By David Himbara
The World Bank’s annual Doing Business report became an influential global tool for assessing countries’ business environments. Ever since it was launched in 2002, however, the enormous flagship undertaking raised questions about data integrity and consistency across 190 countries it covers. Then, in August 2020, the Doing Business report was suspended because of suspected data manipulation in the 2017-2021 reports. For nearly two decades, higher rankings became immensely prized by governments seeking to attract foreign direct investments (FDI). It was broadly assumed that a country moving up in the Doing Business rankings boosted FDI. This was not the case in Africa, however. The top-ranked African countries are the poorest performers in attracting FDI. As a purported indicator of conducive environments for attracting investment to Africa, the Doing Business index is dubious.
Why Doing Business was suspended
The World Bank declared in August 2020 that it had suspended the Doing Business Index due to data irregularities in the last five annual reports. The irregularities in the standardized ten indicators on which the report is based, namely, starting a business; dealing with construction permits; getting electricity; getting credit; protecting investors; paying taxes; trading across borders; enforcing contracts, and resolving insolvency.
The Bank explained it has halted the publication of future ones until an independent review process is complete. The multilateral lender promised to retrospectively correct the data of countries that were most affected by the irregularities. The four countries most affected include China, Saudi Arabia, the United Arab Emirates and Azerbaijan. Saudi Arabia is said to have recorded the greatest improvement in the 2020 report, rising to position 62 from 91 the previous year. China was also among the top 10 most improved business environments, rising to number 31 from 46 in 2020.
The 2018 Doing Business report hinted the trouble ahead
The World Bank experienced something of an internal revolt over the 2018 Doing Business report. Paul Romer, the World Bank’s chief economist, challenged the report’s data integrity before resigning in protest. Romer asserted in the media that Chile’s ranking was dropped from 34 in 2014 to 55 because of internal World Bank data manipulation. He accused the World Bank staff of deliberately skewing Chile’s data because the staff were ideologically opposed to Chile’s socialist government.
Similarly, the U.S. think tank, Center for Global Development (CGD) objected to India’s data. CGD warned that India’s ranking in the 2018 Doing Business Report was not based on economic reforms or improved investment outcomes. CGD asserted that changes in the rankings were manipulated to help the government of India because of its ideological leanings. India jumped from 130 to 100 in 2018 on the basis of methodology adjustments. CGD warned that if the Doing Business index was not scrapped altogether, the World Bank must reform of its methodology and governance. The status quo would not suffice.
In Africa, the higher the rankings in the Doing Business index, the lower the foreign direct investment
In the combined regions of Africa and Latin America, only two countries were in the top fifty economies in the 2019 Doing Business index — Mauritius and Rwanda. Mauritius was in the 20th position while Rwanda stood in the 29th position. Remarkably, Mauritius and Rwanda were even ranked ahead of such powerhouses as the Netherlands, Switzerland, Japan, and China.
The World Bank’s data on FDI indicates an entirely different picture, however. In 2018, Mauritius attracted $371 million versus Rwanda’s $301 million. Mauritius and Rwanda are not only poor performers in attracting FDI in the African region, they rank low in their respective sub-regions of the Southern Africa Development Community (SADC) and the East African Community (EAC). Six economies in SADC, including crisis-ridden Zimbabwe, outperforms Mauritius in attracting FDI, while Rwanda ranks fourth in EAC after Kenya, Tanzania and Uganda. With an FDI of $733 million, Zimbabwe which ranks 140 in Doing Business attracted nearly double Mauritius’ FDI of $371 million. At $1 billion FDI, Tanzania which ranks 141 in Doing Business drew over three times larger than Rwanda’s FDI of $301 million.
U.S. Department of State’s Investment Climate Statements shed more light on Africa
The less known U.S. Department of State’s Investment Climate Statements provide more country-specific information on business climates in Africa and elsewhere. Covering more than 170 countries, these reports analyze crucial factors including legal and regulatory regimes, dispute resolution, and the role of state-owned enterprises. The reports also highlight a variety of barriers to FDI, such as local content requirements, governmental transparency, lack of skilled workforce, corruption, and sectors closed to foreign businesses. These are more substantive environmental factors that explain why some African countries fail to attract larger shares of FDI despite being highly ranked on the World Bank Doing Business index.
The World Bank needs to rethink its Doing Business index for another reason besides safeguarding data integrity. As an indicator of conducive environments for attracting investment in Africa, the Doing Business index is dysfunctional.
David Himbara, PhD, is an educator, author, and professor of international development based in Toronto, Canada. He previously headed strategy and policy for the president of Rwanda. Himbara has consulted extensively for governments including South African government and for organizations such the African Development Bank. Himbara taught political economy at universities in South Africa and the US.