EXPLAINER: Why World Bank is under fire over set of rankings

Under fire at claims that it had bowed to pressure from China and other governments, the World Bank dropped a popular report that ranked countries based on their welcome to business.

The report is important to many companies and investors around the world: they use the World Bank’s “Doing Business” report to decide where to invest money, open manufacturing plants, or sell products.

Eager to attract investment, countries around the world, especially developing economies, have sought to improve their ranking in the World Bank report.

Sometimes countries sought to make significant policy changes, such as making it easier for companies to pay taxes, get loans, or enforce contracts. Sometimes they adopted a more aggressive tactic: like arrogant high school students coaxing a teacher for a better grade, they pressured the World Bank to give the “Doing Business” report a higher score.

Countries that have achieved high rankings have often touted their success. In 2017, for example, Prime Minister Narendra Modi took to Twitter to celebrate India’s great improvement in 2017. In Rwanda, the country’s development council employs a “Doing Business Economist”.

But the World Bank has long been accused of using sloppy methodology and succumbing to political pressure in producing the ranking. This week, the bank dropped the report after investigators examined internal complaints about “data irregularities” in the 2018 and 2020 editions of “Doing Business” and possible “ethical issues” involving staff members. from the World Bank.

In an investigation conducted for the bank, law firm WilmerHale concluded that staff members tampered with data to improve China’s appearance under pressure from Kristalina Georgieva, then CEO of the World Bank and now head of the International Monetary Fund, and the office of Jim Yong Kim, then President of the World Bank.

Here’s a look at the controversy:

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WHAT IS THE WORLD BANK?

Founded in 1944, the World Bank of 189 countries provides grants and loans, often to finance large public works projects, and offers economic advice, mainly to developing countries. The Washington-based bank is also committed to reducing poverty around the world.

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WHAT IS THE “DOING BUSINESS” REPORT?

In 2002, the bank introduced the report, whose annual rankings highlight which countries have adopted pro-business policies and which have not – and to what extent they are improving or declining. The bank, which collects information from tens of thousands of accountants, lawyers and other professionals in 190 countries, rates how easy it is to start a business, get a building permit or get online to the electricity grid. Last year New Zealand ranked No.1 and Somalia No.190. The United States was No. 6.

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WHY WAS THE REPORT IMPORTANT?

While intended to measure how governments treat domestic businesses, rankings have often been interpreted by media and investors as a proxy for the extent to which countries welcome foreign investment.

“Any quantitative country risk model has built that into the ratings,” says Timothy Ash, emerging markets strategist at fixed income manager BlueBay Asset Management. “Money and investments are allocated on the back of this series.”

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WHY WAS “DOING BUSINESS” FIRED?

Questions surrounding the report date back at least to 2018, when Paul Romer, then the World Bank’s chief economist, who would go on to win a Nobel Prize in economics for his previous work, resigned after complaining about how ” Doing Business ”was covered. Chile.

As a result of methodological tinkering, the South American country plunged into the rankings as socialist Michelle Bachelet held the presidency, rebounded under conservative Sebastian Pinera, then collapsed again when Bachelet returned to power. The ups and downs came despite little real policy change, according to a summary of events from the think tank Center for Global Development, which then called on the bank to “drop” the report.

Justin Sandefur, a senior researcher at the center, argues that the rankings have always reflected a bias against government intervention in the economy. He said, for example, that the rankings failed to properly assess the benefits of state spending or of protecting workers and consumers.

“It came from a very strong anti-regulatory anti-tax approach, bringing the state aside so the private sector could thrive,” Sandefur said. “It was original sin. It’s deep in the DNA ” of the report.

WilmerHale dealt another blow to the World Bank and to the “Doing Business” rankings. World Bank employees compiling the 2018 report were preparing to drop China to 85th in the ranking from 78th the previous year. The downgrade reportedly came at a time when the World Bank was trying to raise capital – an effort in which Beijing, the bank’s third-largest shareholder, was to play a “key role,” according to the law firm’s report.

The investigation found that Georgieva “has become directly involved in efforts to improve China’s ranking.”

According to the investigation, she also blasted the Chinese director of the bank for having “mismanaged” the bank’s relations with Beijing and for failing to understand how important the “Doing Business” ranking was to Chinese leaders. Under pressure from above, investigators found, bank staff decided to give China more credit for a new law involving so-called guaranteed transactions – usually loans involving guarantees. The result is that China ended up where it was in the rankings – No.78. (Other changes affected the rankings of Azerbaijan, UAE and Saudi Arabia.)

WilmerHale concluded that bank employees knew the changes to the report were “inappropriate” but feared retaliation – including dismissal – if they expressed concern. The law firm spoke of a “toxic culture” at the bank.

In a statement, Georgieva dismissed the report: “I fundamentally disagree with the findings and interpretations of the data irregularities investigation regarding my role in the World Bank’s Doing Business 2018 report.” .

Eswar Prasad, professor of trade policy at Cornell University, said the ‘Doing Business’ report was already losing favor:’ In recent years, the growing politicization of reporting and analysis of data had already undermined its credibility and diminished its value to international investors. ”

The incident also highlights China’s growing willingness to influence international organizations such as the World Bank and the World Health Organization.

“China clearly does not hesitate to use its growing influence in international organizations to control the discourse on its economy and the political choices of its government,” said Prasad. “For international institutions trying to stay relevant in a rapidly changing world, keeping a large shareholder like China can sometimes trump more objective analytical considerations. “

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AP Economics writer Martin Crutsinger contributed to this report.


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