Why World Bank Doesn't Get 'Doing Business'

The World Bank's Doing Business report has garnered much attention in purportedly comparing the ease of doing business in different countries. That is, how is easy is it to start up or close a business? Oftentimes, it's not only how easy it is to set up a business that determines entrepreneurship but also closing one down if it proves unviable. Seen from this perspective, the likes of Hong Kong and Singapore which are recognized as incubators of entrepreneurship may not really have a concentration of business geniuses but instead make possible trial-and-error until a satisfactory proposition is found.

That said, the Doing Business report I've always found curious in certain respects. Importantly, they are based on the inputs of those familiar with fairly large businesses alike those conducting international commerce and may thus not reflect conditions faced by SMEs. As it so happens, Seth Kaplan over at Policy Innovations expands on this line of argument that perhaps the title of the report ought to be "Doing Business for Multinationals" or "Doing Business for Conglomerates" as opposed to referring to the minimally capitalized who actually do most of the business in developing countries in numerical terms. He points out how incomplete the indicators are for such entities...

The easier it is to start a company, the likelier it is people will do so. The easier it is to register property, the more likely it will be registered, potentially providing a spur to investment in housing, spending on household goods, and capital formation. The easier it is to get a construction permit, the likelier it is companies will invest in new projects that involve construction. But there are many more serious obstacles to doing business in less developed countries that are not addressed in these reports—namely those related to transaction costs. As such, the narrow focus and wide influence of Doing Business distorts priorities and leads reformers to ignore key problems.

A better approach would be to actually consider the typical challenges a small-to-medium sized enterprise (containing, say, 5 to 50 employees) faces in a less developed country. This is what DB is supposed to be doing, but its focus on the formal procedures of government ignores how most companies operate: If they are large, firms use "workarounds;" if they are small, firms operate in the informal economy.

Especially problematic is the report's reliance on the opinions of folks accustomed to handling businesses with economies of scale that are not necessarily typical of the sort of fledgling firms originally envisioned. Startups and mom-and-pop, anyone?

The dependence of Doing Business on "local experts, including lawyers, business consultants, accountants, freight forwarders, government officials and other professionals routinely administering or advising on legal and regulatory requirements" means that results reflect the needs and perspectives of these respondents, not that of a SME owner, especially in less developed countries where these "local experts" rarely work for SMEs. Limiting data collection to the single, largest city—which may contain only a small proportion of a country's businesses—further reduces the usefulness of the data.

Operating in the informal economy, generally avoiding contact with goverment bodies that are not trusted, confronting myriad infrastructure problems, regularly struggling to get paid for services rendered, SMEs in less developed countries have many more important things to worry about than "resolving insolvency" and "protecting investors," which combine to make up one-fifth of the DB aggregate score. Such issues are more important to foreign investors than local retail stores, trading companies, manufacturers, and trucking firms.

Good stuff; and I think the overall criticism that this report is geared towards larger-scale enterprises is essentially correct.