Rwanda’s case shows the flip side of WB’s ‘Doing Business Report’

The Doing Business Report, the annual World Bank publication, attempts to provide a wide-ranging assessment of the business climate in 185 countries, primarily through the lens of formal regulations and procedures. Its centrepiece is the Ease of Doing Business Index.

The report asserts that minimal regulation and very low taxes create the most attractive environment for business. It ranks economies on 10 areas of regulation: Starting a business; dealing with construction permits; getting electricity; registering property; getting credit; protecting investors; paying taxes; trading across borders; enforcing contracts; and resolving insolvency.

A flagship knowledge product of the World Bank launched in 2004, the Doing Business Report caused disquiet from the start. Trade unions, academics, civil society and some governments voiced their concerns because the underlying theme of the ranking is that less regulation is always better. Critics found fault with the following topics:

Access to credit

The indicator measures the legal rights of borrowers and lenders with respect to secured transactions through the strength of legal rights index and the sharing of credit information through the depth of credit information index.

A high ranking in the getting credit indicator therefore shows that the country has a well-functioning credit bureau that collects and distributes fundamental information about credit and a secure transactions regime that allows entrepreneurs to access credit using movable property.

It does not, however, directly measure what the indicator claims to address and does not give a complete picture of developing countries because it excludes the informal sector, which is where the majority of the population in developing countries derive their living. An example of this is Zambia, which is ranked high on this indicator, yet the majority of firms and individuals in the country cite lack of credit as a major constraint.

Construction permits

This indicator gives a high score for fewer restrictions on permits for construction, while ignoring safety and environmental standards. Jay Chebber, Assistant Secretary-General of the United Nations, in an op-ed in the Financial Times in May 2013, highlighted the flaws of this indicator citing the textile industry in Bangladesh.

The country’s textile industry has been touted as a success story. Yet, in the factories thousands of women work in sweat shops, packed into unsafe buildings without job protection or decent working conditions.

The employers are, of course, happy because such conditions help them to reduce costs and increase profits and the few regulations on permits for construction encourage firms to ignore safety and environmental standards.

The flaws with such indicator was exposed in the Rana Plaza tragedy, in which an eight-story building housing several garment factories some 20km from Dhaka, the capital of Bangladesh, collapsed in April 2013, killing more than 1,000 people, making it the second most deadly industrial accident in history after the gas leak in the Union Carbide factory in Bhopal, India.

Paying tax

This indicator measures the total taxes paid by a firm and the administrative efficiency of making the payments. A low overall tax rate as a share of profits gives a high score. The country’s fiscal requirements to raise revenue is overlooked, as well as the equity implications of alternative sources of revenue.

Antonio Gambini, a researcher at CNCD.11.11.11, the Belgian umbrella organisation for NGOs, highlighted the flaws with the indicator thus: “Against a growing realisation by the public and international organisations, such as the IMF and OECD, that tax systems are increasingly dysfunctional and regressive and that big corporations increasingly manage to avoid bearing their fair share of taxes to contribute to collective expenses, the DB is still advocating massive tax cuts for corporations based on questionable data provided by partial and biased actors in the tax debate such as PriceWaterhouseCoopers.

Corporate tax payments are, alongside job creation and technological transfers, an important contribution to poverty eradication and fighting inequality in developing countries. Promoting this indicator for corporate tax is setting us two steps back for every one we advance in the fight for better domestic resource mobilisation.

Employing workers

This indicator promotes labour market reforms, which lead to a deterioration of wages and working conditions. Countries get a high score if they have fewer restrictions on hours of work and on the ease with which firms lay off workers. They get a low score when they choose policies that provide better job protection. The indicator cannot capture the possible offsetting benefits of job protection.

In 2008, because of the controversies the Ease of Doing Business Report had generated, the Bank asked the Independent Evaluation Group (IEG) to carry out a review of the Report.

The IEG’s published findings concluded that the indicators did not have clear association with macro-economic outcomes, that there were important methodological issues to address, that some key indicators needed reform and that the project could only have limited usefulness in guiding business climate reforms in countries.

Getting the project right therefore has important implications for economic development strategies for developing countries in very important critical areas.

In October 2012, the President of the World Bank Group appointed an independent panel of experts to review a broad range of issues surrounding the Doing Business Report.

The panel was chaired by Trevor Manuel, a former Minister of Finance and Economic Planning of South Africa and current Minister in the President’s Office.

They submitted a draft report in June 2013. The report noted that the project is relevant to only a sub-section of the business community, its methodology is flawed, its usefulness in policy formulation limited and in light of this its use of an overall ranking, its communication strategy and even the title of the report needs rethinking.

The panel also suggested moving the project to the Research Department of the Bank to better align it to the Bank’s development mandate. The panel published its final evaluation in June 2014 ahead of the October 2014 annual meetings of the IMF and World Bank.

Just before the publication of the final report by the panel, CAFOD, a leading member of the Global Call for Action against Poverty, updated its critique of the Doing Business Report.

The Report purports to help small domestic businesses. The 2013 World Development Report highlighted the prevalence of self-employment and micro-enterprises in providing a living in developing countries.

These small businesses provide up to 90 per cent of jobs and up to 50 per cent of GDP across developing countries. Three major constraints frequently cited by small businesses in developing countries are corruption, access to credit and property rights.

The Doing Business Report does not tackle corruption; access to credit is addressed but inadequately; property rights is addressed but inappropriately, as it promotes formal titling and ease of title transfer, despite increasing recognition that these can, in some circumstances, undermine community rights and access, which are important for the poor’s livelihoods. As has happened in many African countries, land reforms have facilitated land grabs.

The DB indicators do not represent or serve well the needs of poor micro and small-scale entrepreneurs. The model on which the DB is based is a medium-sized formal business operating in an urban setting.

What are the prospects for meaningful reform?

The findings of the IEG and the Panel of Experts were well-received by Washington. US interests believe that the DB promotes an American model of development and former IFC staff who built their reputations and careers on what has turned out to be a flawed project are opposed to changes and they have powerful allies, including Paul Wolfowitz, former president of the World Bank Group. The Bank has made only minor changes and continues to use flawed and controversial indicators as the basis of its rankings.

The DB project started with the desire to collect information about the regulatory environment in an easy way by surveying law firms. Doing Business, in other words, did not emerge from an analysis of what investment climate reforms matter most for poverty eradication or small businesses, with indicators based on evidence.

It is, therefore, not designed to present governments with a comprehensive blueprint of reforms or even an idea of the most important reforms. Nor does it pretend to take account of the local context, which is important in determining what kinds of reforms are appropriate.

Civil society campaigners, NGOs and other stakeholders have argued strongly for an open, transparent process to guide the reform of the DB report to make it work for small businesses and development.

Will the World Bank leadership put vested interests aside and agree to an open and transparent process?

The case of Rwanda

In 2013, the Doing Business project selected Rwanda together with Colombia and Latvia to be case studies for that year. The objective of the studies was to examine the regulatory and business legislation environment in those countries. For Rwanda, this culminated in the formation of a regulatory reform committee with a mandate to report directly to the President.

When the index for 2015 was published in October 2014, Rwanda was ranked 46th in the world. Melissa Johns, Advisor Global Indicators Group, Development Economics, the World Bank Group, said this about the ranking: “Rwanda has been an example for emerging economies in sub-Saharan Africa and worldwide. The country has successfully implemented a strategy to improve the business environment for local entrepreneurs that has brought tangible results.”

Francis Gatare, CEO of Rwanda Development Board, sang a similar tune: “Rwanda has consistently implemented bold reforms to improve the ease of doing business. We have achieved this through constant dialogue with the private sector to determine their perspectives and needs.”

Contrast this euphoria of World Bank and government officials with the plight of fruit and vegetable vendors around Kimironko Market on November 21 and 22, 2014.

On the two days, about 30 women had gathered around the market like they have always done for the past 10 years between 5am and 7.30am, to buy fresh fruits and vegetables from wholesalers.

But the Gasabo district authorities had decided to stop them, so they deployed askaris to close the entrances to the market and chased away the vendors known locally as marato. Those who had come early and had already got their merchandise had to run away leaving their purchases at the mercy of the askaris. The merchandise confiscated from the women was loaded on pick-ups by the askaris and taken way.

It was a pitiful sight. Here are poor women trying to earn an honest living being mistreated by agents of the local authorities whose policies earned a high ranking from the DB project.

Will there be a time when the radar of the World Bank will capture the plight of these women and the intellectuals at the Bank design an appropriate Ease of Doing Business Index to help the poor souls and their children earn a decent living without molestation?