The ease of doing business indicator, known as EDB, is a system that ranks the regulatory environment in countries around the world. New research looks at how the World Bank’s ease of doing business index has amassed considerable influence over business regulations worldwide. The financial institution has succeeded in doing so even though it doesn’t have an explicit mandate over regulatory policy. The authors of the study are Beth Simmons, a professor at the University of Pennsylvania Law School and a legal studies and business ethics professor at Wharton, Judith G. Kelley, dean of the Sanford School of Public Policy at Duke University and Rush Doshi with the Brookings Institution. Simmons and Kelley recently joined Knowledge@Wharton to discuss their paper, “The Power of Ranking: The Ease of Doing Business Indicator and Global Regulatory Behavior.”
An edited transcript of the conversation follows.
Knowledge@Wharton: Where did you get the idea for this research?
Beth Simmons: The idea for doing this research came from looking at the world around us and noticing the ubiquity of phenomena that are rated and ranked all around the world. We are all very familiar with consumer products being rated. We are familiar with hospitals being rated, schools being rated. What really started to pique our interest was the fact that ratings and rankings have clearly made their way into public governance issues. Issues of the policies that states put in place affect people’s lives on a very broad scale.
Knowledge@Wharton: How much influence do these rankings have?
Judith Kelley: It varies greatly depending on the domain that these rankings are in. I think the World Bank ease of doing business indicator has been very successful in getting the attention of governments in the area of regulatory behavior. While there are certainly governments that don’t pay attention to it, there are many governments that have geared their policies towards moving up in the rankings, specifically. So, I do think it has been impactful for the bank.
Knowledge@Wharton: It’s probably helped some countries gain recognition they would not have had without this data, correct?
Kelley: That’s right. I do think that it provides a platform for a country like Singapore, which ranks really well, to thrust itself to the forefront of the attention. Other countries are seeing that and saying, “How do we compete? How do we play that game? How do we get up top?”
Simmons: …One thing that really got us interested about ratings and rankings in governance issues is the fact that they literally are proliferating in many, many different areas across the world. We did an inventory of trying to understand the spread or the growth of global performance indicators, and we were able to put together a database that just looks like it is exploding geometrically. These are specifically ratings and rankings that are targeted at states to try to influence their policies. The ease of doing business indicators is one of the best known, but I should say that economic indicators is the real growth area here.
It’s hard to exactly say how much of an influence they are having; it depends on how you want to measure this. But we can enumerate several ways in which we can see their impact pretty clearly. First, it’s really important to notice that the ease of doing business indicators have a tremendous market share. They have a big impact just on the information that people are looking at when they think of economic indicators for countries. The way that we can see this kind of influence is that states and their leaders clearly make statements that indicate that they intend to improve in the rankings. These get publicized around in the media, and it starts a bit of a frenzy of competition between leaders.
The second way that we noticed was a little bit more of a bureaucratic kind of development, that states literally have put into place new bureaucratic structures that respond specifically and directly to the reforms and the reform recommendations that the World Bank is asking for. So, countries have really structured their bureaucracies to respond to the ratings.
Knowledge@Wharton: Does the World Bank ease of doing business indicator also have an impact on politics?
Kelley: In the paper that we just published together, we have a case study on India, which we pulled out of an example of a prime minister who has concertedly used this ranking to promote a set of reforms domestically. He’s using it as a political tool even to the point to where he created some subnational indicators that mirrored this international ranking strategy. I think that leaders sometimes can use these ratings and rankings to drive some of their own policy priorities under the cover of a strategy to perform well internationally or the sense that there is an external pressure to do these things.
Knowledge@Wharton: Do you know from the work that you did if these global performance indicators are really one of the determining factors in policy change, or are they part of a larger process that these countries are undertaking?
Kelley: We have talked with folks inside the bank who are very passionate about what they do and believe that they are promoting a set of good policies. And we find that they report that they worked very closely with policymakers in these countries. What happens behind the scenes is really interesting. People within these bureaucracies that Beth just referred to established links to the agencies that are rating and ranking — in this case, the bank — and have backs-and-forth about advice, about how laws and regulations could be drafted differently so that they will move up the rankings, but also in a belief that this is a good thing.
On the ground, we won’t necessarily see a legislator going, “We’re now passing this particular thing because of the ranking.” I think it much more will be what happens behind the scenes — that is what this paper helps to uncover — but that is also what is really the powerfulness of it.
Knowledge@Wharton: Is there a possibility that the data can be molded to fit the narrative that a politician would like to achieve?
Simmons: Oh, that is very true. Sometimes these ratings and rankings are literally used to achieve policy objectives that particular government officials have in mind. That is one of the things we definitely noticed in the India case. But another thing I think is really important to stress is, what does it mean to be ranked and to be rated? To take every country from top to bottom, from the very best down to the very worst of something. That is really a lot of the theory behind why this indicator works. It’s not just that it’s the World Bank, although it’s important that it’s the World Bank. But it’s that the World Bank is using information in a very particular way.
We had a set of hypotheses about how ranking influences policymaking. One way is that when publics see the way their country has been ranked, this can be used as ammunition or as data for which to lobby, which to call for reforms. It’s like, “We can do better, we’re behind our major competitors on these important dimensions.”
In a survey we launched, we found that publics really do respond competitively to comparisons. When we told a set of respondents that their government was not performing as well as their major competitor — we were using China and India in this test — they were much more likely to say, “It’s crucial to respond to improving our ranks, and it’s crucial to improve our business climate.” Just varying that piece of information about how your competitor is doing itself can have a pretty strong effect.
Knowledge@Wharton: It’s that aspect of rivalry, just like in sports.
Simmons: Yes. It’s funny you should mention the sports analogy because the World Bank is very aware of that. In some of the older reports when they were implementing the ease of doing business indicators as a ranking exercise, they explicitly drew out the sports analogy and said, “Once you start keeping score, everybody wants to win.”
Knowledge@Wharton: Going back to what Beth was talking about, I would think it would negatively affect people to see their country fall outside of the top rankings?
Kelley: That’s right. Many of these rating and ranking systems that we have studied outside of the World Bank’s ranking system use these categories very explicitly so that countries will feel labeled, that they belong in a certain grouping. Think about the Freedom of the World report that would call countries free or unfree or partly free. Then you get these color-coded maps, and you were either green or red or an alarming color purple.
Countries respond, just like human beings, to this notion or this stigma that might be attached to being not only in a certain group, but also lumped with certain other countries that it is uncomfortable to be lumped with. But I want to pick up on this, because I think that when we talk about this whole ratings and rankings, the question is why now? Why are we seeing this explosion now?
The reason all of this is happening is the intersection we have found between our inherent status and comparison – things we respond to — with this new information environment that we live in today where people don’t have time to digest a lot of lengthy narratives and understand context. This simplified way of drawing out information helps people draw quick conclusions about things, and it comes to stand out in a way that it didn’t 30 years ago when we weren’t as inundated by information.
Knowledge@Wharton: Beth, your thoughts?
Simmons: I think that is very true. It seems to me that when people aren’t willing to read long, lengthy reviews, they follow these sorts of rules of thumb. Ranking is about the clearest rule of thumb you can land on. It is about the clearest way that you can say one country is a better bet than the other, and it is certainly a good way to get them to compete over the area of reputation with each other.
One thing that we also found interesting was that this is not just internal to the politics of a country, not internal to a country’s relationship with the World Bank, although it is both of those. But the ease of doing business indicators have a measurable impact on the attitudes of potential investors. One of the main linkages between being ranked and changing your regulatory policy is the anticipation that a high ranking is going to make it appear as though you are a better site for investment.
We did find some evidence to this effect, too. We were assisted here with the Wharton Behavioral Lab, and they helped us to recruit a set of investors. We put to them the question, comparing two countries, which one would you be more likely to recommend an investment in? We gave macroeconomic background, we gave some political background, we gave indications about growth, unemployment, other kinds of indicators for prospects of the future. The one thing that we altered was information about ranking. It turned out that that had a significant impact on the willingness of an investor to recommend a particular location for investment.
Knowledge@Wharton: You mentioned how the numbers of these global performance indicators have been increasing in recent years. How quickly are they increasing, and do you expect this trend to continue because of the influence they are having around the world?
Kelley: Exponentially is the right description. But I think it is important to distinguish the fluff from the really meaty ones. There are a lot of things that don’t get much attention at all. They are concerted efforts, but they just don’t rise at all to get any kind of attention. If we are just looking at the ones that are really gaining traction, then I don’t think the increase is as rapid.
The other thing we have seen in our database when we were just following it over time is that they are also dying. Organizations will undertake these for numerous reasons. They may undertake them because they truly want to impact the policy on the ground. They also might undertake them because it’s a branding tool for them, or it’s a way of getting attention to the issue. As these indicators proliferate in a certain issue area, competition emerges and not everybody survives.
In the long run, we might also start to see that there are so many different indicators and so many different issue areas that countries will simply feel saturated. They may even start to play some of these off of each other and say, “You know, we’re doing horribly on this ranking on human rights, but we’re doing great on these other rankings.” It is a fraught exercise in many ways, and its future is uncertain. But I think there will always be a handful of really strong ones that will have some traction as long as they can maintain credibility of their methodologies, be consistent and not start to cave to political pressures and such things.
Simmons: Judith is exactly right. It is very, very possible for these indicators to begin to clutter the information environment. The very thing that makes them attractive in the first place is how they provide clarity. But there is a lot of incentive to offer a counter indicator. If China doesn’t like the way that the bank rates the ease of doing business, they’ve got incentives to develop their own counter indicator and offer that as an alternative way of judging the quality of the regulatory environment in a country.
A lot of these global performance indicators are fluff in the sense that they come from very small organizations. But another thing that is really interesting is that, from the ones we were able to count, more than half of them come from organizations in the United States. And about 95% of them come from the very developed world. We are increasingly in a setting in which organizations that are centered in the global north are rating the rest of the world in some sense. And that creates something that we ought to be aware of as we assess going forward the effects of these indicators in a more normative vein.
Knowledge@Wharton: What do you believe with this growth of global performance indicators? There are benefits, but there are also negatives. Where do you think the greatest influence lies?
Kelley: To go back to the ease of doing business index, you can find several accounts of countries that were concertedly gaming the system to try to move up in the rankings. Georgia comes to mind. To the extent to which countries can figure out how to move up in a way that is rather empty when it comes to policies on the ground, that is a negative consequence because it is just spending energy on stuff that is meaningless.
If you take something like the ease of doing business index, there are winners and losers from choosing a regulatory or deregulatory framework to implement. Many of these are ideological contestations. What is the most prominent ranking in the world? In some ways you could rank GDP, right? This is one way of measuring prosperity in the world. Then you’ve got other indicators that come out and say, “Well, it’s really about people’s well-being, it’s about happiness, or it’s about sustainable prosperity,” or whatever. There are ideological bents or philosophies to each one of these. In the case of the bank, deregulation could harm the environment, it could harm workers. So, there are winners and losers from each of these perspectives.
Knowledge@Wharton: You are talking about creating a level of power within the country, within the government, that may not have been there a year ago, five years ago, 10 years ago.
Simmons: That is what our research does seem to suggest. It’s not that there wasn’t that kind of power in the government, it’s that it could not as easily have been wielded in such a clearly programmatic way. To your question about the normative impact of some of these ratings and rankings, one of the things we found interesting in the investor survey was that once you supply all of the macroeconomic evidence to the investor to get a sense of what they think about the site for investing, and then if you give a bad rating, it turns out they want to invest less.
Even though the economic essentials are held constant and you add a very negative rating, that can take away the investment enthusiasm that you otherwise might have gotten in the absence of that information. That is pretty sobering. It’s away from the fundamentals and towards a ranking system that the bank has produced. If that is broadly the case, and more research should be done on that question, then the bank giveth and the bank taketh away.
Knowledge@Wharton: With so many countries looking for that next great investment to be able to improve their infrastructure or economy, these reports are incredibly important to the process.
Simmons: I think that’s right. There has been other research that looks at the effect of this ranking system on investment, and they find a positive relationship. But every other study that we have come across takes the ranking as truth of the business environment and then just says, “So you see business environment matters for investment.”
We problematize that relationship by saying, “This may not be an accurate reflection of the business environment. Let’s control for other measurable things and see what the additional impact of simply changing this ranking could have on the willingness to invest.” We don’t want to assume that this is the business environment. It is a ranking system.
Knowledge@Wharton: Do you think people consume these reports and rankings with a grain of salt and understand that there are more factors at play?
Kelley: Unfortunately, I think that the common consumer does not pay attention to that. They don’t think about their methodology at all. While the bureaucrat may be very keenly tuned into this, they may not have the luxury of saying that because if the common understanding is that the country is falling behind, then the perceptions are often what really matters and what policymakers need to respond to.
But I want to not lose the positive aspects of this whole phenomenon. We are living in a world that is very interrelated. We are facing a lot of big global problems, and we have come to a point where we probably realize that using military force or even economic sanctions and such is not always getting us a lot of traction. The world isn’t going to be saved by these kinds of ratings and rankings, but we have seen ratings and rankings that have been able to do really positive things on the margins, like a transparency index that has gotten countries’ development agencies to be public about their aid budgets.
Or we talked about Freedom House before — reports that monitor, for example, media freedom in different countries. How many journalists are getting killed? These kinds of things that, while they are not going to save the world, are not very expensive to implement and get traction in a way that force might not be able to do.