In the overall scheme of things, the World Bank’s Ease of Doing Business (and other such indices) don’t seem to be terribly important. As long as you don’t go full retard on such matters and adopt Soviet-style central planning, or something like that, then you should do just fine as long as your human capital/national IQ is up to scratch. Just compare Chile and China: The former radically liberalized under the late Pinochet; the latter still exercises capital controls, with layers of bureaucracy and prevalent state ownership. But China, with human capital indicators approximately one standard deviation higher than Chile’s, has been growing at 10% for more than three decades, while Chile remains in the middle-income trap.
That said, there are good reasons for paying attention to them too.
First, elites pay a lot of attention to it. Several countries – including Russia, Kazakhstan, and India – have made climbing up the Doing Business rankings a matter of national economic planning.
Second, all else equal, more economic freedom really is “better” than less economic freedom. You do not need to be some kind of neoliberal hypercapitalist to appreciate that having more layers of bureaucracy, more hops you need to jump through to start a business or enforce a contract, as benefitting anyone other than the bureaucrats who create these rules in the first place. Indeed, when adjusted for differing GDP per capita levels, there is a strong correlation between a country’s place on the Doing Business rankings and its reported incidences of bribery/corruption, presumably because the more regulations you have the more opportunities bureaucrats have to shake businesses down.
Finally, one presumes that “kleptocracies” – i.e., what the Putin regime is frequently characterized as by Western officials and the media – will be unwilling to cut down on regulations because it is “built on corruption” and similar rhetoric. But instead we are seeing the precise opposite across multiple objective indicators of corruption, with the Doing Business rankings being just a case in point.
First off, here is Russia’s percentile performance on the Ease of Doing Business rankings since the World Bank began doing them. (Each report refers to the year beforehand, so the most recent report, Doing Business 2016, refers to the situation as of this year). Relative to other countries – and in general, the world has been improving fast this past decade in this respect – Russia went down under the second Putin administration. The Medvedev administration, for all its reformist rhetoric, made no appreciable gains. Only under the current administration has Russia surged ahead to 51st place this year, ahead of the vast majority of non-OECD nations. (Though ironically, at the same time, its growth rate has plummeted, which just goes to further show that in the large scheme of things, institutions aren’t that big of a deal).
A more useful way of looking at this, which also enables both cross-country and temporal comparisons, is to look at the Distance to Frontier index – i.e., how far any particular country lags from the “optimal” level of ease of doing business at any particular year.
Russia and the Ex-USSR
Thoughout the ex-USSR, business conditions have improved significantly in the past few years, to the extent that Russia, Kazakhstan, and – yes – Belarus as now close to the level of the much-lauded Baltics in the late 2000s. Contrary to Maidanist rhetoric, it also seems that Ukraine under Yanukovych made big leaps forwards, only for progress to come to a grinding halt under the pro-European and “reformist” Maidan regime. Let it sink in that it is and long has been much easier to do business in “statist” Belarus under Europe’s “last dictator” than it has been in the pro-Western failed state of Ukraine.
Russia and BRICS
From being middling amongst the BRICS, Russia has surged to the forefront. Note that Russia’s low position on the Ease of Doing Business index has at times been given as a reason to kick it out of BRICS (no matter that Brazil and India always did worse).
Russia and East-Central Europe
From lagging the Visegrad bloc of countries a few years back, Russia has more or less merged into them.
Russia and the West
And has even merged with some Western countries – primarily the more traditionally more corrupt ones along the Eastern Med such as Italy, Greece, and Israel – but still. Point is – no longer is Russia an outlier in terms of ease of doing business even relative to the fully developed world.
Not surprisingly, many people are not very happy about these developments. Bloomberg’s Leonid Bershidsky, normally one of the better anti-Putin journalists:
For some governments, improving their country’s standing in the World Bank’s Doing Business survey has become a national priority. Yet the results of such efforts sometimes are deceptive.
That’s because the annual ranking of business friendliness of regulatory systems isn’t based on surveys of businesses. Instead, it analyzes regulations and regulatory change, and awards points for pro-business measures and takes them away for anti-business ones. In practice, that means rating government policies without considering their real effect. It’s a ranking of institutional good intentions, which explains why so many politicians swear by it.
The fact that it is not based on surveys of perceptions picked by mysterious methods and accountable to nobody is its very point and what makes it objective in the first place! (And I’m not just saying this now that Russia is performing quite well on it. I was saying the same thing in 2008 back when Russia’s position on the Doing Business rankings was nothing to write home about).
Unlike, say, Transparency International’s Corruption Perceptions Index, which is what Bershidsky from the sounds of it basically wants to copy in relation to Doing Business:
As I explained in previous posts on this blog, it suffers from numerous flaws. Part of it has to do with its questionable methodology: using changing mixes of different surveys to gauge a fluid, opaque-by-definition social phenomenon. Another is its reliance on its appeal to authority, the theory being that “experts” in business and think-tanks know more about corruption relative to anyone else. Countries with more regulations are systematically prejudged, as are those facing hostile media environments such as Russia or Venezuela. Above all, the CPI doesn’t pass the face validity test – in other words, many of its results are frankly ludicrous. Is it truly plausible that Russia (2.1) is as corrupt as failed states like Zimbabwe (2.4) or D.R. Congo (2.0), or that Italy (3.9) is more corrupt than Saudi Arabia (4.7) which is a feudalistic monarchy!?
… Russia jumped in the charts thanks to four innovations: It cut the number of days required for a new company to open a bank account and register property, cut property taxes and simplified the process of obtaining an electricity connection.
These hardly seem substantial improvements, compared with the danger of losing property to powerful and thoroughly corrupt law enforcement agencies and bureaucrats, the risks imposed by Putin’s external aggression, and the country’s shrinking economy and decayed infrastructure. It’s not for nothing that Russia is 143rd out of 152 nations in the Heritage Foundation’s latest Index of Economic Freedom.
Bershidsky translated: It’s showing the wrong results shut it down let me and Anders Aslund compile it instead.
More general theme: Whenever Russia’s scores on such indices begin to unfathomly climb a bit too high for comfort, there are inevitably calls for them to be erased and replaced with other indices.
This is a familiar phenomenon. For instance, when Transparency International’s Global Corruption Barometer 2013 appeared to indicate that incidences of bribery had recently plummeted in Russia to levels resembling those of the more corrupt First World nations (as opposed to typical levels of other middle-income countries) they opted to not release them at all due to not having “confidence in the reliability of the data.”
UPDATE: Alexander Mercouris has produced an article on the Doing Business rankings that basically confirms the points made here but with more in the way of personal experience.
If Russia’s rapid rise in the World Bank’s ease of doing business rankings tells us that – for all its problems – Russia cannot be the corrupt kleptocratic oligarchy of Western fantasy, it also tells us two other things.
The first is – as I said at the beginning of this article – that the demand for more and more “reforms” simply ignores the fact that reforms are in fact being carried out.
Anyone who reads through the World Bank’s annual surveys will see that they are all about “reforms”. It is precisely because Russia is carrying out “reforms” that its ranking is rising so fast.
To be clear, modernising the court system, introducing a new bankruptcy law, simplifying procedures for connecting to the electricity supply, and passing laws on registering property and on administering bankruptcy, are reforms.
They may lack the drama of breaking up Gazprom, but academic research, historical experience and the World Bank all say the same thing: it is these sort of unexciting reforms that in the end are the ones that make a difference and which produce results.
In other words Russia is reforming, and it is doing so successfully, in a methodical and purposeful way.
The second point is that if one looks at what sort of countries now outrank Russia in the survey, it turns out that they are – broadly speaking – the three Asian industrial giants: Japan, Taiwan and South Korea, the two Asian city states of Hong Kong and Singapore, and the traditional and well established industrialised societies of the West: the US, the three rich countries of the British commonwealth (Canada, Australia and New Zealand) and most (though not all) the states of the EU – in sum what was once called “the first world”.
If one removes the one indicator where Russia scores especially badly, Trading Across Borders – for which there are special reasons (see above) – Russia becomes even more clearly aligned with these “first world” countries rather than with those countries that make up what used to be called “the third world”.
The Russian government’s target is to achieve 20th place in the World Bank’s ease of doing business survey by 2018. That may be too optimistic, though it is worth pointing out that the target for this year was 50th, which Russia only missed by one place.