DBIEvaluation

Moliere’s take on the ‘Doing Business’ Methodology

The Doing Business Indicators make a point of measuring how business laws are written  – the de jure situation – which of course isn’t always what happens in practice.

Moliere’s classic 1673 comedy The Imaginary Invalid (now playing at the Shakespeare Theatre in Washington) shows that it pays to know the difference between the de jure and the de facto :   

The old hypochondriac Argan is furious when a notary tells him of a supposed law preventing him from leaving his money to his gold-digger second wife.   Argan thunders:  “I should like to consult my lawyer to see what can be done.”

The notary replies:  “ It’s no use running to lawyers, because they’re typically strict about these things.  They figure it’s a huge crime to break the law.  There are other people to consult who are much more understanding and who have ways to quietly get around the law, and make possible what’s not allowed – who know how to smooth out the snags and find ways to bypass the usual channels by indirect means.   Without that, where we would be on a daily basis ?   There needs to be some flexibility in things – otherwise we’d never get anything done... “

Moliere's notary is describing exactly what the evaluation meant -- but expressed less vividly -- by:  " In the enforcing contracts indicator, the gap between law and practice is particularly wide.   It measures only contract enforcement through the court system, and not other formal and non-formal resolution methods commonly used in many countries." 

"A Long Way to Go"

The launch of the Doing Business evaluation has prompted lots of people to share with us their own work assessing the DB Indicators.   For instance there's a program called "Economic Attractiveness of Law"  at the University of PAris - X.  The director sent along a translation of his 2006 paper, Can We Rank Legal Systems According to Their Economic Efficiency?  Here's the paper's concluding passage:

"We consider a decisive step that an organization like the World Bank began to look seriously  at institutions and particularly at legal systems as a key determinant in the explanation  of development and growth. However, we also consider essential to not embark on the wrong boat, going to the wrong place or, even worse, going nowhere. Measuring the economic impact of legal systems is a complex business that needs more conceptual refinement and the careful development of an appropriate methodology. Otherwise it reflects only ideological biases. We still have a long way to go in order to find the right direction."

Unbundling the 'dead weight losses' of regulation

At the launch of the evaluation an audience member -- a distinguished economist, as it happens -- called for unbundling the useful parts of regulations from the parts that generate sheer 'dead-weight loss'.  He sent along this brief summary of his point:

In deriving policy implications it is important to try to separate the "cost of doing business"  into two components:
* a cost to the firm that has a countervailing benefit to the rest of society ---  for example, taxes paid that are received by the treasury , costs of registry that are necessary to finance a well functioning and transparent registry, etc.
  versus
* a cost that basically finances a transfer, such as briberies to tax officials , excessive cost of firm registration far above the one necessary to finance a good system,etc. These costs are in the nature of dead weight losses.
I believe your evaluation implicitly tried to recognize this distinction. 

Obviously this unbundling is not easy empirically, particularly for large cross-country comparisons. Most will require a deeper case by case approach. However, for taxation, it may be possible to identify what part of the 'cost of paying taxes'  represents side payments to officials because firms actually have that information. It would be interesting  to rank countries by this indicator of 'dead weight loss'.

Do happy workers enhance the bottom line?

DB's 'employing workers' indicator has been a real lightning rod for criticism because it measures the costs -- but not the benefits --  of certain restrictions on  hiring, firing and working hours.

At our evaluation launch, Mr. Jeff Wheeler, an expert in international  employment law made a plea (see event video, time code ~ 1hr. 16mins., 200MB download!) for a more 'holistic' view of labor markets than the one offered by the  indicator.  One vision of what 'holistic' might look like is sketched in Be careful when Doing Business by Hoyland et al (for the Norwegian Ministry of Foreign Affairs). 

Quoting from Hoyland's report: "Higher wages and non-wage employment costs may promote greater employee effort and a stronger employee commitment to the business enterprise. This may raise profits directly, and in turn reduce labor turnover, which increase profits further by saving on other costs related to training and social conditions in the workplace. All in all overall efficiency may go up. Similarly, protecting employees against overwork and child labor may increase social stability and thus long run business efficiency and work performance."

An Interview with Victoria Elliott, Evaluation Team Lead

Click on the photo below to play the video interview (~4 minutes).

Starting out with a bang...

Yesterday's launch event for the Doing Business Evaluation provoked a lively discussion about whether regulations offer any benefits at all, or whether they are purely an excuse for bribe-taking with no redeeming value.   Our discussant Dennis de Tray took the latter view, based on his expereinces in Timor Leste.   Paul Krugman's article in Friday's NYTimes offers another perspective.   The moral of Krugman's article, he writes, is "that failure to regulate effectively isn't just bad for consumers, it's bad for business".     Mexican tomatoes, Indian pharmaceuticals, Chinese schools, and countless other examples should make it clear that 'good' regulation is vital both to consumers and producers, let alone the safety and security of workers, and the benefits of regulation can't simply be ignored.

Taking Measure of the World Bank - IFC Doing Business Indicators

The annual Doing Business report is one of the Bank Group's flagship knowledge products. It measures the burden of selected business regulations in 178 countries and ranks the countries on 10 dimensions.

This independent evaluation assesses the scope and relevance of the DB indicators, and the methods used to construct the country rankings and their use by Bank Group staff, policy makers, and other stakeholders.

Visit the website | Download the report