World Bank suspends its business climate index over data ‘irregularities’

The World Bank has suspended the publication of its global business climate index after identifying “irregularities” in its data that may have affected the ranking of four countries, including Saudi Arabia and China.

The annual Doing Business report, launched in 2002, has become an influential global metric to assess the business environment and relative competitiveness of countries. High rankings are prized by governments seeking to attract investment and a motivation for policymakers to improve conditions for business. A country moving up in the rankings tends to boost foreign direct investment.

“A number of irregularities have been reported regarding changes to the data in the Doing Business 2018 and Doing Business 2020 reports,” the World Bank said in a statement.

In response, the multilateral lender said it needed to conduct a “systematic review” of the last five such reports and had halted the publication of future ones until that process was complete. “We will act based on the findings and will retrospectively correct the data of countries that were most affected by the irregularities,” it said.

“This is a huge admission by the World Bank with far-reaching implications,” said January Makamba, a member of parliament and former deputy minister in Tanzania. “A lot of policy recommendations and prescriptions, and judgment[s] on FDI direction . . . in developing countries have been based on this report,” he added on Twitter.

The four countries most affected by the irregularities in the 2020 and 2018 reports, were China, Saudi Arabia, the United Arab Emirates and Azerbaijan, the World Bank said.

Saudi Arabia recorded the greatest improvement in its business ranking in the 2020 report, rising to position 62 from 91 the previous year. China was also among the top 10 most improved business environments in 2020, rising to number 31 from 46.

The Doing Business report has come under scrutiny before. In 2018, Paul Romer, the World Bank’s chief economist, resigned after alleging in a media interview that Chile’s ranking, which dropped from 34 in 2014 to 55 in 2018, may have been deliberately skewed by World Bank staff ideologically opposed to Chilean president Michelle Bachelet’s socialist government.

Conversely, in the 2018 report, India jumped to position 100 from 130 the year before, in a move celebrated by the World Bank but challenged by some academics, including Justin Sandefur at the Center for Global Development, a US think-tank. Following Mr Romer’s resignation, Mr Sandefur raised questions over India’s performance, arguing that the large improvement was based on a change in World Bank methodology and not an equivalent change in the business environment.

But data integrity was not the only problem with ranking countries in this way, according to Carlos Lopes, a professor of economics at the University of Cape Town and the former head of the United Nations Economic Commission for Africa. The global investor focus on the index had encouraged countries to prioritise creating low-tax, low-regulation environments, sometimes at the expense of macroeconomic considerations, he said.

“It makes countries compete into some sort of race to the bottom against the expectation that they will be rewarded with more FDI when in fact what matters most for investors is stability, predictability and regulatory clarity,” he added.

He noted that the World Bank had adjusted its methodology over time in response to previous pressure but said the index remained flawed. “As recognised by the recent decision, we are not yet there,” he said.

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