Deciding Where To Do Business

Our story starts in Lima, Peru in 1983. After spending 289 days getting the permits and approvals they needed to start a small business, a group of researchers publicized the results. They hoped to pressure government into becoming more efficient. Twenty years later, the World Bank adopted the idea. When anyone wanted to know how long it took to deal with construction permits or get electricity, they just went to that year’s “Doing Business” report from the World Bank. Chock full of data from approximately 190 nations, the document reduced business friendliness to one number and one rank that were based on 10 categories:

1. starting a business
2. dealing with construction permits
3. getting electricity
4. registering property
5. getting credit
6. protecting minority investors
7. paying taxes
8. trading across borders
9. enforcing contracts
10. resolving insolvency

But then in 2020 they had to abandon it.

A New Business Friendliness Index

The problem was the numbers. It turns out that some of the people calculating the ranking fudged the numbers. Acquiescing to pressure from countries that included China and Saudi Arabia, World Bank employees boosted certain evaluations.

Now, they’ve announced a replacement. Published on October 3, Business Ready (B-READY) is the new index.  When The Economist compared the two Indices, they cited a list of differences. At first it will cover 50 economies but soon build to 180. As for business size, big businesses will be added to the surveys of small and mid-size establishments. Also moving in a different direction, new metrics will include “social benefits” like sustainability and workers’ rights. While they are grouped as “Regulatory Framework, and Operational Efficiency,” everywhere they thread digital adoption, environmental sustainability, and gender. As they explain, the goal is not only to score a regulatory environment but also to consider the quality of those regulations. The result is close to 2,000 data points for each economy, 10 topic scores, and 3 pillar scores.

Some said that the “Doing Business” report was mostly talking about the regulatory business climate.

But now there is much more:

Our Bottom Line: Transaction Costs

Still though, the bottom line is transaction costs.

Defined as the time, energy and effort it takes to complete a task, a transaction cost can include the number of forms you fill out to register property or to get a loan. It can involve the regulatory procedures that precede a construction project or opening a restaurant. Like “Doing Business,” B-READY brings us to a business’s transaction costs through a business friendliness lens. But then it adds the qualitative dimension.

So yes, business friendliness comes down to transaction costs. I should add though that skimming the B-READY report involved a massive transaction cost. I suspect they did not remember that sometimes less is more.

My sources and more: I recommend taking a look at The Economist for more on the new World Bank business index. But the 212 page B-READY report was somewhat enlightening (and overwhelming). You also might go back to our post on “Doing Business.”

Please note that several of today’s sentences were in a previous econlife post.