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?

Cargo Cults: not just in the South Pacific?

Smithsonian magazine just ran a piece on a cargo cult in Vanatu

These cults started during WWII as the US air-dropped material all over the South Pacific. Well after the war ended, Islanders would create “runways” and build wooden planes and conduct ceremonies to induce the air-dropped riches to re-appear.

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Daniel Ellerman claims that the World Bank has systematically encouraged developing countries to practice a similar cargo cult religion, by encouraging them to adopt the outer trappings of rich countries and assuring them that wealth would follow.

Get the institutions right, increase your school enrollments, get a stock market going, privatize, get the prices right, create a competition authority, enforce intellectual property rights.

In practice, are these injunctions (which by and large poor countries have followed without the promised success) so different from the hollow planes and ceremonies of the South Pacific culters?

I don’t think they are.

Isn’t the WB guilty of practicing cargo cult science?

I think they are.

What do you think?