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HomeEconomyIndia's rise in EODB rankings: Good for optics, great for hope

India’s rise in EODB rankings: Good for optics, great for hope

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No matter your view of the usefulness of the Ease of Doing Business rankings, you cannot deny that it’s positive news for India.

This article originally appeared on the American Enterprise Institute site.

The World Bank has released its annual Ease of Doing Business rankings. As expected, India climbed a dramatic thirty places to #100.

Not surprisingly, with important state elections approaching, the government was quick to seize on the news. On Twitter, Prime Minister Narendra Modi credited the improvement to “the all-round & multi-sectoral reform push of Team India.”

Addressing a press conference, Finance Minister Arun Jaitley expressed confidence that India was on track to achieve Modi’s publicly stated goal of vaulting India into the world’s top 50 places to do business. A host of other officials chimed in to congratulate the government on its historic achievement.

If we step away from the hype for a moment, what does India’s improved ranking really mean? Here are a few quick thoughts:

First, this is undeniably good optics

No matter your view of the usefulness of the rankings, you cannot deny that it’s positive news for India. Businesses and commentators alike tend to view a country’s EDB ranking as a crude proxy for how welcoming it is to private investment.

The top five countries this year — New Zealand, Singapore, Denmark, South Korea and Hong Kong — all have well-deserved reputations as places where doing business is clean, efficient and predictable. As for the bottom five, only the bravest businessman would consider investing in Somalia, Eritrea, Venezuela, South Sudan, or Yemen. It’s fair to argue that reaching #100 out of 190 countries and territories surveyed hardly calls for uncorking the champagne, but nonetheless it’s a lot better than languishing at #130.

Second, reality is much more complex than what the index suggests

Arguably the more interesting question, one which scholars such as Harvard’s Lant Pritchett have wrestled with for years, is the relationship between a country’s ease of doing business ranking and the reality of what businesses face on the ground. Over at the Carnegie Endowment, Milan Vaishnav and Matthew Lillehaugen recently summed up the limitations of how the World Bank ranks countries:

By the World Bank’s own admission, the Doing Business rankings do not “measure all aspects of the business environment that matter to firms or investors”. Rather, they provide an assessment of red tape and administrative hurdles across 11 areas of business regulation. To determine their rankings, the World Bank relies on four sources of information: the laws and regulations on the books, experts well-versed in local business practices, national governments, and World Bank staff. The World Bank uses these various inputs to estimate how many hoops a “prototypical firm” must jump through to carry out a set of standardized tasks.

The insights the World Bank compiles are extremely useful, but they are not necessarily representative of what firms experience in real life.”

Add to this the fact that, as Pritchett, Vaishnav and others have pointed out, the World Bank focuses on just two Indian cities—Delhi and Mumbai—and you can see why the difference between a country’s ranking and its reality can sometimes be quite stark.

Here’s how the Financial Times explains this year’s dramatic improvements by Russia and India in the rankings: “Both countries’ progress reflects government focus on the bank’s rankings as a guide for economic reform. But bank officials concede it also illustrates the potential pitfalls of the rankings and how countries can game a system that does not measure other business barriers, such as corruption.”

In the end, though, arguments about the usefulness of the World Bank’s rankings miss a larger point: That the Indian government is even talking about ease of doing business is undeniably a step in the right direction. For a country long steeped in socialism, where politicians have tended to treat business as a bad word, this is a welcome shift.

In my view, the Modi government’s approach to the economy has relied far too much on bureaucrats, resulting in misfires such as an overly complex Goods and Services Tax. But as long as the government’s stated goal remains to improve the ease of doing business in India — even if narrowly cast in terms of climbing the World Bank’s rankings — we can hold out hope that things will improve over time.

Sadanand Dhume is a resident fellow at the American Enterprise Institute.

Also read: Ease of Doing Business: Over to the states & local bodies now

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