By Anis Chowdhury, Adjunct Professor at Western Sydney University & University of New South Wales (Australia), who held senior United Nations positions in New York and Bangkok and Jomo Kwame Sundaram, a former economics professor, who was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. Originally published at the Inter Press Service
The World Bank has finally given up defending its controversial, but influential Doing Business Report (DBR). In August, the Bank “paused” publication of the DBR due to a “number of irregularities” after its much criticized ranking system was exposed as fraudulent.
Apparently, data from four countries – China, Azerbaijan, the UAE and Saudi Arabia – was “inappropriately altered”, according to the Wall Street Journal. Exposure of these irregularities was the final straw: now, it is uncertain whether the DBR will return after its suspension.
Exposing the Lie
After Chief Economist Paul Romer told the Wall Street Journal two years ago that he had lost faith in the “integrity” of the DBR, and apologized to Chile for possibly politically motivated data manipulation, he was forced to resign. The Economist commented then, “His resignation may not end the controversy”.
Romer later received the so-called Economics Nobel Prize following his resignation. Almost two decades ago, Joseph Stiglitz also received the Prize after being forced to resign following differences with US Treasury Secretary Larry Summers following the 1997-1998 Asian financial crisis.
When Justin Sandefur and Divyanshi Wadhwa of the Center for Global Development (CGD) exposed how ostensibly methodological tweaking changed Chile’s and India’s DBR rankings to bolster “market-friendly” Piñera and Modi vis-à-vis their more centrist opponents. Simeon Djankov, founder of the Bank’s Doing Business index, dismissed the CGD and the two authors as “reformed Marxist”.
Doing Business vs SDGs
Djankov insisted that the DBR is about the costs of doing business, not “the benefits of running a society”. He contemptuously told those who criticised the DBR for failing to consider social or environmental impacts, to create their own “index that says the benefits of …regulation”.
For the DBR, it did not matter if reducing regulations harmed the environment or employment conditions, or if lowering taxes constrained governmental capacity to fund public investment and provide decent public health or social protection as long as such “reforms” lowered the costs of doing business.
Singlehandedly, Djankov exposed the shallowness of the Bank’s commitment to the Sustainable Development Goals (SDGs). By undermining social and environmental dimensions, Djankov exposed the Bank’s actual attitude to sustainable development.
Hence, the Bank had little choice but to ditch the DBR, which has already done enormous damage to development by encouraging harmful tax competition and ‘races to the bottom’ with regard to the protection of the environment and labour rights.
Racing to the Bottom for Nothing
Governments seek improvements in their country’s DBR ranking believing that it will increase growth via increased investment, especially foreign direct investment (FDI). However, the evidence has been disappointing.
For example, a World Bank Policy Research Working Paper found that, “on average, countries that undertake large-scale reforms relative to other countries do not necessarily attract greater [foreign direct investment] inflows”. For developing countries, it found an insignificant statistical relationship. Another study concluded, “the various studies do not provide guidance on which of the wide range of possible [investment climate (IC)] reforms are most strongly correlated with increased growth”.
Such ranking competition has encouraged debilitating investor-friendly government behaviour. The index has become a tool for governments to formulate, evaluate and legitimize their economic policies. Some now game the system to notch up their countries’ ranking with essentially cosmetic reforms.
Indonesia’s recent “Omnibus Bill” ostensibly for job creation includes many market-friendly reforms that would most certainly boost Indonesia’s DBR ranking. The bill, from a government increasingly influenced by the Bank, is now widely criticised for heavily favouring powerful business interests at the expense of workers, human rights and the environment.
Agrarian Counter-Revolution
Ditching the DBR may be a good start, but is far from enough. The Bank must also end other similar ‘ideologically driven’ exercises, such as its Enabling the Business of Agriculture (EBA) and Investing Across Borders (IAB) indicators, which prioritise FDI, typically at the expense of some SDGs.
The Bank’s EBA indicators project is an extension of its Benchmarking the Business of Agriculture (BBA) programme, first launched in 2013. BBA, partly based on the DBI methodology, was created after the G8 asked the Bank in 2012to develop such an index for the G8’s controversial New Alliance for Food Security and Nutrition programme.
The Bank claimed, “The indicators provide a tangible measure of progress and identify regulatory obstacles to market integration and entrepreneurship in agriculture”, leading to a more modern commercial agriculture sector. Private agribusiness investors will be the main beneficiaries of its proposed land policies and environmental protection deregulation.
But the Bank does not bother to explain how farmers, especially smallholder or peasant farmers, will benefit from the proposed reforms or from large-scale commercial agriculture. Our Land; Our Business highlighted that the EBA will encourage corporate land grabs and undermine smallholder farmers who produce 80% of food consumed in the developing world.
In January 2017, over 158 organizations and academics from around the world denounced the EBA to the WB President and its five Western donors (USAID, DFID, DANIDA, the Netherlands, and the Gates Foundation), demanding its immediate end.
In response, the Bank made some cosmetic changes and dropped its controversial land indicator. However, its latest (2019) EBA still reflects its strong bias for commercial agricultural inputs and mono-cropping, undermining food security, sustainability as well as customary land holdings.
Favouring Foreign Direct Investment
The Bank’s International Finance Corporation (IFC) introduced its Investing Across Borders (IAB) indicators in 2010. Heavily influenced by Hernando de Soto, the IAB indicators were designed to complement the Bank’s DB indicators.
The IAB indicators claim to help accelerate economic growth by giving primacy to FDI as a driver for job creation, technology transfer, upgrading skills, fostering competition and fiscal consolidation. In fact, IAB indicators encourage frameworks that limit benefits for host countries besides enhancing the harmful effects of cross-border investment deals.
The indicators also violate the letter and spirit of the IFC’s Performance Standards for Environmental and Social Sustainability; Principles for Responsible Agricultural Investment respecting rights, livelihoods and resources; Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests; and various other international instruments.
One Size Never Fits All
The rise and fall of the DBR expose the dangers of using and exaggerating the significance of standardised rankings for very different countries and business environments. An IC is typically complex and difficult to reduce to a few key indicators, let alone a meaningful composite index.
Reforming only certain aspects of business regulation because of the influence of Doing Business cannot possibly be optimal, especially when government capacity is constrained. Academic literature reviews conclude, “while there is empirical evidence that institutional reform can promote growth, it is less clear which reforms matter most, how to prioritise possible IC reforms, and what kinds of institutional frameworks and functions are needed”.
Growth drivers and constraints are very context specific, so reform priorities should also be context specific. Therefore, a one-size-fits-all approach to measuring and understanding complex investment environment issues is very problematic, especially one based on the interests and priorities of particular institutions and powers.
The Bank should stop doing harm by concentrating on its original mandate of intermediating finance at the lowest possible cost for sustainable development, relief and recovery in our extraordinary times. It should stop misleading the world, especially developing countries, with its highly biased supposed knowledge products.
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One of my son’s Profs in his economics masters program put it succinctly: “Of course the IMF is an instrument of US imperialism”. Well, it appears that the World Bank is also.
Imperialism corrupts everything it touches.
The purpose of profit-driven “market economies” is indeed to “do business.” The results speak for themselves, and have, decade after decade. And it’s well to remember that these pristine stacks of printouts and bound reports expressing the invisible guiding hand of capital are, as Thomas Friedman reminded us, necessarily backed up by US Marines. It’s just business, nothing personal…
Yet, it is personal when “race to the bottom … market economies” ignore the humanitarian costs incurred by any country’s citizens, especially if people continue to suffer while businesses and corporations continue to profit. To conveniently declare it as “just business” does not excuse the predatory nature of a capital-driven economy that intentionally glosses over human suffering in the name of “money-making.” Neoliberal capitalism must end.
How come there’s no union or protection or lobbying that goes on for small, medium enterprises?
We’ve got to get that sorted.
Whoa… only one comment so far? Well, I’ve got notes here for at least 5 long points of interest. This was a super summary of our financial (global as well as national) nonsense. Pure nonsense to be precise. We are not creatures of finance – we are creatures of aeons of evolution for survival. Finance merely “emerged” in the last 2 centuries to become symbolic of life because we industrialized everything. But now time has caught up with us with a vengeance. “Finance” it is nothing more than a mirage. Life is not money.
I think after the antics of both the rating agency’s and the big 4 pre and post GFC …. its just more after taste.
Albeit the incentives which drove behavior, which then became normalized – is a case study in itself.
One can only ponder the plight of the businessman fallen on hard times through their own fault or not and takes the last of the cash to Las Vegas for the proverbial Hail Mary faerie tale ending.
Here’s a comment: Government privileges for the banks decreases the demand for fiat (in favor of their private deposits) thereby freeing up that fiat to enslave foreigners.
Feature or bug, it’s not the way to do things since the oppression of the domestic population increases the temptation or need to oppress foreigners too.
I’m pretty sure fiat doesn’t need to be freed up, just allocated…
Private banks are fiat users, not fiat creators. So the less fiat they need (via government privileges such as deposit guarantees) for their domestic needs, the more they can lend to foreigners and to the World Bank. Not that monetarily sovereign governments may not fund the World Bank directly too:
The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other. Its owners are the governments of its 180 member nations with equity shares in the Bank, which were valued at about $176 billion in June 1995. The IBRD obtains most of the funds it lends to finance development by market borrowing through the issue of bonds (which carry an AAA rating because repayment is guaranteed by member governments) to individuals and private institutions in more than 100 countries. Its concessional loan associate, IDA, is largely financed by grants from donor nations. The Bank is a major borrower in the world’s capital markets and the largest nonresident borrower in virtually all countries where its issues are sold. It also borrows money by selling bonds and notes directly to governments, their agencies, and central banks. The proceeds of these bond sales are lent in turn to developing countries at affordable rates of interest to help finance projects and policy reform programs that give promise of success. from The IMF and the World Bank, How Do They Differ? [bold added]
‘Private banks are fiat users, not fiat creators’.
Really?
Maybe I’m getting this wrong, but isn’t fiat money, among others, paper money created by the central bank, i.e. ‘cash’?
And don’t private banks create new ‘money’ by granting loans?
Your deposit increases by the amount of the loan, which you then can
convert to cash, i.e. ‘fiat money’ at an ATM.
I know, banks don’t create the paper money itself, but by increasing deposits through loans, they indirectly increase the money that can be withdrawn.
‘The World Bank is an investment bank, intermediating between investors and recipients, borrowing from the one and lending to the other.’
Doesn’t this sound like the good old ‘Loanable Funds Theory’, that we know isn’t true?
You’ve got a good point; due to the private banks holding the economy hostage, they DO, indirectly, force the creation of new fiat to keep the payment system going during a crisis.
And that’s one reason, among many, why we need an ADDITIONAL but risk-free payment system consisting of inherently risk-free accounts for all at the Central Bank itself, and not just for banks.
True cost: everything truly is accounting and characterization. Djankov personifies cost externalizing (“picking and choosing what to put in the equation”) here.
The Omnibus Bill, or the Neoliberal wishlist, in Indonesia is a live dumpster fire. The inept and corrupt bureaucrats use the professional cover of international finance along with an unrelated crisis to excuse their personal money grab. Fat elites cleaning out the pantry the poor during a pandemic is particularly cruel. The intellectualization doesn’t even matter. It comes from a dark place in our humanity, no ape-manity. Per Dr. Robert Sapolsky, apes, and thus human instincts, inflict cruelty on others if only just to maintain dominance.
Anyway, not surprised about the DBR cheap suit falling apart at threads. The fact that the western world can build these institutions and metrics shows intellectual/academic superiority. The fact that we have knowingly pushed these failed (and hypocritical) policies upon lesser countries shows our moral inferiority.
“Of all the creatures ever made he (man) is the most detestable. Of the entire brood, he is the only one…that possesses malice. He is the only creature that inflicts pain for sport, knowing it to be pain. The fact that man knows right from wrong proves his intellectual superiority to the other creatures; but the fact that he can do wrong proves his moral inferiority to any creature that cannot.” – Mark Twain