of social cost of easing regulations to improve its ranking on the Ease of Doing Business indicator can be found in that Indian states which leads Ease Of Doing Business rankings, poorly perform in other development indicators. Even if we take India as a whole, in spite of significant gain in Ease Of Doing Business rankings continuously for last two years, on other development indicators like Human Development Index, Global Hunger Index, performance has been dismal.

Critics point out this ease of regulations doesn’t benefit the mainstay of Indian Economy, the unregulated small and micro enterprise, like small garments factory etc. This step only favors the top business enterprises, whose contribution to the economy is not much as compared to this MSME’s.

Critics also point out that rise in India’s ranking is not because of its high score in different parameters but as aggregate scores of different countries are not very different from each other. A small difference in the score can boost the rank of any country in Ease of Doing Business ranking. Methodological changes and introduction of large number of countries in the ranking have also helped India rise in Ease of Doing Business.

So, the question remains, can the Ease of Doing Business ranking act as an indicator for the economic situation in the country?

Conclusion

The Ease Of Doing Business ranking indicates the state of business environment in a country. However it can’t be taken as an indicator for measuring progress of a country both economically and socially. Merely making reforms which will boost India’s ranking in the Ease Of Doing Business indicator will not help in development of the country.

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