Why Doing Business indicators should not be included in the Post-2015 Framework

Added 17 Dec 2014

The Donor Committee for Enterprise Development (DCED) – a group of donors, multilateral institutions and foundations [1] – recently made the case for the inclusion of a Business Environment Indicator for the Post-MDG Framework. This indicator would be part of the Sustainable Development Goals (SDGs) that are set to replace the Millennium Development Goals (MDGs) in 2015. Eurodad has several concerns about this proposal, most notably regarding the creation of a composite indicator based on the World Bank Doing Business report. We strongly believe that any indicator hoping to contribute to development should avoid a donor-driven cookie cutter approach. 

In the proposal, the DECD suggests four options for indicators that could assess progress towards achieving a successful business environment:

1.       A composite indicator based on existing global surveys (such as the Doing Business survey, Global Competitiveness Index…).

2.       An indicator based on Enterprise Surveys, expanded to give regular global coverage.

3.       As for indicator 2, but including a measure of whether regulations are equally applied to all firms.

4.       A wholly new indicator, developed specifically for this purpose

Option 1 suggests the use of the Doing Business indicators as a possible source to build the proposed indicator. This could prove quite contentious as the Doing Business indicators have been widely criticised by members of the World Bank Board of Directors, civil society organisation groups and by the Bank’s internal watchdogs. Let’s look at the reasons behind this.

Business environment: deregulation reforms should not be viewed as a goal

Doing Business indicators do not consider the social or economic benefits of regulation. They see regulations as obstacles to efficient markets. Under this assumption, those obstacles need to be removed to achieve poverty reduction.

This rationale has even been criticised by the World Bank itself. The report of the Bank’s Independent Evaluation Group on Investment Climate Reforms pointed out that regulation “performs a necessary function in enabling markets to function and in protecting public health and safety”. Translation: insufficient regulations can be an obstacle to private sector development.

In addition to the lack of consideration for the benefits of regulations, the Doing Business indicators focus on some topics, such as corporate tax rates despite their negative spillover effects, especially in developing countries. At the same time, Doing Business fails to assess important issues causing market failures. Geographic location, availability and cost of real estate, transport infrastructure, skilled workers and finance are key factors of a functioning market ignored by those indicators.

We believe that a full range of policy and regulatory instruments are necessary to ensure a business climate that is conducive and supportive of poverty reduction, decent work, human rights and other development objectives.

Doing Business indicators don’t reflect the reality of developing countries

Doing Business indicators use law firms as the main source of their data. We believe that this is very problematic. This approach implies that data may be disconnected from the reality on the ground. Concrete application of laws and regulations, as well as corruption, are absent from the report.

We believe that any development indicator should seek to capture what is really happening on the ground. Surely then the best way is to ask the people living in that reality – in other words, owners of small companies, in formal or informal sectors and poor communities.

The same solution everywhere: what about ownership?

In contrast to aid effectiveness principles, Doing Business indicators are promoting one-size-fits-all solutions to development. The Busan Declaration on Aid Effectiveness outlines five fundamental principles for making cooperation for effective development more effective. Ownership is the first of those principles and states that “Partnerships for development can only succeed if they are led by developing countries, implementing approaches that are tailored to country-specific situations and needs”.

Eurodad does not deny the important role that must be played by the private sector in terms of achieving development goals. However, the weaknesses and flaws of the Doing Business indicators should disqualify the first option presented by DCED.

DCED should instead encourage the development of a new indicator that would respect country ownership through a bottom-up and participatory process. If properly designed, this indicator could be useful for promoting private sector development that contributes to poverty eradication.

[1] The DCED is a forum promoting private sector development. It was created in 1979 at a World Bank meeting. Its 22 members are bilateral and multilateral donors and agencies, as well as foundations.