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Doing Business, Indeed

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Doing Business, Indeed

As the demise of an influential World Bank ranking shows, multilateral institutions are prone to corruption. November 5, 2021
Economy, finance, and budgets

From the United Nation’s Oil-for-Food Program to Interpol’s scandal-ridden contracts with Philip Morris and FIFA, international organizations have proved inept at management and undermined faith in the institutions they claim to support. The latest exhibit: the World Bank, which announced in September that it would stop publishing its Doing Business report, once an essential tool for ranking economic opportunity across the world. Internal and external audits showed that the report had become subject to political pressure, corruption, and ineptitude. The report’s demise is a tragedy, since its very success is what made it a target of manipulation. But the scandal also shows the danger of trusting such projects to international institutions like the World Bank, where malicious actors often punch well above their weight.

The World Bank created the Doing Business report in 2003 in response to a growing literature that showed the importance of small businesses to economic growth. Writers like Hernando de Soto had demonstrated that burdensome regulations not only hurt poor entrepreneurs but also kept entire economies poor. The Bank’s report soon became famous for an index that ranked all countries by ease of doing business there, based on measures such as how long it took to start a new company and how hard it was to get a construction permit.

The report had a surprising global impact. When Narendra Modi became prime minister of India, he promised to improve his country’s rank on the index to 50th. Vladimir Putin of Russia pledged to push Russia’s rank to 20th. The World Bank documented 3,800 reforms inspired by the rankings.

We now know that corruption undermined the report’s integrity. An outside audit of the 2018 and 2020 reports showed that Kristalina Georgieva, then at the Bank but now head of the International Monetary Fund, succumbed to political pressure to improve China’s rating, out of concern that a bad rating would endanger the Bank’s next round of funding from Beijing.

Political pressure is nothing new at the World Bank. In 2018, then-chief economist Paul Romer made a “personal apology” after discovering that a staffer with an animus against the Chilean government manipulated that country’s rankings. Earlier, organized labor forced the Bank to remove measures on the ease of hiring and firing workers from its general index. The sad truth is that the index fell prey to “Campbell’s Law,” named after sociologist Donald Campbell, who argued that the more important a government metric becomes, the more vulnerable it is to manipulation and corruption.

Multilateral institutions like the World Bank are particularly susceptible to such forces. Their structures ensure that each government gets a say, while no one government is held accountable. When Georgieva thanked a data manipulator for doing his “bit for multilateralism,” she was more right than she knew.

Like many supposedly not-for-profit international organizations, the World Bank also found ways to peddle its influence. It began selling “Reimbursable Advisory Services” to countries that wanted to improve their ranking on the index.

In an impressive understatement, an audit of the report by top economists released in September noted that the Bank’s sales service was “an apparent conflict of interest.” For instance, a top Bank official had touted the advice that the Bank had sold to Saudi Arabia and publicly claimed that the country’s score would improve because of the purchase. Indeed, in the 2020 report, Saudi Arabia’s rank rose more than any other nation’s.

Beyond simple integrity, the old index had problems with measurement. For instance, the United States enjoys a high ranking—sixth overall in last year’s report. Yet the entire U.S. measurement comes from the ease of starting businesses in just two cities, New York and Los Angeles, perhaps the two least business-friendly places in the country. Picking certain cities over others was one way Georgieva tried to manipulate China’s ranking.

Private institutions like Transparency International and the PRS Group already rank countries by their level of corruption and have not embroiled themselves in the same kinds of scandal as the World Bank. These or other like-minded groups should step up and carry the flag of economic freedom. They can emulate the best of the Doing Business report without being subject to the same political pressures. While we can be grateful to the World Bank for emphasizing the importance of entrepreneurs, it’s time for the private sector to take the lead in defending them.

Photo by ERIC BARADAT/AFP via Getty Images

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