Explained: The Controversy Over Ease of Doing Business Ratings
On Tuesday, the executive board of the International Monetary Fund (IMF) endorsed its managing director, Kristalina Georgieva, stating that it has full confidence in her. The announcement was intended to quell weeks of mounting questioning about Georgieva’s role in allegedly manipulating the World Bank Ease of Doing Business Rating when she was the executive director there.
What is the controversy surrounding Georgieva?
Georgieva is a Bulgarian economist who held various high profile positions in European politics. In January 2017, she was appointed Executive Director of the World Bank Group. In January 2019, she took over as interim president of the WB group after Jim Yong Kim resigned three years before the end of his second term. In October 2019, she assumed the position of Managing Director of the IMF.
The problem began when in January 2018, Paul Romer, then the World Bank’s chief economist, who replaced Kaushik Basu, told The Wall Street Journal that the World Bank’s Ease of Doing Business (EoDB) ratings were changed for political reasons. . Soon Romer resigned. (By the way, Romer was awarded the Nobel Prize in economics later that year for showing how knowledge can function as a long-term growth engine.) Romer’s comments and resignation triggered a series of questions both inside and outside the World Bank about the integrity of the EoDB ratings.
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In August 2020, the World Bank suspended its EoDB rating after finding some “irregularities in the data.” “A series of irregularities with respect to changes in the data have been reported in the Doing Business 2018 and Doing Business 2020 reports, published in October 2017 and 2019. The changes in the data were inconsistent with the Doing Business methodology,” he stated in a press. release.
In particular, it was alleged that the EoDB rankings were modified to inflate the rankings of China (in EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020).
The World Bank launched a full review and independent investigation. One of those efforts was to involve WilmerHale, a law firm, in January 2021. In their report, released on September 15 of this year, Wilmerhale’s investigations found that World Bank staff actually manipulated the data to help the classification of China and did so under pressure from Georgieva. . In fact, at one point the report claims that Georgieva “chided” the World Bank country director for “mismanaging” the Bank’s relationship with China and “failing to appreciate the importance of Doing Business to the country.”
These findings are particularly damning because China is the World Bank’s third-largest shareholder after the United States and Japan, and is seen as manipulating its way to higher rankings.
WilmerHale did not find any evidence of wrongdoing regarding the rankings of Saudi Arabia, UAE and Azerbaijan.
What are EoDB classifications and why are they important?
EoDB rankings were started in 2002 to rank countries on a number of parameters to indicate how easy or difficult it is for anyone to do business in a country. Each year, EoDB rankings mapped whether, and by how much, a country had improved on a number of parameters large and small, such as how long does it take to start a business or how expensive it is to obtain a building permit, or how many procedures are required. must perform to enforce a contract, etc.
Given the seemingly extensive nature of the ratings and that the World Bank was doing it, the EoDB soon became the go-to metric for international investors to assess risk and opportunity around the world. Billions of dollars in investments started to be based on a country’s position in EoDB and whether it is getting better or worse. It also took on massive political significance as leaders of different countries began to use EoDB rankings to claim success or rebuke the existing government.
How reliable are the ratings?
Even before this controversy, it was openly known that there are several gaps in the rankings. For example, in India, which had seen a massive jump in recent years, all the data to build the ranking was taken from just two cities: Mumbai and Delhi. Any ranking based on such a small sample ignored how markedly the “ease” of doing business varied once one moved away from these two metropolitan areas.
These weaknesses were used to boost China’s ranking.
WilmerHale’s report claims that at one point, when Georgieva took direct control of China’s ranking and was looking for ways to raise it, a junior member suggested that they simply take the average of the two best performing cities, Beijing and Shanghai, as make. for several other countries (like India) rather than taking a weighted average of multiple cities. By selecting the top two cities, the ranking of China would increase.
How can the classification methodology be improved?
On September 1, the World Bank also released the results of an external panel review of its EoDB methodology. He stated that “the current methodology must be significantly modified, which implies a major revision of the project.
Some of the key recommendations are:
* A substantial methodological shift away from hypothetical case studies and in favor of more data collection from representative samples of “real” business owners and operators about their de facto experiences doing business.
* Don’t ignore the government functions that provide essential public goods to the private sector: transportation and communication infrastructure, skilled labor, public order, etc.
* Doing Business covers a wide range of indicators that often have little meaning when aggregated with arbitrary weights. For some indicators, less is clearly better (eg, Delays in registering a business), while for others, the optimal policy is much less clear (eg, The optimal corporate tax rate).
* Do not classify countries based on their tax rates. From a social point of view, tax collection is necessary, and therefore lower tax rates are not necessarily better.
* Eliminate the indicators “Protection of minority shareholders” and “Resolution of insolvency”.
* Give greater relevance to the indicator “Contracting with the government”.
* Reset and improve the “Employing workers” indicator, but do not rank countries based on this information.
* Improve transparency and oversight of Doing Business.
Is this the first time that the head of the IMF and / or the World Bank has found himself in a controversy?
No. In recent years, several heads of the World Bank and the IMF have been found guilty of some wrongdoing.
In 2011, Dominique-Strauss Kahn, then IMF director general, had to resign after being arrested in the United States following charges of sexual assault. Rodrigo Rato, MD of the IMF between 2004 and 2007, was jailed in Spain for a credit card scandal in 2017. Christine Lagarde, who was MD of the IMF between 2011 and 2017, was found guilty of negligence in allowing the misuse of funds public in 2016 for a case dating back to 2011.
Paul Wolfowitz, president of the World Bank between 2005 and 2007, had to resign due to ethical violations and his romantic ties to a World Bank employee. The role of Jim Yong Kim, who was president of the World Bank until 2019, is also being questioned in the ranking controversy.