Neoliberal manipulations

The World Bank Group’s Doing Business 2020 study had claimed that the enactment of six regulatory reforms has landed Pakistan among the world’s top 10 business climate improvers. As a result, Pakistan climbed 28 places and rose to a rank of 108 in the global ease of Doing Business rankings from 136.

On October 24, 2019, PM Imran Khan claimed in a tweet that Pakistan has achieved the biggest improvement in its history in the World Bank's Ease of Doing Business rankings.

But then in early 2018, World Bank chief economist Paul Romer had already conceded to The Wall Street Journal that he had lost faith in the integrity of the Doing Business (DB) index.

The World Bank has conceded ‘irregularities’ in its data, which could have influenced the rankings of emerging markets. Therefore, the bank has finally discontinued publishing its DB index.

Indeed, according to Helmut Reisen (The End of a Beauty Pageant for Investors, published in International Politics and Society Newsletter on November 2, 2020) the DB index was like a global beauty pageant for investors.

“Ease of Doing Business ranking calculates the gap between a particular economy’s performance and ‘world best practice’ — as defined by the International Finance Corporation, a WB affiliate. That calculation is used to determine an international DB ranking: It assesses the difficulty in ‘starting a business, dealing with construction permits, getting electricity and credit, enforcing contracts and resolving insolvency.’ Registering property, paying taxes and trading across borders are also assessed,” expounds Mr Reisen.

Ironically, however, according to IFC website, the last DB report included India, Nigeria and Saudi Arabia among the major economies that markedly improved their business environments; New Zealand, Singapore and Hong Kong top the 2020 rankings. Germany (22), Switzerland (36) and the Netherlands (42) lag quite far behind European countries like Georgia (7), North Macedonia (17) and Latvia (19). What accounts for these astonishing results?

India’s rise in the DB rankings, which were celebrated by PM Modi (‘The biggest democracy in the world is also the fastest growing economy!’), proved to be largely due to methodological changes (to get India’s fantastic growth figures). India’s rank only rose because of new indicators, while Saudi Arabia shot up in the 2019 rankings after buying lots of weapons from the US.

Actually DB was designed to promote deregulation, with its ideology based on 1970s and 1980s tenets. Back then, legal institutions were seen as influencing economic growth and countries following English common law were expected to fare better than countries with civil laws. In the heyday of Thatcher and Reagan, economists used it as a benchmark.

As it happens, Campbell’s Law seems to apply in the case of DB design: the more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and capable of distorting and corrupting social processes it is supposed to monitor.

A case in point — DB had been politically manipulated to embarrass Chile’s socialist president, Michelle Bachelet. As a Center for Global Development report put it: “Questionable methodological changes had made Chile’s ranking plummet after Bachelet took office, then rise again under her conservative successor Sebastián Piñera, only to crash a second time when Bachelet returned to power in 2010 — through manipulating the methodology without any fundamental changes to Chile’s laws or policies.”

An especially harmful DB indicator aimed at global investors encouraged poor countries to keep their taxes low and to only marginally regulate them. The DB instigated a kind of race to the bottom for poor countries — signaling that winners would be rewarded with FDI.

‘Doing Business’ often creates the wrong incentives, such as by rewarding the countries that have low taxes. Simultaneously, the WB calls on developing countries to better mobilise their domestic resources to finance their expenditures and not depend on foreign aid. A country like Pakistan, whose taxes amount to almost 9-10% of GDP, needs more tax income — not less — to develop.

Meanwhile, for investors, stability, reliability and regulatory clarity are more important than tax rates.