Why is the Ease of Doing Business report not enough?

The ease of doing business ranking is a useful tool to compare regulatory framework in countries. However, a single index is not enough to capture the complexities and practical difficulties at the ground level.

By Devika Kher (@DevikaKher) and Surya Prakash B. S. (@SuryaPrakashBS)

In the first post in this series, we have explained how there has been little focus in India on everyday hurdles to doing business which has lead to the generation of ‘unaccounted income’. However, there have been welcome deviations from this norm. One such example is the focus of the Union Government on India’s ranking in the World Bank’s Doing Business Report, one of the most comprehensive indices that compares regulatory frameworks across countries.

As per the World Bank’s Doing Business 2015 Report, India ranked 142 out of 189 countries. The ranking was based on factors such as dealing with construction permits, registering property, protecting minority shareholder interests, enforcing contracts, resolving insolvency, getting electricity, getting credit and trading across borders. Amongst these factors, India scored highest in protecting minority investors (7th position) and the lowest rank in enforcing contracts (185th position).

The factors considered by the report appropriately capture the regulatory hurdles faced by businesses. However, the report falls short on two grounds. First, it does not capture the administrative practices followed in a country. Second, it looks at all the sectors with the same frame of reference.

Reports on doing business

The Ease of Doing Business (EDB) ranking captures the conduciveness of the regulatory environment to business operation. The countries are ranked from 1 to 189 with 1 being the best. The EDB ranking is useful tool to compare business environments across borders. It highlights the cost incurred by businesses in a country in the form of innumerable regulations that precede setting up of a business. These additional barriers increase the cost of setting up business and indirectly provide a conducive atmosphere for illegal modes of transactions.

The rankings also act as a comprehensive guide for any business trying to set up shop in a new location. It has thereby helped in raising competition amongst countries trying to attract higher investment. The index provides an international scale to compare business environments across the globe. In order to attract foreign businesses, the 189 members have undertaken various reforms to improve the business environment within their countries. For instance, the Indian government recently increased the validity period of industrial licenses as a step to ease the burden of cumbersome registration processes in the country.

The EDB ranking plays a vital role in indicating the significance of business environment in attracting investment. However, it is overly dependant on factors which are one- time or infrequent, and does not factor in issues unique to the individual countries. As can be seen in Table 1, most of the factors consider by the EDB report are one-time or infrequent occurrences and does not capture the everyday hurdles faced by the businesses. In addition to that various countries have norms and general practices which are followed but are not in the regulations by the government.

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Table 1: Factors taken into account by World Bank’s Doing Business Report and the frequency of their occurrence

Improving over the Ease of Doing Business Report, The World Bank along with KPMG came up with an India specific report titled “Assessment of state implementation of business reforms” covering a wide range of factors — see Table 2 below.

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Table 2: Factors considered by the Assessment of state implementation of business reforms

The assessment studied the implementation status of reforms in areas such as setting up a business, complying with the regulations, carrying out inspections and enforcing contacts. The Department of Industrial Policy and Promotion, a part of the Ministry of Commerce and Industry has listed out a set of recommendations based on these assessments for the States and Union Territories to begin implementing. The recommendations ranged from suggesting increase in access to information and transparency enablers to creating a special bench or division under the high court to hear commercial cases.

Shortcomings of the reports on doing business

To begin with, the EDB report although an important step towards recognising the need for a better business environment, fails to capture the administrative practices applied on the ground. For instance for a factor like obtaining construction permits, applying for the permits is only part of the process. The rest of the process involves paying a fee to obtain permit at almost each step of the construction. In addition to this, as per the Anti-Corruption Bureau Chief there exists rampant corruption while issuing building permits in major cities like Mumbai.

One of the plausible ways to indicate the high cost of conducting business transaction in a country can be based on the legal restrictions imposed on them. The high cost of transactions creates the incentive to opt for illegal activities which reduce the economic cost of the business. Hence, the builder in the previous example would prefer bribing the government official at the higher levels enough to reduce the fine paid at each step and the time spent in getting clearances.

The second shortcoming of both these reports is that they measure the same factors as if they were equally important to all sectors. For instance factors like complying with environment regulations will be of higher significance for the heavy industrial than for the software industry. Hence, the factors considered should vary as per the characteristics of a given sector.

In all, EDB report indicates the pace at which the global markets are opening up to business development. However, as the report specifies, “it is unable to capture factors like security, market size, macroeconomic stability and the prevalence of bribery and corruption.” Thereby, it lacks the ability to capture the intrinsic problems with doing business and, thereby curb the generation of unaccounted income.

This is the third blog in our series on unaccounted income. The previous post explains the nuances of the common phrases used in the context of ‘black money’.

Surya Prakash B. S. is a research scholar at The Takshashila Institution. His twitter handle is @SuryaPrakashBS.

Devika Kher is a Research Associate at Takshashila Institution. Her twitter handle is @DevikaKher.

Source for feature image: Wikipedia