Was India’s Leap In Ease Of Doing Business Aided By A Changed Methodology?

Justin Sandefur explains how changed methodology may have led to India’s big jump in Ease of Doing Business rankings

An employee walks on the balcony of a show home (Photographer: Dhiraj Singh/Bloomberg)
An employee walks on the balcony of a show home (Photographer: Dhiraj Singh/Bloomberg)

Non-profit think tank Center for Global Development found that India’s jump in the World Bank’s Ease of Doing Business index is modest even as debate rages on the rankings after the international lender’s then-Chief Economist Paul Romer raised questions over its methodology.

“We found if we try to smooth out the changes in methodology, instead of India moving from 130 to 100, it would have started closer to 119 and moved up to 114,” Justin Sandefur, a senior fellow at the Center for Global Development, told BloombergQuint in an interview. Sandefur, who analysed the ranking along with Divyanshi Wadhwa, dropped all the new indicators to get a clearer picture.

India’s big leap in the rankings was attributed to reforms by Prime Minister Narendra Modi’s government. These included eased rules for construction permits, landing credit, protecting minority investors, paying taxes, cross-border trade and resolving insolvency. The improvement came even as the growth fell to its lowest in three years following the demonetisation and Goods and Services Tax rollout.

Romer, who eventually resigned, raised questions over alleged manipulation of the rankings of Chile, possibly for political reasons. The World Bank defended its methodology. That also raised a doubt about India’s leap.

Sandefur said India’s rise up the rankings was ‘small and modest one’

If you didn’t make these changes in methodology you wouldn’t have seen this big jump in the ranking for India.
Justin Sandefur, Senior Fellow, Center for Global Development

Here’s the full interaction with Sandefur:

Let’s begin by understanding what this entire controversy is about. Why have the doing business index methodology and rankings come under scrutiny?

This started when the World Bank’s own chief economist pointed out that the methodology was changing a lot over time. And he got worried that the bank was making announcements about movements and rankings, one country going up or another going down. They were actually comparing apples and oranges because if you change the methodology, you can’t really compare this year’s ranking with last year’s ranking and say that anybody did better or worse. He felt the bank wasn’t being entirely forthcoming about those changes. And he promised before he resigned that the bank would issue new and revised rankings. With his departure I am not sure if we are ever going to see that.

It began of course in the context of Chile, and the big question there was whether these rankings were politically motivated. Would that question then logically extend to all the rankings?

I think people are free to form their own hypothesis. We have tried to focus here on the development just at looking at the data, digging into the methodology. In the case of Chile there were these very striking coincidences. When you had a left leaning government in power Chile’s position fell. As soon as the right leaning government came in power, it went up again. And that happened over multiple changes in the government where the index always seem to move with respect to power. When we looked at the underlying scores it seemed if you held the methodologies constant those movements weren’t really there. The changes in the methodologies were moving the rankings with the political wins, and that kind of led us to dig into India, one of the countries that surged up the most in the rankings under the current government. There, our analysis led us essentially to the same conclusions, that if you didn’t make these changes in methodology you wouldn’t have seen this big jump in the ranking for India.

What are those changes in methodology that have actually moved up India’s ranking?

It’s too many to enumerate here. The doing business Index covers several different domains, everything from tax to business registration, previously they had labor regulations included and in each of those there are several sub-indicators so you have a dozen of pieces of index. We have made some changes to how the tax rules are measured, how bankruptcy regulations are scored but there have been small tweaks to a number of indicators. One of the remarkable things about the doing business ranking is, because it’s a ranking where many countries have very similar scores, a tiny shift in your score can change your ranking quite a bit. The rankings are actually quite fragile. Minor tinkering around with the weights and the indicators can lead to fairly massive changes in the rankings.

As per your research if those changes in methodologies were removed, what would India’s ranking be?

Every choice of methodology is somewhat amateur , we can debate about this. So what we found is if we try to smooth out the changes in methodology that have happened over the course of the life of the Index, that instead of India in 2017-2018 moving from 130 up to 100, it would have started closer to 119 and moved up to 114. So still a movement in the positive direction but kind of a small and modest movement. And in the years prior, since the current government came to power there would have been no improvements in the previous two years. Whereas the official scores show kind of a continual rise, 2015-16 at a rise also. So instead of a jump of 30 points last year we found a jump of 5 points.

Would it be fair to say India did improve under the current government. But perhaps not as much as it was made out to be.

That’s probably fair. The folks at the World Bank research department insisted that there were actual reforms on some of these indicators that drove the changes in the scores. I don’t want to contest that. I think one line which has been misleading in the World Bank’s response here though is these changes in the ranking reflect realities on the ground and feedback from the small and medium enterprises and that’s really not true. These ranking and index is based on a survey of experts, lawyers and government officials who talk about the formal rules not how they are applied on the ground. I think it’s fair to say that there’s been some modest movement in the form of rules. But there is really no basis to claim, on the basis of this Index of any actual change on the ground. That’s something that new research would have to look into.

If a methodology is changed, it would then apply equally to all the nations who are being looked at. All things being equal the rankings stand, doesn’t it?

It’s true to say that the methodology was applied equally to all countries. One of the reasons that we focused on India here is when you look at the changes in methodologies, who benefited from the change? It just happens that India was one of the countries that benefited significantly from the change in methodology. That change applied across the board. There is an argument that the new methodology is better than the old methodology, that’s certainly what the World Bank will tell you. The new methodology is better so focus on the ranking of 100. I would be willing to accept that but we shouldn’t try to make this comparisons over time and talk about India’s amazing recent rise because those comparisons over time are very dubious.

How much does this really matter to foreign investors , to companies looking to set up shop in India.

Personally I’m suspicious that any investor is going to look at this recent controversy and question their investment decisions. My guess is most investors thinking about making a serious commitment in India are going to be looking at concrete realities in their own sector, their own city or location where they are thinking of investing and not turn to World Bank’s page to decide on their investment decisions. It is in defending the Index in the face of criticism about some fairly objective errors that the World Bank begins to undermine it’s credibility. I hope they come out to clear up some of these questions to maintain the rigor and transparency of their data.