Ease of doing business index

What Is Ease of Doing Business Index?

The Ease of Doing Business Index was a composite statistical measure published by the World Bank Group, designed to assess the quality of the regulatory environment for businesses in various economies worldwide. As an economic indicator, it aimed to provide insights into how regulations facilitate or hinder business activities across a nation. The index measured quantitative aspects of regulations relevant to the lifecycle of a small to medium-sized domestic firm, evaluating the ease with which businesses could navigate legal and administrative requirements.

History and Origin

The Ease of Doing Business Index originated from research following the World Development Report 2002 and was formally introduced by the World Bank Group in 2003, with rankings first published in the Doing Business 2006 report⁴⁵, ⁴⁶. It was jointly created by economists Simeon Djankov, Michael Klein, and Caralee McLiesh. The annual "Doing Business" reports became a flagship publication of the World Bank, aiming to measure the costs to firms of business regulations in 190 countries⁴⁴. Over its 18-year run, from 2003 to 2020, the reports recorded nearly 5,000 regulatory reforms implemented by various economies, indicating its influence on national policy-making.

However, the Ease of Doing Business Index faced increasing scrutiny over its methodology and allegations of political interference⁴², ⁴³. Internal concerns about potential data manipulation surfaced in June 2020, specifically regarding scores for countries such as China, Azerbaijan, Saudi Arabia, and the United Arab Emirates⁴¹. An independent investigation by the law firm WilmerHale revealed that senior World Bank officials, including former CEO Kristalina Georgieva, pressured staff to alter data to improve the rankings of certain countries, notably China, in the 2018 and 2020 reports³⁸, ³⁹, ⁴⁰. Due to these "data irregularities" and "ethical concerns," the World Bank Group announced on September 16, 2021, its decision to discontinue the Doing Business report entirely³⁵, ³⁶, ³⁷.

Key Takeaways

• The Ease of Doing Business Index was a World Bank Group metric assessing the regulatory environment for businesses in countries.
• It covered 10 areas of business regulation, such as starting a business, dealing with construction permits, and paying taxes.
• The index aimed to motivate countries to implement reforms that foster a more business-friendly climate and attract foreign investment.
• Higher rankings indicated a more favorable regulatory environment and stronger property rights.
• The report was discontinued in 2021 following revelations of data manipulation by World Bank leadership.

Formula and Calculation

The Ease of Doing Business Index was not a single, directly calculated formula in the traditional sense, but rather an aggregate score derived from ten sub-indicators. It was primarily computed by aggregating "distance to frontier" scores for different economies³⁴. The "distance to frontier" methodology benchmarked economies against "regulatory best practices" observed globally³³.

For each of the ten topic areas—which included starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency—a distance to frontier score was computed. Th³¹, ³²ese individual scores were then aggregated to form the overall Ease of Doing Business Index. A ³⁰score closer to 100 indicated a country was closer to the "frontier" of best practices. Th²⁹e index gave equal weight to all ten factors.

#²⁷, ²⁸# Interpreting the Ease of Doing Business Index

When the Ease of Doing Business Index was published, a high ranking (a low numerical value, with 1 being the best) indicated a regulatory environment conducive to business operations. Co²⁶untries were ranked from 1 to 190, and a higher rank suggested that it was easier for local firms, typically a limited liability company of a specified size, to start and operate.

G²⁴, ²⁵overnments often viewed their ranking as crucial, believing it influenced the cost and amount of international capital available to them. Im²³proving a country's standing in the Ease of Doing Business Index was often a policy goal, as it was perceived as a way to attract direct investment and foster economic growth. Th²²e index provided a snapshot of a country's business climate, allowing for comparisons and encouraging reforms aimed at reducing bureaucratic hurdles and improving conditions for the private sector.

#²¹# Hypothetical Example

Consider two hypothetical countries, Alpha and Beta, both aiming to attract investment and foster economic activity.

In 2019, before the index's discontinuation, Country Alpha had a relatively high Ease of Doing Business score, reflecting streamlined processes for starting a business, efficient taxation systems, and robust contract enforcement. For example, it took only 5 days and 3 procedures to register a new company. This favorable environment meant that entrepreneurs faced fewer obstacles, encouraging both domestic and international businesses to establish operations.

Country Beta, on the other hand, had a lower Ease of Doing Business score. Its regulatory framework was more complex, requiring multiple permits and lengthy approval times for construction or market entry. Starting a business might take 30 days and involve 15 distinct procedures. As a result, Country Beta likely experienced slower growth in new enterprises and struggled more to attract foreign direct investment compared to Country Alpha, despite potentially having other attractive attributes like a large consumer market. The index highlighted these disparities, often prompting governments like Beta's to consider reforms to improve their standing.

Practical Applications

While no longer published, the Ease of Doing Business Index historically had significant practical applications, primarily serving as a tool for governments and international organizations to assess and influence business climates. It spurred numerous regulatory reforms globally, with countries actively seeking to improve their rankings to signal a more welcoming environment for enterprises. Po²⁰licymakers used the insights from the index to identify areas where bureaucratic hurdles could be reduced, such as simplifying procedures for market entry or improving access to credit markets.

Furthermore, the index was often consulted by investors and businesses considering international expansion. A higher ranking could indicate lower operational costs, greater legal predictability, and reduced administrative burdens, all of which are favorable for business expansion and capital allocation. The desire to ascend the rankings frequently motivated governments to implement reforms, leading to tangible improvements in their national business environments.

#¹⁹# Limitations and Criticisms

Despite its widespread influence, the Ease of Doing Business Index faced significant limitations and criticisms, which ultimately led to its discontinuation. One major critique was its narrow focus on deregulation and liberalization policies, which some argued prioritized multinational business interests over broader concerns like human rights, labor rights, or environmental protection. Cr¹⁷, ¹⁸itics suggested that the index could encourage a "race to the bottom" by pushing countries toward policies that might be detrimental to overall economic development.

A¹⁶nother substantial limitation was that the data primarily referred to businesses in the economy's largest city and might not accurately represent regulations in other regions of the country. Th¹⁵e methodology also focused on a specific business form (a limited liability company of a specified size), which might not reflect the realities for other types of businesses or larger corporations.

T¹⁴he most damaging criticism, however, stemmed from allegations of data manipulation. An independent investigation found that senior World Bank officials pressured staff to alter data to enhance certain countries' rankings for political reasons. Th¹¹, ¹², ¹³is "gaming" of the system, where countries focused on improving their scores by superficial changes rather than fundamental reforms, undermined the credibility of the entire Ease of Doing Business Index. Th⁹, ¹⁰e World Bank's decision to cease publication in 2021 was a direct consequence of these integrity issues.

#⁸# Ease of Doing Business Index vs. Global Competitiveness Index

While both the Ease of Doing Business Index and the Global Competitiveness Index aimed to assess aspects of a country's economic environment, they differed in scope and methodology. The Ease of Doing Business Index, published by the World Bank Group, had a narrower focus, specifically measuring regulatory barriers to key business operations, such as the time and cost involved in starting a business, obtaining permits, or enforcing contracts. It⁷s primary intent was to highlight the ease or difficulty of navigating specific administrative and legal requirements for a typical domestic firm.

In contrast, the Global Competitiveness Index, published annually by the World Economic Forum, provided a broader assessment of a country's ability to achieve high levels of productivity and sustainable prosperity. It⁶ considered a much wider array of factors, organized into "pillars" that included institutions, infrastructure, macroeconomic stability, health, education, financial market development, and innovation, among others. Wh⁵ile the Ease of Doing Business focused on the "rules on paper," the Global Competitiveness Index sought to capture a more holistic view of the factors driving a nation's competitiveness, making it more relevant for assessing a country's prospects for international capital and overall economic health.

#⁴# FAQs

What was the main purpose of the Ease of Doing Business Index?

The primary purpose of the Ease of Doing Business Index was to measure and compare the regulatory burdens and efficiencies for businesses across different economies. It aimed to encourage governments to implement reforms that would simplify business processes, protect property rights, and foster a more favorable regulatory environment for local firms.

Why was the Ease of Doing Business Index discontinued?

The Ease of Doing Business Index was discontinued by the World Bank Group in September 2021 due to an independent investigation that uncovered "data irregularities" and allegations of undue pressure from senior bank officials to manipulate data for specific countries in the 2018 and 2020 reports.

#², ³## Which countries typically ranked highest on the Ease of Doing Business Index?

In its later years, New Zealand frequently topped the Ease of Doing Business rankings, holding the first position from 2017 to 2020. Before that, Singapore consistently ranked highest between 2007 and 2016. These countries were recognized for their highly efficient and transparent regulatory frameworks for businesses.

Is there a replacement for the Ease of Doing Business Index?

As of mid-2023, the World Bank Group released a new methodology for a replacement project aimed at assessing the business climate, focusing on a more transparent approach and less emphasis on country rankings. Ot¹her organizations also produce similar reports, such as the World Economic Forum's Global Competitiveness Report and various Indices of Economic Freedom.