Economic Research Forum (ERF)

Going beyond Doing Business to foster job creation

The World Bank’s Doing Business rankings provide a useful benchmark, but making them a key policy goal is inappropriate for Arab countries where the reform agenda needs to be far more wide-ranging. This column argues for a more practical and effective approach to creating business environments that will attract investment and foster job creation.

In a nutshell

A better performance in the World Bank’s annual Doing Business rankings is thought to attract job-creating investment.

Such a policy goal is insufficient to foster investment and job creation in Arab countries.

Arab policy-makers need to embrace a broader approach – one that includes structural reforms to reduce business-government transaction costs, enhance competitiveness and increase investment returns.

Policy-makers in Arab countries should not rely solely on the World Bank’s Doing Business rankings to improve the business environment and foster investment and job creation. Informative as it is, as an analytical instrument, Doing Business is not enough to capture the ground-level complexities of the economic environment in most Arab countries (Haidar and Larbi, 2016).

What Doing Business rankings do and do not measure

The key issue is what the rankings do and do not measure. First, Doing Business treats all indicators as if they were equally important in all sectors. The indicators neither cover all aspects of the costs of doing business nor factor in issues specific to individual countries. Moreover, most of the indicators are one-time or infrequent occurrences – such as construction permits or business registrations – and do not capture the daily hurdles and associated costs that businesses face.

Second, Doing Business does not look into the reasons behind the poor performance of a country on a given indicator. Poor performance may be due to policies or regulations and can stem from low capacities and deficient practices of implementing agencies. In the latter case, Doing Business fails to capture the administrative practices and complex procedures applied on the ground.

For example, rampant corruption and lack of accountability increase the cost of doing business even when regulations are streamlined and theoretically easy to comply with. While Doing Business indicators may provide a good assessment of certain regulatory frameworks, they do not show how they function in practice or why they might be dysfunctional.

Third, Doing Business does not capture many relevant dimensions of the business environment in Arab countries. For example, if enterprises lack access to formal credit, the efficiency of the credit registry might not be relevant. Similarly, if a large numbers of enterprises are not in the formal sector (30-50% in most Arab countries), they do not have access to finance or to the formal court system for contract enforcement.

Fourth, Doing Business does not take account of major institutional factors, such as political stability, social tensions and rule of law. Likewise, macroeconomic and monetary policies are key factors for the business environment, but they do not feature in the Doing Business indicators.

Fifth, the Doing Business rankings are relative. If a country improves its business environment, it will only move up the ranking if it improves more than other countries. Similarly, a country can maintain or improve its ranking if other countries fall behind in terms of certain business regulations.

Going beyond Doing Business rankings

Policy-makers need to go beyond Doing Business rankings to inform policy debates about job creation. They need to formulate more comprehensive structural reforms in support of doing business not only at the entry point, but also throughout the lifecycle of enterprises.

Doing Business rankings work well as a catalyst for competition among countries and policy debates in support of enhancing private sector development. But such rankings should be used with caution. Indeed, it is common – but almost never wise – to think that the goal of policy should be to improve countries’ Doing Business rankings.

For example, to measure the difficulty of dealing with licences, Doing Business examines the burden of obtaining a construction permit to build a warehouse. But depending on the type of business, the operation of the warehouse may require several other licences and permits that may be more or less easy to obtain but not covered by Doing Business indicators. Typically, countries that regard raising their ranking as an important key policy goal may not see the need to improve licensing procedures in other areas not covered by the Doing Business.

Arab policy-makers should use the Doing Business indicators after understanding what they do and do not measure. One way to use them productively is to call on complementary analytical work. This might include investment climate assessments (more comprehensive firm surveys), country policy reviews (carried out by countries themselves and/or development agencies), and country diagnostic assessments (a product recently developed by the World Bank). The goal would be to identify constraints on investment, firm growth and job creation.

In other words, Doing Business rankings should be considered complementary, helping either to target or guide some of the reforms aiming at improving the business environment of a country. For example, a long bureaucratic delay to register a new business is an important indicator of the need to improve the business entry process.

But the policy reform should go beyond reducing the registration paper work or improving the administrative process. Access to finance, availability of ready space to occupy or developed land for new construction, as well as institutional support for new start-ups and other incentives, should be considered if policy-makers want to improve the business environment in a sustainable manner.

The Doing Business rank-improvement approach is best treated as part of a broader set of tools that policy-makers can use to reform public institutions. The soundness of this approach is supported by recent research on the effects of improving the business environment and institutional frameworks. There is a growing consensus that the quality of business regulation and the institutions that enforce it are major determinants of economic prosperity – see, for example, Haidar, (2009, 2012).

That said, a full assessment of the business environment faced by enterprises in a specific country should go beyond cross-country comparisons of Doing Business indicators and firm-level assessments. It needs to be more inclusive in terms of policy areas that directly or indirectly affect the quality of the business environment over time.

For example, the following areas are also important for investment decisions and thus for the business environment: the quality of human capital and skills; access to finance, especially for small and medium-sized enterprises (SMEs); the quality of infrastructure services; and logistics and cross-border trade facilitation.

Last but not least, another key policy concern for Arab countries is the growth of obstacles facing firms, especially SMEs. Most new firms either disappear after a few years of operation or remain small with at most one or two employees. Only a tiny proportion of firms move up the scale to become medium or large firms. Doing Business does not cover this issue, but addressing the root causes of the lack of growth of existing and new SMEs should constitute another priority reform.

Further reading

Haidar, Jamal Ibrahim (2009) ‘Protecting Investors and Economic Growth’, Economics Letters 103:1-4.

Haidar, Jamal Ibrahim (2012) ‘The Impact of Business Regulatory Reforms on Economic Growth’, Journal of the Japanese and International Economies 26: 285-307.

Haidar, Jamal Ibrahim, and Hedi Larbi (2016) ‘Going Beyond Doing Business to Foster Job Creation in Arab Countries’, ERF Policy Brief No. 7.

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