The Business of Doing Business

While Tyler and others have supported the continuation of the World Bank’s “Ease of Doing Business” rankings, I think that we suffer from ranking fatigue. We have multiple rankings of business friendliness, multiple rankings of “economic freedom”, and the dreaded ICRG indices among many others.

There are many problems with these rankings.

First off, in a “confusing the map for the territory” / “cargo cult science” manner, countries are actually targeting the rankings! My grad student from Cote d’ Ivoire reports that his country is considering such a policy. In a very nice essay, Ricardo Hausmann reports that, “Many countries – including Colombia, Liberia, Mexico, and Saudi Arabia – have at some point made improvement in the Doing Business ranking, or that of the World Economic Forum’s Global Competitiveness Report, a policy goal.”

Of course, since we have no notion of causality from the index (really any of the indices) to desirable real world outcomes, targeting the index is likely to work about as well as building an airstrip and waiting for the cargo to arrive.

Secondly, lazy researchers around the world are dumping these indices into the right hand side of regression equations and clogging the research pipeline with bad papers. These indices are not exogenous to outcomes. Even the selection of components is endogenous to the composers’ beliefs about outcomes.

Thirdly, as Ricardo also ably points out, the indices generally make no distinction between de facto and de jure. Suppose the legal, de jure burden of opening a business is onerous, but a $20 bribe to the mayor removes all obstacles. What is the actual ease of doing business?

And, isn’t it possible to be too easy to do business? Consider Ricardo’s example of a country where it’s very easy to comply with very bad regulations. Is that good?

Rich country economists generally fail to appreciate how important the World Bank is for policy in poor countries. WB pronouncements are taken way too seriously in the developing world, where there aren’t armies of professionally skeptical, social media proficient debunkers and snarkers.

I am very uncomfortable with the WB putting its inprimatur on an arbitrary index. Sure it’s great to poke China with their bad ranking, but wouldn’t virtually every developing country in the world like to BE China?

Top Down versus Bottom Up Development

Planned cities are typically touted with tons of hype and fanfare, but they are often far from where people actually want to live and there are all sorts of infrastructure and transportation problems.  A Daily Mail article on the subject noted that in China, “some estimates put the number of empty homes at as many as 64 million, with up to 20 new cities being built every year in the country’s vast swathes of free land.”  Here is a photo of one of these ghost towns:

chinese_ghost_town

Click here for many more amazing satellite photos.

Apparently China is not alone, as there are now several recent ghost cities that have been created in Sub-Saharan Africa. In a blog post entitled “Developers are failing new African cities,” Faustin Moukala writes:

“Let’s’s also look at Hawkwood properties, which, in 2009, promised to construct a world-class urban centre on 375 hectares of islands in the Democratic Republic of the Congo (DRC). Proposed as the “future of Kinshasa,” La Cité du Fleuve was supposed to host luxury housing, schools, parks, a marina, hotels, and more. But four years have passed since the engines began to claim land from the Congo river, and the result today is very far from the tropical Manhattan shown in the company’s 3D architectural life footage: Only modest residential blocks are emerging along the single paved street.

or a case of the Nova Cidade de Kilamba in Angola.  Moukala notes that the city is “located 30km out of the capital…[and]…was designed to accommodate half a million people. But to date, nearly two years after its official completion, this ghost town is home to barely a tenth of that number. Too expensive and too far from Luanda, the project that failed to meet the needs of Angolans is today a mocked white elephant, a must-see for foreign journalists.”

It is unclear to me what the role of the government is in these examples, but it is does seem like whoever is involved needs to have a much better understanding of why top down development doesn’t work.  Personally, I’d recommend they read Bill Easterly’s The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good or anything by the excellent Ghanaian economist George Ayittey.