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In News
- Recently, the World Bank Group scrapped its flagship publication, the ‘Doing Business’ report.
- This report published the influential annual ranking of countries on the Ease of Doing Business (EDB) index.
Why was the Publication Scrapped?
- The Group acted on its commissioned study to examine the ethical issues flagged in preparing the 2018 and 2020 editions of the EDB index.
- The allegation surrounding Kristalina Georgieva, MD of the IMF and former CEO of World Bank, is the proximate reason for scrapping the publication.
- She is accused of having exerted pressure on the internal team working on the Doing Business report to falsely boost China’s rank by doctoring the underlying data.
- Similarly, tensions were also reportedly brought to bear in the case of Saudi Arabia’s rank, among others.
Importance of The Ease of Doing Business Report
- Indicator of Business Friendly Policies:
- Many countries showcase improved ranking to signal market-friendly policies to attract foreign investments.
- This helps nations to measure domestic policies against global “best practices” and browbeat domestic critics.
- Prime Minister Narendra Modi, for instance, wanted his administration to ensure that India breaks into the top 50 ranks of the EDB index.
- Ranks countries by the simplicity of rules framed for setting up and conducting businesses:
- Peruvian economist Hernando De Soto’s theory underpins the index.
- The theory claims that secure property rights with minimal state interventions are a precondition for a free market to flourish.
- Taken as a tool for success of Economic Policies:
- India ranked low, around 130-140, till 2014.
- However, it zoomed to the 63rd position in 2019-20 (see figure attached below).
- Showcasing the accomplishment, India has claimed success of the ‘Make in India’ campaign.
Source: TH
Make in India
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Criticism
- A mere tool to polish International Image
- Some countries seem to use their political heft to improve their rank, polish their international image and sway public opinion (as appears to be China’s case).
- Its focuses on Statutes rather than Real Practices:
- Management consultants and corporate lawyers collect the information for the index as per the statute (de jure) and not as practised (de facto).
- As per the data shown in the figure above, Make in India was not that successful.
- Annual growth rate in GDP manufacturing (at constant prices) fell from 13.1% in 2015-16 to 2.4% in 2019-20.
- The Net FDI inflow to GDP ratio has fluctuated around 1.5%.
- The fixed investment to GDP ratio (at current prices) fell from 30.1% in 2014-15 to 26.9% in 2019-20.
- Limited sample Size and Data
- The data collected is from select cities and larger firms, which is a great limitation.
- No Proper correlation between Property Rights and Market Economy.
- There are different counterexamples of basic assumptions of Soto’s theory that Property rights are constraints to the Market economy.
- Eg. China’s phenomenal economic success, especially its agricultural performance (after the reforms in 1978).
- There are different counterexamples of basic assumptions of Soto’s theory that Property rights are constraints to the Market economy.
- EDB index also seems vulnerable to a tweaking of the underlying method.
- India’s improved ranking was reportedly an outcome of such an effort.
- When the index was re-estimated with unchanging procedures, the needle hardly moved.
- Similarly, Chile’s rank on the EDB index sharply rose when the conservative government was in power.
- And it went down when the socialists were ruling despite no changes in policies and procedures.
- Later, Former World Bank Chief Economist, and later Nobel Laureate, Paul Romer, publicly apologised to Chile’s socialist President for this.
- India’s improved ranking was reportedly an outcome of such an effort.
- Weakening labour regulations
- India tried to adopt the free market ideal of ‘hire and fire’.
- Most States have emulated Maharashtra’s lead of
- toothless labour laws,
- dismantled official labour inspection systems
- allowing employers to file self-regulation reports.
- Most States have emulated Maharashtra’s lead of
- More breach than the compliance of Safety norms was reported after Third-party Private body certification in Safety was allowed
- Prior Information Inspection by the Labour Department rendered it of almost no use.
- India tried to adopt the free market ideal of ‘hire and fire’.
Way Ahead
- What matters is economic incentives.
- The economic principles are not universal and have different applications under different circumstances.
- Eg. Chinese Reforms in 1978.
- So, the Ease of Doing Business report needs to check its underlying principles.
- Remove the bias for Free Market Ideal
- Being Balanced between welfare and laissez-faire can be the key to success.
Source: TH
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