Centre's 'Ease of Doing Business’ ranking is pointless, it must be dumped

India’s Ministry of Commerce and Industry has released the ranking of States based on the implementation of the “Business Reform Action Plan” (BRAP) for 2019. The BRAP is a set of reform points for States, released by the central government. Relative levels of success in the implementation of BRAP are supposed to indicate the Ease of Doing Business (EoDB) in each State. The ranking States based on BRAP began in 2015.

Prior to 2018-19, three sets of rankings were released by the Ministry: for 2015, 2016 and 2017-18. Two key outcomes of the 2019 exercise has invited media attention. First, Uttar Pradesh has improved its rank from 12th in 2017-18 to 2nd in 2019. Second, Kerala’s rank slipped from 21st in 2017-18 to 28th in 2019.

I will argue in this article that the exercise of computing an EoDB index is misleading, and the methodology of such exercises is contentious and controversial. Such composite indices tell us little about the actual conditions of business or the economy on the ground. Instead, they mostly serve as instruments of the Centre to push for more neoliberal reforms in States. In my view, the concept of ranking of States on the basis of EoDB should be discarded.

The World Bank’s EoDB index

The EoDB index took birth in the early-2000s at the World Bank. From 2003, the World Bank has been releasing an annual publication titled Doing Business Report (DBR), with rankings for about 190 countries. The three key assumptions behind the DBRs are: (a) strong property rights lead to higher private investment; (b) high costs of establishing businesses deny economic opportunities to the poor; and (c) liberal labour laws lead to higher private investment.

Both these arguments have been in vogue within mainstream economics for decades. But it was Hernando de Soto’s book – titled The Other Path, published in 1983 – that catalysed efforts within the World Bank to publish the DBRs with a clear sense of purpose. Simeon Djankov, a pioneer behind DBRs in the World Bank, wrote in 2016 about the two “inspirations” behind the DBRs. First, years of research on socialist and centrally planned economies had shown that overregulation led to a waste of entrepreneurial talent and resources. When communism collapsed in Eastern Europe, the “reformers” of Eastern Europe needed lessons and directions on the benefits of simpler regulation. The DBR was to serve that purpose.

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Secondly, de Soto’s book had estimated the number of days required to obtain all permits to establish a small garment business in Lima, Peru (it was 289 days in 1983). Paul Romer, the former Chief Economist at the World Bank, wrote in 2017 that de Soto’s estimate created such an impact that the number days required for the same declined to just one by 2002. The lesson, for the World Bank, was that regular measurement and reporting of such variables can create pressures to improve the efficiency of governments across the world.

Thus, the number of days to obtain licenses, time taken to register the purchase or sale of land and other fixed assets, ease of getting bank credit, protecting the liabilities of investors, extent to which labour laws are liberal, less number and extent of taxes paid by private businesses, ease of enforcement of contracts and the ease of resolution of insolvencies, among others, were included as components in the computation of country-wise ranks in the DBR.

The World Bank’s DBRs have, over the years, been used to persuade and cajole developing countries to reduce the role of the government and liberalise their economies. If structural adjustment programmes (of the Washington Consensus) were used to guide loan disbursements of the World Bank till 2002, the rankings of the DBR were used to a similar effect after 2002 to push for more neoliberal reforms in recipient countries. Countries have also voluntarily competed for a higher rank in the DBR. For instance, when New Zealand dislodged Singapore to take the first rank in 2016, a key reason cited was the former’s reduction of employers’ contribution to workers accident compensations.

Political bias?

The situation changed by around 2018. In that year, the DBRs attracted severe criticism on two separate but related fronts. First, as Justin Sandefur and Divyanshi Wadhwa pointed out, the ranks of countries moved too closely with change of political regimes. A good example was Chile. When the leftist government of Michelle Bachelet was in power from 2006 to 2010, the DBR rank of Chile dropped from 25 to 49. When the conservative government of Sebastián Piñera followed from 2010 to 2014, the rank improved from 49 to 34. When the Bachelet government returned in 2014, the rank dropped to 57. Paul Romer himself gave an interview to the Wall Street Journal, where he admitted that the World Bank unfairly influenced its own rankings to undermine Bachelet’s leftist government. “I want to make a personal apology to Chile”, Romer said, and added that he had lost faith in the integrity of DBR rankings. Romer had to retract his comments and quit the World Bank soon after.

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Secondly, Sandefur and Wadhwa also analysed the curious case of India’s spectacular rise in DBR rank from 130th in 2016 to 77th in 2018. They found that India’s rank improved primarily because of a change in how “ease of getting credit” was computed. When they spliced the dataset to correct for such methodological changes, India’s rank was found to be largely the same (i.e., 113th or 114th rank) between 2014 and 2018. Also, a report in the Huffington Post had detailed the backhanded ways in which the Government of India managed to improve the country’s rank. Sandefur and Wadhwa concluded that:

“Reasonable people should all agree, however, with one simple fact: changes over time in the Doing Business rankings are not particularly meaningful. They largely reflect changes in methodology and sample—which the World Bank makes every year, without correcting earlier numbers—not changes in reality on the ground.”

More scathing remarks were made by independent researchers in the World Bank as well as the “Independent Evaluation Group” of the World Bank. For instance, the Group noted in 2008 that the DBR ranking:

“…measures selected dimensions of the regulatory environment, some of which are bound to be irrelevant in some countries. It notes the costs of regulation but not the benefits. Seven of DB’s 10 indicators presume that lessening regulation is always desirable, whether a country starts with a little or a lot of regulation…the policy implications are not self-evident, since regulations deliver benefits as well as costs. What is good for a firm (or firms) may not be good for firms at large, or the economy and society as a whole. The right balance for any country is a matter of political choice” (p. xv).

There were more problems with EoDB rankings. Researchers have found almost no evidence on whether an improved EoDB rank leads to higher economic growth or higher inflows of foreign investment into a country.

Thanks to all these controversies, the World Bank has decided to “pause” the publication of DBR on the 27th August 2020. Its statement referred to the accusations of irregularities in the DBR reports for 2018 and 2020, and said that the pause was pending a “systematic review and assessment of data changes” and an “internal audit” of DBR reports.

India’s ranking of States

I have argued that the World Bank’s EoDB rankings are flawed and lack credibility. Nevertheless, let us go ahead and see how this method was put to use in India. Following the World Bank’s footsteps, the Government of India began ranking States in 2015. Ranking of States was done by the World Bank by reviewing and verifying the reports submitted by States; the Ministry of Commerce and Industry facilitated the process. The methodology of ranking was modified, but the spirit of the exercise remained largely the same.

The Government of India’s ranking of States suffers from similar shortcomings and biases as noted for the World Bank’s ranking of countries. The BRAP for States actually includes a far wider net of reform measures. In 2016, the BRAP had 340 action points, consisting of 58 regulatory processes, policies and processes across 10 reform areas spanning the lifecycle of a typical business. In 2017-18, the number of action points rose to 372, as new reform sectors were added to the 2016 BRAP. These were consolidated in 2019 to include 187 reform points covering 12 business regulatory areas.

Kerala and EoDB

It is important to note a few basic features of change in the Kerala economy till 2018-19, which is the year considered for the government’s survey. Between 2017-18 and 2018-19, the growth rate of Kerala’s Gross Domestic Product (GSDP) improved from 7.3 per cent to 7.5 per cent. In the same period, the growth rate of India’s Gross Domestic Product (GDP) fell from 7 per cent to 6.1 per cent. In Uttar Pradesh, the growth rate of GSDP fell from 7.2 per cent in 2017-18 to 5.3 per cent in 2018-19. In fact, in 2019-20, the GSDP growth rate in Uttar Pradesh further fell to 4.4 per cent. What these figures show is that (a) Kerala’s GSDP growth in 2017-18 and 2018-19 was better than India’s and Uttar Pradesh’s; and (b) Kerala’s GSDP growth rate was improving in 2018-19, the year of the ranking, while Uttar Pradesh’s and India’s were falling.

As per the Economic Review 2019 prepared by the Kerala State Planning Board, the share of manufacturing in the Gross State Value Added (GSVA) of Kerala was only 9.8 per cent in 2014-15 but rose to 13.2 per cent by 2018-19. Data from the Annual Survey of Industries (ASI) show that Kerala’s share in the total value added by India’s factory sector rose from 1.4 per cent in 2015-16 to 1.5 per cent in 2017-18.

Let us now consider the number of new investment projects announced each year. In Uttar Pradesh, the total number of new investment projects in the private sector (Indian and foreign) was 165 in 2017-18, which fell to 108 in 2018-19 (it further fell to 55 in 2019-20). If we consider only those projects with cost, the numbers in Uttar Pradesh were 112, 63 and 31 in 2017-18, 2018-19 and 2019-20 respectively. In Kerala, on the other hand, the total number of new investment projects in the private sector (Indian and foreign) rose from 22 in 2017-18 to 27 in 2018-19 (and 24 in 2019-20). If we consider only those projects with cost, the numbers in Kerala were 9, 10 and 11 in 2017-18, 2018-19 and 2019-20 respectively.

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Kerala also has a commendable record in the encouragement of micro, small and medium enterprises (MSME). Since 2016, a total of 52,137 MSMEs were set up in the State. In 2019, these new MSMEs constituted more than 40 per cent of all the MSMEs in the State. The total investment they brought in was Rs 4500 crore.

The results from other assessments of the investment potential of States offer findings squarely different from the Government of India’s. Take the State Investment Potential Index (SIPI) for 2018 released by the National Council of Applied Economic Research (NCAER). The SIPI rank for Uttar Pradesh was consistently one of the poorest among States, though the State improved its rank from 20th in 2017 to 18th in 2018. But Kerala was ranked 7th in 2017, which improved to 6th in 2018. In other words, Kerala’s overall SIPI rank was considerably and consistently superior compared to Uttar Pradesh (see Table 1). In fact, the NCAER report notes that “Kerala is one of the top five states for the pillar of land, labour, infrastructure and N-SIPI survey” (p. 64). The State did lag behind in the pillars of economic conditions, governance and political stability, but these shortcomings did not prevent the State from attaining 6th rank at the national level.

Full View

The NCAER report further showed that Kerala improved its rank between 2017 and 2018 as compared to Uttar Pradesh (see Table 1). This improvement in Kerala’s SIPI rank in 2018 was because of the rapid progress achieved in the computerisation of land records. Kerala moved up by 6 places in the land pillar between 2017 and 2018. But Uttar Pradesh fell by 3 places in the land pillar between 2017 and 2018. Computerisation of land records is an important component of most EoDB rankings. However, the Government of India’s method appears to have completely ignored such improvements in Kerala.

In sum, unmistakably, Kerala’s economy was performing better than the economies of India and Uttar Pradesh in the years leading up to the EoDB rankings in 2018-19. The drop of Kerala’ rank from 21st to 28th is thus intriguing. Let us examine this matter a little more deeply.

Kerala’s efforts to improve business environment

The Government of Kerala, particularly the current Left Democratic Front (LDF) government that came to power in 2016, has initiated a number of steps to improve the business atmosphere in the State. Clearly, the LDF government is not wedded to the neoliberal ideology that drives the EoDB rankings. At the same time, the government is also committed to ensuring that private entrepreneurship is not shackled by unreasonable regulations, red tape and corruption. The government is committed to encourage private investment, but without resorting to undue relaxations of labour laws or revenue losses to the exchequer. The healthy growth of the private industries in Kerala over the past few years is indicative of the success of such a socially responsible strategy.

Let us take the BRAP that guided the 2018-19 rankings. There were 187 reform points in the BRAP. Kerala has already implemented 157 out of the 187 reform points. In other words, 85 per cent of the reform points have been undertaken in the State. Further, the share of implemented reform points rose from 53 per cent in 2017-18 to 85 per cent in 2018-19. Yet, Kerala’s rank fell from 21st to 28th.

In contrast, Uttar Pradesh claims to have implemented 184 out of the 187 reform points. This appears to be the reason for its improved rank. But then, the case of Lakshadweep emerges as baffling. Lakshadweep implemented zero out of the 187 reform points. Yet, its rank was 15th, up from 34th in 2017-18.

A more curious case is of Odisha. Odisha slipped from the 14th to the 29th rank between 2017-18 and 2018-19. But Odisha had implemented 180 out of 187 reform points. In addition, Odisha has claimed that it was the top investment destination among all States in the country in April-September 2019, attracting 18 per cent of the total investment in India.

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There are three major conclusions that we draw. First, the methodology followed by the Ministry of Commerce and Industry to arrive at rankings of States is not transparent. Nowhere in the website of the Ministry is the methodology for 2018-19 explained. The Ministry has also not released data on feedback scores from its ground-level surveys in 2018-19. States like Odisha and Kerala have raised serious questions about the methodology followed to compute the ranks. A statement of the Odisha government argued that “the survey agency appointed by DPIIT could not complete the feedback survey with the industries and MSMEs in the State”.

Secondly, as we argued using the cases of Kerala and Uttar Pradesh, the EoDB rankings appear to have no relationship with actual industrial performance. Thirdly, the results of the Ministry’s EoDB rankings do not reflect the State-level rankings attempted by other agencies for the same period. As we saw, the SIPI rankings of NCAER were at considerable variance from the Ministry’s EoDB rankings.

Yet, unfortunately, the EoDB rankings continue to be used by the central government to force States to undertake a range of neoliberal reform measures. When the centre allowed the States to borrow an additional 2 per cent of their GSDP in the face of the Covid-slowdown, a part of it was made conditional on the States implementing the BRAP. In other words, even in the presence of the Covid-crisis, the centre was keen on pushing the States to implement the BRAP.

To conclude, EoDB rankings appear meaningless given international and Indian experiences. Various allegations of irregularities have led the World Bank to shelve its publication of DBRs. EoDB rankings for Indian States are equally problematic. The relationship of such rankings with actual economic performances is weak. Moreover, in India, it has become a tool in the hands of the central government to push through contentious neoliberal reforms, particularly labour reforms, in States. As a result, the already skeletal protection measures available to workers are being rapidly diluted. In my view, it may be most desirable if the publication of such pointless reports is permanently shelved.

(R. Ramakumar is Professor at the Tata Institute of Social Sciences, Mumbai and Member, Kerala State Planning Board)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)