Doing Business and Doing Development
Doing Business and
Doing Development
Neil Gregory
Introduction
Countries need to change to develop. This is true of developed as well
as developing countries. Government policies and institutions need to
evolve to match the needs of a growing economy, a changing global context and new technologies. Over
The World Bank Group
time, development institutions
(WBG) have learned
like the World Bank Group (WBG)
that good policies and
have learned that good policies and
institutions matter more
institutions matter more for develfor development than
opment than investments and aid
investments and aid projects.
projects. The WBG thus has an
interest in fostering policy change to achieve its goal of ‘a world free of
poverty’. This is not easy to achieve for the following reasons.
1. How does the WBG know the correct policy prescription?
2. How does the WBG catalyse change by client countries, especially in
countries not dependent on external financing, where the WBG has
little financial leverage?
3. How can change be institutionalised within the client country, rather
than remaining a one-off process that occurs only with the intervention
of an outside agency?
Neil Gregory is
Chief Strategy
Officer for
Investment
Operations at
the IFC.
WORLD ECONOMICS • Vol. 13 • No. 3 • July–September 2012
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Neil Gregory
Private companies face similar challenges in how to change business strategy and processes. Businesses use market intelligence on what other companies, both competitors and customers, are doing to stimulate change.
And they use the market for feedback on whether their strategy and processes are delivering results.
Governments can use markets in the same way in many areas, and
increasingly do so, but at the core of government policy and institutions,
there is a monopoly provider and no market test or market feedback. Such
is the case with business regulation. As a result, many countries struggled
on for many years with outdated, inefficient and burdensome regulations
that were an obstacle to the small business creation espoused by governments, with no means to catalyse change. Governments had no basis to
know how well they were doing, and had no catalyst to embed a process
of continuous improvement.
In 1985, China was just starting its long journey from central planning to
a market economy. It asked the WBG to advise it on how to attract Foreign
Direct Investment (FDI). In response, the WBG established the Foreign
Investment Advisory Service (FIAS) to advise China and other countries
on regulatory reform. The initial focus was on the regulation of FDI, but
over time the agenda expanded to support the evolution of countries
towards market economies with appropriate supporting regulations. In this
way, the WBG got into the business of advising governments on regulatory reforms, but as an external actor, it was even more difficult to catalyse
change. Apart from executing expensive one-off diagnostic studies, it was
hard to assess the quality of a country’s business regulations, or to monitor
improvement over time as a result of reforms. There was no mechanism to
motivate policy reform and institutional change to lead to improvements.
Hence, most of these resource-intensive diagnostic reports stayed on the
shelf, with little impact, measured or not.
At the same time, anecdotal feedback from private investors and business managers gave credence to the idea that business regulations mattered and inadequate regulations were a stumbling block to both foreign
and direct investors. Various attempts were made to measure the quality
of the business environment, including World Bank Enterprise Surveys
(www.enterprisesurveys.org), which systematically asked enterprise managers about a range of investment climate issues. Over time, the surveys
were refined to minimise the subjectivity of the responses. They have
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Doing Business and Doing Development
become an important form of market feedback from one set of ‘clients’ for
an analysis of business regulation.
Other attempts were made to assess the quality of the economic
environment for investment, including the World Economic Forum’s
World Competitiveness Report and the Heritage Foundation’s Economic
Freedom Report, which ranked countries on a range of factors. However,
such reports were based on a mix of secondary data and perceptions of
survey respondents – they thus functioned as a way of summarising and
amplifying existing knowledge about the quality of the business environment, but did not do much to improve it.
Enterprise Surveys and other surveys were used by the WBG as the raw
material for the more comprehensive Investment Climate Assessments
(ICAs), diagnostic reports, which recommended policy reforms to governments in areas such as regulations, infrastructure and access to finance for
the private sector. But the production of such reports lacked the means to
catalyse action on a sustainable basis. Like the FIAS diagnostic reports,
they were often shelved, or prompted only a limited set of reforms, after
which the state of the investment climate became unknown again until
the next ICA. There was no feedback loop between diagnosis and action,
no ongoing measurement of the outcomes of reforms.
Benchmarking
In order to improve the data and reporting on the regulatory environment
facing private businesses, the World Bank Group’s Doing Business project
(www.doingbusiness.org) adapted
To improve the data and
the discipline of benchmarking that
reporting on the regulatory
had grown up in the private sector
environment, the World Bank
to supplement market information.
Group’s Doing Business
Companies found that the perforproject used benchmarking.
mance of internal systems that were
not client-facing could not easily be assessed from market feedback.
However, because they were not directly competing with other companies
in these areas, it was possible to find ways to exchange comparative information on the relative performance of companies – either in similar or different industries. This process of benchmarking gave companies a basis to
assess how well they were doing in these areas relative to other companies,
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Neil Gregory
and to assess improvements over time. Moreover, it allowed them to identify sources of improved practices that they could learn from. If a company
found another company, not a competitor, which ran an internal process
more efficiently (say, its call centre) it could reach out to that company to
learn from it. Benchmarking has become a staple tool of management consultants, in more or less structured ways. Industry associations have also
taken on this agenda, as well as specific benchmarking associations such as
the American Productivity and Quality Consortium (APQC).
Doing Business (DB) drew on a range of academic studies that sought
to establish causal relationships between specific aspects of business regulation and the performance of private firms, especially SMEs. The value of
these studies was to point to specific regulatory configurations which could
be pronounced beneficial to SMEs. Benchmarking studies then scored
the performance of individual countries against these configurations. The
key difference from other surveys is that DB does not do so by means of
a statistical survey of firms, of regulators or other stakeholders. Instead,
as with private-sector benchmarking, it follows a ‘time and motion study’
approach, and breaks down the desired policy into a series of action steps
or regulations and institutional arrangements that either exist or don’t
in a country. This allows it to score countries in an objective, verifiable
way.
Having defined the regulatory or institutional goal (e.g. the existence of
a credit bureau, or the existence of a low-cost, quick process to register a
company) DB produces comparable data for each country on the status of
that country against the goal. These data are aggregated into indicators for
a topic that covers related activities leading to the desired private-sector
outcome (e.g. the Starting a Business indicator covers all the regulatory
steps needed for a new business to start operating). Country scores on
these indicators are normalised and presented as an ordinal ranking, on
the basis that cardinal scores don’t have any inherent meaning. The value
of the ordinal ranking is to give countries a sense of where they are in the
universe of existing performance levels.
This was the model for the first few years of Doing Business, launched
in 2002, and was expanded over time from 5 to 11 topic indicators, and
from 133 to 183 countries. For the first time, it provided governments with
the type of fact base that private companies are accustomed to working
with. It analysed business processes step by step, laying out the time and
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Doing Business and Doing Development
cost of following them, and comparing the actual legislation and institutional arrangements with a defined ideal.
What is the difference between having information of this type, rather
than the kind of ‘market intelligence’ provided by Enterprise Surveys?
The difference is that the information is specific, comparable and
actionable­.
Specific, because it doesn’t give you an outcome measure like ‘few
SMEs have bank loans’ but an input metric ‘the credit bureau is not operational’. This generates a very concrete policy agenda.
Comparable, because the methodology strips away differences in context between countries and looks only at things that can be the same
regardless of context. There is no cultural, economic or political reason
why one country needs twice as long as another to issue a construction
permit, for example. This is akin to the role of benchmarking in business,
where it is not dependent on the product being produced by the company
– as previously noted, many benchmarking studies are explicitly crossindustry. There is a recognition that one can learn from circumstances
that are different from one’s own, as well as ones that are similar. Thus,
benchmarking opens up new vistas of knowledge and learning from peers.
It also removes excuses for differences in performance.
Actionable, because the dimensions that are being benchmarked are
within the direct control of government. Governments can’t directly control the flow of credit to SMEs. They can control the legislation needed
to create a credit bureau, or improve the functioning of courts for debt
recovery.
Knowledge
This type of indicator is a radical departure from much of the data generated by development institutions at the time, and still today. First, it is
much more specific than the country-level, macro-outcome metrics that
are the mainstay of World Bank reports. Second, its strict comparability
directly challenges the implicit assumption that all countries are different, and can’t expect to perform at the same level. In its weak form, this
assumption excuses developing countries that aren’t doing as well as their
neighbours. In its strong form, it assumes that developing countries cannot aspire to and learn from developed country performance. It is notable
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Neil Gregory
that many World Bank databases, such as the Enterprise Survey data,
include only data for developing countries. From the start, Doing Business
included developed countries, and now covers virtually every economy in
the world (183 to date). In doing so it broadens the horizon for policymakers to learn from international experience, and provides less excuse for not
doing so. Finally, the focus on actionable indicators is an important step
forward from measuring outputs or outcomes, which allow room for interpretation as to why activities and inputs (whether provided by the government or a donor) fail to deliver desired outputs and outcomes. Producing
benchmark indicators in this way provides a powerful knowledge tool for
policymakers to act on.
It is also a departure in the way it is produced – it is crowd sourced,
drawing pro bono contributions from over 8,000 contributors. The Bank
Group’s value add in this process is as a convenor and an honest broker
of information, not as the provider of information and expert advice itself.
Likewise, it provides a basis for peer-to-peer learning, with the WBG
development in the role of convenor and facilitator and provider of the
public good (information), rather than in the role of expert or adviser.
Again, this is a radical departure in the history of development – one
that is widely aspired to by development institution leaders, given past
failures to impart knowledge from the outside, but one rarely achieved
to date. The WBG has convened peer learning events on the DB agenda
in all regions of the world, where countries come together not just to talk
about what they have done but to do study tours of company registries,
etc. This is not north–south or even just south–south knowledge transfer
– best practices can come from any country in the world, and any country
in the world can participate in the peer learning. Some countries take this
peer learning further into peer mentoring. A group of African countries
led by Mauritius and Rwanda have created a network of DB reformers for
ongoing exchange of information and learning. If you want to see a working model of what a ‘knowledge bank’ (the aspirational phrase coined by
the World Bank) looks like, the Doing Business project is a good place
to start.
The knowledge and data generated by the project have spawned
some 4,000 research papers in peer-reviewed journals, 10,000 media clippings each year, some 56,000 downloads of reports each year, and nearly
2 million visits to the website each year, making it the most used data
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source in the World Bank after the Development Economics data site.
The report has stimulated more than 1,000 specific reforms over nine
years, with 125 countries undertaking 245 reforms in 2010–11 alone.
Measuring results
A major challenge for development programmes, and government programmes in general, is how to measure results. It is easier to measure
inputs like spending rather than outputs. It is harder still to measure
outcomes and impact. DB has results measurement built in, because the
annual survey specifically tracks regulatory reforms undertaken in the past
year (activities) and it measures the impact on the outcomes (time and
cost, etc.) of compliance with the regulations. This provides the basis for
monitoring and evaluation of reform programmes – repeated consistent
measurement provides benchmark of progress, and a feedback loop on the
impact of reforms on specific outcomes.
What DB doesn’t do directly is measure the link between these outcomes and the impact on variables such as small business or job creation.
This is where the link with Enterprise Surveys is important as a basis for
measuring changes in outcomes that can be analysed alongside reform
activity. It is important to maintain an active research programme to
examine these questions. This is best achieved through rigorous research
establishing causality between DB outcomes and impacts. Such research
provides the basis for assurance that the benchmarks are relevant to the
ultimate goals of government policies and institutions. Hence, the DB
project encourages research using the DB data, and fosters the sharing of
relevant research through its website.
Catalysing change
Such a research programme is in itself insufficient to catalyse change.
Governments may not be interested in the results of the report. Small
businesses stand to benefit most from reforms in the areas benchmarked,
but have little capacity to absorb World Bank analytical reports, and little
standing to lobby governments to change. Large foreign and direct investors often have direct access to governments, and are sufficiently important to them in terms of generating royalties, tax revenues, etc., that they
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Neil Gregory
command government attention. Hence, they are better able to lobby
for regulations and taxes that suit them. Sometimes too much so, but
small businesses lack this capacity, and suffer from a collective action
problem combined with a survivor bias problem. While all SMEs would
benefit from regulatory changes, it is not worth any individual SME
devoting effort to changing them. Moreover, the SMEs that do exist are
more likely to be firms that have found a way to work within the existing
system – the SMEs that most benefit from change are those that do not
exist under the current regulatory framework. That is why it’s not sufficient to ask the Chamber of Commerce about the quality of government
regulations.
To address this problem, an additional element was added to the DB
project not typically found in private benchmarking projects: the deliberate use of media and public interest
The Doing Business project
to catalyse government action. Here
made deliberate use of
is how it works – the data are scored
media and public interest to
and countries ranked by individual
catalyse government action.
indicators and, overall, using a simple unweighted average. These rankings are published to great media fanfare, and a concerted media and stakeholder media campaign, including
roadshows, media interviews, etc. This puts the performance into the public domain, and empowers civil society stakeholders to hold governments
accountable for their performance. This becomes the catalyst for action,
rather than advocacy from the WBG or donors, or promises of financial
support or advice. Reversing the traditional supply-led sequence of trying
to use advice to motivate governments to reform, advice comes later; once
a government is motivated by pressure to act, it may come to the WB or a
donor of a private consulting firm for advice on how to implement change
or technical support in implementing change.
This approach has proved successful. Before DB, few countries undertook reforms each year, and the media and civil society paid little attention
to regulatory issues. Now, over 3,000 media citations follow in the first
month after the launch of each year’s report, across 180-plus countries.
Each year, hundreds of reforms are implemented in areas measured by
DB: 245 reforms in 125 countries in the past year alone, nearly 1,000 since
the project began.
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Limitations, shortcomings and criticisms
Live by the sword, die by the sword. Because DB explicitly uses a model
to catalyse change that involves the media, civil society in a public debate
on business regulation, it opens itself to a degree of public scrutiny unlike
that of any other World Bank knowledge product. Since it explicitly aims
to catalyse change by governments, it provokes reactions, for good or bad,
by governments surveyed in the report. Governments and other stakeholders, including internal stakeholders in the WBG, have criticised the DB
report in a number of ways. Some are based on a misunderstanding of the
methodology, others are valid critiques but inherent in the benchmarking
tool, and others are aspects of the DB products that could be strengthened
within the benchmarking methodology. As the ‘Methodology’ section on
the DB website details, the methodology has undergone considerable
refinement over the years in response to such external review and feedback. In addition, all results are checked for factual accuracy with the governments of each country before publication, so that remaining disputes
are usually over the methodology for scoring the facts rather than the facts
themselves. However, there is a trade-off between continuous methodological improvement and the value of a consistent data series. This has
led World Bank Group to stabilise the methodology over the years, to the
point where for most indicators it may be regarded as mature, and having
withstood such extensive external and internal scrutiny, robust.
Misunderstandings
For those who do not read the methodology statements in the DB
report, but only know the report from the media, there is a common
misunderstanding that DB measures the overall investment climate in
the country, or measures the attractiveness of a country to foreign investors. As explained earlier, the scope of DB is much narrower, focusing on
specific government–SME interactions. It is explicitly not a measure of a
country’s competitiveness or of its attractiveness to investors. Clearly, the
regulations that affect foreign investors are substantially different to those
of greatest importance to domestic SMEs – some of these are measured
in a companion benchmarking study called Investing Across Borders
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Neil Gregory
(iab.worldbank.org). Also, investors clearly look at much more than regulatory and legal frameworks when considering where to invest.
A second misunderstanding is that DB promotes deregulation and low
taxation. Since it measures the cost of compliance with business regulation, the inference is that countries will be rewarded with higher rankings
by deregulating and lowering taxes. There is a grain of truth in the low
taxation concern, since the total tax rate is one-third of the Paying Taxes
indicator. But as about 3% of the overall DB score, it rarely affects a country’s overall ranking on its own. Nevertheless, the DB methodology has
been modified to set a threshold below which lower taxes do not lead to a
better score (currently around 30%). However, the indicators of business
regulation mostly measure time and cost to comply – both of which can be
reduced without eliminating regulations altogether. Hence, we find highly
regulated economies such as Norway, the US and the UK among the top
performers on DB. In other indicators, better scores come from having
institutions and regulations in place – for example, to promote collateral
registration and credit bureaus.
Critiques of benchmarking
More fundamentally, such concerns represent a failure to appreciate the
design and intent of benchmarking tools. By design, they are not comprehensive, but aim to provide a narrow but deep examination of specific
processes. In doing so, they enable the subjects of the benchmarking
study to get the kind of specific, actionable information that broader, less
deep studies would provide. That is, benchmarking is always selective
and does not cover all issues that matter. They are used to start a process
of diagnosis and reform; they are not a complete diagnosis in themselves.
Benchmarking is a process to provoke questions – for example, why does
it take ten times as long to do this process here rather than there? – rather
than to provide answers, such as how you should manage this process.
Nor are benchmarking tools normative in terms of implying that a particular score is an optimal level. A business may benchmark its response
times in its call centre against other firms, and then decide where it
wants to be in the range of response times, based on its business model,
cost structure, etc. It does not necessarily mean that it will use the study
to drive to have the fastest response times – it may decide that it is too
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expensive or not a priority for its business success. Likewise, DB scores do
not dictate policy change, but they provide a fact base for governments to
consider whether they are happy with their performance on these metrics,
and what direction of change they want to achieve.
An inherent weakness in the model for catalysing change is that governments may seek to gain publicity benefits from improved rankings without
undertaking more thorough reforms. This type of ‘gaming’ the system may
manifest itself in change programmes that target very narrowly the indicators being benchmarked, rather than pursuing broader systematic change.
At its extreme, a government may change the fee or the process solely for
the specific type of company that is used in the DB case study, but leave it
unchanged for other companies. Such gaming is clearly not in the interests
of the development of the country itself, but may be in the narrow interests
of the government or particular government ministers or officials. However,
the high profile that creates the incentive to indulge in gaming also provides a safeguard against it, as the media and other stakeholders are quick
to call attention to divergences between the DB ranking and other observations of performance in the country. The very transparency of the process
invites stakeholders to call governments out if they game the system. This
provides a counterbalance to incentives for gaming.
Doing Business and doing development
The Doing Business project has been not just a contribution to investment
climate reform, but a pilot of a new way of doing development and catalysing policy reform. The business model – encompassing the benchmarking
studies and the follow-up actions (media campaign, dissemination, peer
learning, linked advisory work) – possess many attractive features for successful development impact, as noted below.
• Low cost – Doing Business costs about US$6 million pa to produce and
disseminate, or approximately US$30,000 per country. This is about the
same cost as sending two experts on a one-week mission. Costs are kept
low by using an extensive network of pro bono contributors to provide
the raw data.
• Knowledge-based – Doing Business provides a rich set of knowledge
about business processes and institutions.
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Neil Gregory
• Peer learning – Doing Business enables governments to identify best
(or better) practices elsewhere in the world, and to learn from them.
• Stakeholder engagement – Doing Business data is shared widely, and
in a form which enables multiple stakeholders to use the data in their
work and advocacy.
• Demand-driven advisory – Doing Business creates demand for advisory
services to make improvements.
• Results measurement – the annual survey on a consistent basis provides
a strong framework for measuring the results of advisory work and government reforms.
Doing Business has proved the concept that benchmarking can be an
effective tool for development and policy reform. There is therefore a
strong basis for now applying this tool to other aspects of the development
agenda. However, to be successful, replication of the tool should adhere
closely to key aspects of the business model. It should:
• be built on a strong research base to establish why the policies, processes or institutions being benchmarked are important, and to link
improvements to them to development outcomes and impacts
• use indicators that are specific, comparable and actionable
• invest in regular repetition of the benchmarking to provide a basis for
change and means for results measurement
• implement a publication and communication strategy to engage stakeholders in interpreting the results and drawing policy lessons.
With these guidelines in mind, there is good potential for replicating
the benchmarking model in other areas, such as the quality of public
infrastructure, or the quality of environmental regulations. More topics could be added to the list, while recognising that not all topics will
meet the requirements for successful benchmarking. The key constraint
to wider use of benchmarking at this point is not identifying opportunities for valuable benchmarking, but in mobilising resources and
institutional support to implement these ideas, and ensuring credibility of
the products.
In addition to meeting the technical conditions for a good benchmarking product, the success of any new benchmarking initiative will depend
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on the backing of an organisation or coalition of organisations which can
provide funding, institutional support and credibility.
Funding
As noted, benchmarking studies are low cost compared to other forms
of development project. However, because they produce a public good
– knowledge – there is a structural tendency towards under-supply. It is
easier to mobilise funding for a product that delivers a private good to a
specific client than for a public good, where there is a free-rider problem
– all governments and development institutions benefit from the publication of the data. That is why the WBG has taken the lead on benchmarking work to date, as part of its global mandate, which includes provision
of knowledge services. However, the WBG’s ability to play a larger role in
benchmarking is constrained by the degree of institutional support such
products receive from its senior management and Board.
Institutional support
It requires a certain bravery and independence of action to produce
benchmarks across a wide range of countries. Inevitably, the results will
not flatter all countries, and may prove to be politically inconvenient for
some – not just where a country is ranked low on an indicator, but also
where a government has staked its reputation on making improvements
and the benchmarking results do not show sufficient improvement. While
multilateral institutions are in a good position technically to produce
global knowledge products, their diverse ownership means that there will
inevitably be some of their owners who are unhappy with the design or
results of particular indicators. This unhappiness can manifest itself in
opposition to producing the product, or attempts to modify the methodology. The pressure may be conveyed through formal governance structures
such as the WBG Board, or through informal communications with senior
management and country representatives.
Credibility
A challenge for global benchmarking studies is how to shield the design of
indicators and their implementation from influence by those being benchmarked. To be useful, it is important that the methodology of each indicator be based firmly on analytical foundations, and not modified to generate
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Neil Gregory
results that suit particular stakeholders or to address non-technical sensitivities. Equally, it is important that the process of data collection and
analysis be free from actual or perceived bias. Only with a strong, credible
process will these indicators be seen as unbiased and relevant. Strong
technical institutions like the WBG are well placed to provide this kind
of credibility. In particular, the WBG has a strong reputation for technical
expertise, best practice policies on transparency and conflict of interest,
and a governance framework which ensures that a wide range of government stakeholders oversee its work, keeping in check the influence of any
one government or set of stakeholders. Other inter-government agencies,
such as the OECD, possess similar attributes that enable them to manage
benchmarking projects effectively.
If these conditions are met, there are many more economic development challenges where the Doing Business model of benchmarking can
make a difference, including healthcare, education, agriculture and infrastructure. In doing so, benchmarking can make the process of development more evidence-based, transparent and accountable.
Acknowledgement
The author thanks Michael Klein for helpful comments on an earlier draft. The
findings, interpretations, and conclusions expressed herein are those of the
author and do not necessarily reflect the views of the Executive Directors of the
International Finance Corporation or the governments they represent.
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