Doing Business rating as an indicator of regulatory reform quality

Abstract

In 2014 Ukraine scored a significantly higher ranking in the World Bank Doing Business rating than ever before. But doubts were cast as to its capability to reflect objectively the quality of regulatory reform. Despite of the fact that DBʼs indexes have been widely publicized by the media, heavily promoted as performance scores and often used for motivating policy and defining “best practices”, its methodology really has significant drawbacks. Namely, the Starting Business index incurs five sets of failures:

1) Distorted reform priorities, as it only considers the costs incurred by entrepreneurs for the initial formalization of a company, disregarding all other costs, especially the value of such formalization services;

2) The exclusive focus on the ex ante cost of business formalization and mandatory procedures, which impedes considering the tradeoff between ex ante and ex post costs, including the reduction in future transaction and administrative costs;

3) Insensitivity to local specifics, as its emphasis on the average cost of a specific transaction (the incorporation of a mid-size, limited liability company) favors capital- intensive solutions;

4) Mistakes in evaluation and measurement distort judgment, as it repeatedly proclaims as successful reforms that are plain failures or exist only on paper (windowdressing reform);

5) Doing Businessʼ marketing promotes misguided reforms and rent-seeking.

To my opinion, the Doing Businessʼ ranking canʼt serve as a comprehensive indicator of the regulatory reform quality. It should be seen only as one of the many descriptors in a broad institutional context. Similarly, regulatory simplification shouldnʼt be seen as a substitute for a full-scale regulatory reform.