- GS-2: International Institutions & their workings
Controversy over Ease of Doing Business Rankings
Context: Recently, there were allegations of data tampering by Kristalina Georgieva (Former WB Chief & currently MD of IMF) in the World Bank’s Ease of Doing Business rankings in favour of China.
What is the controversy around Georgieva?
- Georgieva is a Bulgarian economist who held several high-profile positions in European politics. In January 2017, she was appointed the chief executive of the World Bank group.
- In January 2019, she took over as the interim president of the WB group.
- In October 2019, she took over as Managing Director of the IMF.
- The trouble started when in January 2018, Paul Romer, then the chief economist of the World Bank told The Wall Street Journal that the World Bank’s Ease of Doing Business (EoDB) rankings were tweaked for political reasons.
- Soon Romer resigned. Incidentally, Romer was awarded the Nobel Prize in Economics later that year for showing how knowledge can function as a driver of long-term growth.
- Romer’s comments and resignation kick-started a series of queries both inside and outside the World Bank about the integrity of EoDB rankings.
- In particular, it was alleged that the EoDB rankings were tweaked to inflate the ranks for China (in EoDB 2018) and Saudi Arabia, UAE and Azerbaijan (EoDB 2020).
What has happened since the controversy broke out?
- In August 2020, the World Bank suspended its EoDB rankings after finding some “data irregularities”.
- The World Bank initiated a full review and an independent investigation. One such effort was to engage WilmerHale, a law firm, in January 2021.
- In its report, submitted September 2021, Wilmerhale’s investigations found that the World Bank staff did indeed manipulate data to help China’s ranking and they did so under pressure from Georgieva.
- The WilmerHale report states that at one point, when Georgieva took direct control of China’s ranking and was looking for ways to raise it, it was suggested to just take the average of the two best performing cities — Beijing and Shanghai — as they do for several other countries (such as India) instead of taking a weighted average of several cities. By cherry-picking the top two cities, China’s ranking would go up.
- These findings are particularly damning because China is the third-largest shareholder in the World Bank after the US and Japan, and it is being seen as manipulating its way to higher rankings.
- The investigation report did not find any evidence of wrongdoing with respect to the rankings of Saudi Arabia, UAE and Azerbaijan.
What are the EoDB rankings, and why do they matter?
- The EoDB rankings were started in 2002 to rank countries on a number of parameters to indicate how easy or difficult it is for anyone to do business in a country.
- Given the apparently extensive nature of rankings and that the World Bank was doing it, the EoDB soon became the go-to metric for international investors to assess risk and opportunity across the globe.
- Billions of dollars of investments started becoming predicated on where a country stands on EoDB and whether it is improving or worsening.
- It also acquired massive political significance as leaders in different countries started using EoDB rankings to either claim success for their policies.
How can the ranking methodology be improved?
On September 1, the World Bank also published the findings of an external panel review of its EoDB methodology. It stated that “the current methodology should be significantly modified, implying a major overhaul of the project.
Some of the key recommendations are:
- Any ranking based on such a small sample ignored the ease of doing business in other cities & regions of the country. Thus, there is a need for broad basing the data collection from a larger representative samples of “actual” business owners and operators.
- Not to ignore the government functions that provide essential public goods to the private sector: transport and communications infrastructure, a skilled workforce, law and order, etc.
- Do not rank countries on their tax rates. From a societal standpoint, collecting taxes is necessary, and thus lower tax rates are not necessarily better.
- Eliminate the indicators “Protecting Minority Shareholders” and “Resolving Insolvency.”
- Make the “Contracting with Government” indicator more relevant.
- Restore and improve the “Employing Workers” indicator, but do not rank countries based on this information.
- Improve the transparency and oversight of Doing Business.
Is this the first time the head of the IMF and/or World Bank has been in a controversy?
- No. In recent years, several heads of the World Bank and IMF have been found guilty of some wrongdoing or the other.
- In 2011, Dominique-Strauss Kahn, then the MD of IMF, had to resign after he was arrested in the US following allegations of sexual assault.
- Rodrigo Rato, IMF’s MD between 2004 and 2007, was jailed in Spain for a credit card scandal in 2017.
- Christine Lagarde, who was IMF MD between 2011 and 2017, has been found guilty of negligence in allowing the misuse of public funds in 2016 for a case dating back to 2011.
- Paul Wolfowitz, president of the World Bank between 2005 and 2007, had to resign following ethical violations and his romantic links with a World Bank employee.
- The role of Jim Yong Kim, who was World Bank president until 2019, is also being questioned in the rankings controversy.