Burying the World Bank’s Info

The World Bank is considering killing a key report on economic development.

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Andrew S. Natsios is an executive professor at the George H.W. Bush School of Government and Public Service at Texas A&M University, a senior fellow at the Hudson Institute, and the author of Sudan, South Sudan and Darfur: What Everyone Needs to Know. Natsios served as administrator of the U.S. Agency for International Development and as President George W. Bush's special envoy to Sudan.

Ten years ago, the World Bank created the "Doing Business Report," which has become a powerful tool for local reformers in developing countries trying to kickstart their economies and reduce poverty through economic growth. James Robinson and Daron Acemoglu in their impressive new book, "Why Nations Fail," argue that some economies don't grow because local elites don't want them to. They maintain monopoly control over their economies to protect their own parochial interests; growth is seen as a threat, as it may produce competition and innovation. The "Doing Business Report" is one World Bank's most successful efforts to break that control.

But efforts are now gaining traction inside and outside the Bank to gut the report and take the Bank out of its leadership role in these reform efforts. The parochial interests driving this effort, if they succeed, will damage the global poverty alleviation campaign, a key part of the Millennium Development Goals, and the World Bank's reputation as a research center and advocate for reform.

The "Doing Business Report" is not the product of ideological conviction, but of extensive empirically-based studies documenting the effect on economic growth of improvements in the efficiency of regulation and strengthening of the rule of law. These include, among others: simplifying the permitting process, reducing time delays in starting new businesses, improving credit accessibility for business start-ups, reducing barriers to cross-border trade, improving the enforceability of contracts through civil courts and reducing the cost of starting a new business.

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That the report has had an impact is clear. Since its inception, only Zimbabwe and Venezuela – two parasitic and predatory regimes – have failed to improve their rankings, while countries like Georgia, Rwanda, Colombia, China and Poland have all enacted significant reforms which have increased the numbers of new businesses, helped accelerate growth and improved foreign direct investment.

Precisely because of its success and growing influence there is opposition to the "Doing Business Report." Early on, the French Foreign Ministry criticized the report for favoring Anglican common law over the French Napoleonic (or civil) code, which they saw as an affront to French culture. The Chirac and Sarkozy governments themselves ignored the Ministry's objections and attempted to reform French law using the "Doing Business Report." Unreformed Napoleonic civil code legal systems do have embedded in their rules many more barriers to market entrance than do common law legal systems, and yet many civil code countries, such as the Nordic states, rank high in the report and are among the most favorable environments to business incubation in the world after they modernized their civil codes system.

More recently, however, China has become vocal in its criticism of the report. Its relative rank compared to other countries has not greatly improved over time because other countries have made more rapid comparative progress. This is not a reflection on China's own efforts at reform, because the report recognizes the remarkable improvements China has made, but a result of other countries having made even greater strides.

According to the 2013 report, China successfully reduced the complexity and cost of regulation, but has been too slow to strengthen its nascent legal institutions and the rule of law, while other countries have done both. The tax authority in China, whose complex tax code is tied to rising corruption in the Chinese system, is behind the bureaucratic opposition to the "Doing Business Report." This is unfortunate, because China is one of the most remarkable examples of the report's success, rather than of its failure.

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Some United Nations agencies, perhaps jealous of the Bank's success with the "Doing Business Report," have joined the attack. A particularly scathing article by Ajay Chhibber, Assistant Administrator of the United Nations Development Program, has placed the tragic collapse of the Bangladeshi textile factory which killed more than 1,200 workers at the feet of the "Doing Business Report." Characterizing the message of the report as "less regulation is always better," he argues that the index has encouraged countries to eliminate regulations, which in turn allowed the construction of the poorly built building. This is simply nonsense.

Chhibber attacks are poorly researched and deeply flawed. Nowhere does the report argue that less regulation is always better, but instead that the regulatory environment for market entry for new business should be based on clear and coherent rules. The best-performing economies in the report are not those without regulation, but those which create rules that are enforceable and are not designed to prevent new business start-ups. All of the countries that are highly ranked in the report have well developed and strong legal and regulatory systems governing the entry of new businesses to their economies, and all have a much stronger rule of law system than any of the most poorly ranked countries.

In fact, when describing their index on the ease of getting a construction permit, the report argues that if the process of getting a building permit is too complex or too difficult, it creates incentives for the builder to ignore regulations and build without the proper permit. Building permit regulations are often ignored across the developing world because of widespread corruption among enforcing authorities and of byzantine building code rules.

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The tragedy could have been avoided if Bangladesh had confronted its ugly culture of corruption, which is the real source of the problem. The owner of the Bangladeshi factory – a well connected and powerful oligarch in the Bangladeshi clientelist political system – took his building permits from a small local board to build the factory, but did not bother getting permission from Dhaka's development authority, where the stricter construction codes originate. He had the political influence to avoid the regulatory system.

The rule of law requires institutions to enforce the rules fairly and consistently for everyone, and overly complex regulations inhibit such enforcement. In fact, Bangladesh is ranked 129th out of 185 countries in the "Doing Business Report" and 144th out of 176 countries in Transparency International's Corruption Perception Index. In the ten year life of the "Doing Business Report," Bangladesh has registered no reforms to its building code permitting system. And what's more, the existing Bangladesh code has safety inspections, which obviously were ignored by the factory owner. Their poor ratings did not cause the building collapse that killed more than 1,200 people; they are the result of it. Thus, Chhibber's arguments are doubly wrong.

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Reforming the legal and regulatory environment for new business creation is difficult enough because politically-connected business figures that benefit from the status quo resist change by limiting market access by new firms. The "Doing Business Report" has become a powerful tool for local reformers to challenge clientelist networks that control developing economies and conspire to prevent economic growth. Douglas North (with Weingast and Wallis) in his book "Violence and Social Orders" argues that only by impartially and consistently enforced, rule-based systems can a society break down these patrimonial, clientelist systems which hinder development and growth. The Bank's report encourages countries to strengthen their institutions by reforming them to function more efficiently and impartially. Without reforms aimed at these regulatory systems, rules are simply used as a barrier by the elites to maintain control.

The report is widely recognized among economists, scholars, and development practitioners and many have spoken out its defense. Paul Collier, Simon Johnson, and Daron Acemoglu have strongly argued against the delegation of the report to some outside institution or its elimination. Even Oxfam, which has been at times critical of the "Doing Business Report" in the past, argues against eliminating or weakening it.

President Jim Yong Kim, the new president of the World Bank, who has extensive experience in international health, but little experience or (apparent) knowledge of economic development theory and practice, has remained sadly silent on matter. All of his last three predecessors as Bank presidents – Jim Wolfensohn, Paul Wolfowitz and Robert Zoellick – were vocal supporters of the report. If the World Bank follows through with the elimination of the "Doing Business Report," it will undermine its reputation of leadership in economic reform in the international system, slow new business formation in poor countries and damage the international poverty alleviation campaign. It is a terrible idea.

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