Under fire, World Bank’s ease of doing business revamped to BEEP, but…

The World Bank’s Doing Business Project (DBP), one of the most influential and also highly controversial, would soon reappear in a new form, called Business Enabling Environment Project (BEEP). The bank released a pre-concept note on it on February 4, 2022 for comments, more than a month before its investigations into the corruption in DBP was complete and made public (on March 15, 2022).

The DBP was junked in September 2021 with the bank saying that it had internally found “data irregularities” in Doing Business 2018 and 2020 and ethical issues, including “the conduct of former Board officials as well as current and/or former Bank staff”.

The objective of BEEP remains the same. The pre-concept note says “the objective of this benchmarking exercise is to provide a quantitative assessment of the business environment for private sector development” with some tweaking in its methodologies “to strike better balances as a business environment assessment, as recommended by the External Panel Review”. It defines “private sector development” by three characteristics: “It promotes economic growth through innovation and entrepreneurship; it increases equality of opportunities among market participants; and it ensures the general sustainability of the economy in the long term.”

Like the DBP, BEEP would also be an annual affair and will cover most economies.

Premature Concept of BEEP

The pre-concept note on BEEP has already caused concern for several reasons.

The first is its premature conception. The bank’s investigations into the corruptions in DBP was released on March 15, 2022, which makes some scathing comments about the way it was carried out. Three in particular ones stand out:

· “DB reports have made many claims for the benefits of measured country reforms that go beyond rigorous or replicated evidence. By favouring supportive evidence and by not establishing strong criteria for filtering evidence, the reports open the door for critics of their objectivity and accuracy, posing a reputational risk to the World Bank Group and potentially misleading clients and stakeholders.”

· “(DB) Indicators suffer from inadequate feedback loops from research and field experience to their design and application.”

· “Consistent with good practice, the World Bank Group should avoid using DB indicators as explicit reform objectives or monitoring indicators in projects and country strategies and, where their use is unavoidable, should not use DB as primary indicators of reform progress.”

Second, the Tax Justice Network (TJN), a global coalition of researchers and activists fighting against tax avoidance and tax havens, has raised several red flags over the BEEP. It says:

(i) “There is no rationale given to prioritise an environment that enables business – as opposed, to, for example, an environment that enables the reduction of inequality; an environment conducive to decent work conditions; an environment that enables the full achievement of human rights; or an environment that enables biodiversity and the necessary mitigation of the climate crisis.”

(ii) “The full extent of the argument appears to be that offered in figure 1 (“Twofold Purpose towards Private Sector Development”), in which an arrow labelled ‘Private sector development’ passes through points marked ‘Growth’, ‘Equality of opportunity’ and ‘Sustainability’. We are unaware of any causal relationships of this sort, and the paper does not propose their existence.”

(iii) About taxation, the BEEP seeks to retain the low tax regime advocated by the DBP by acknowledging that tax adds to “regulatory burden” of individual firms, although unlike the DBP it recognises that there may be “trade-offs” (positive impact) on the economy. However, the focus remains “narrow” as “none of the tax indicators, for example, reward the kind of transparency measures that can strengthen public accountability – most obviously, public country by country reporting for multinationals (even in the aggregate), to put their tax behaviour on a level playing field with that of domestic firms filing public accounts.”

This country by country (CbyC) reporting is a significant element of the OECD-G20’s Inclusive Framework on BEPS (Base Erosion and Profit Shifting) of 2012, an initiative aimed at cutting down tax evasion and avoidance by multinationals. The BEPS estimates that $240 billion is lost to tax avoidance by multinationals every year by shifting revenues and profits to tax havens (zero or near zero tax jurisdictions) like British Virgin Islands, Cayman Islands, Bermuda, the Netherlands, Switzerland, Luxemburg, Jersey, Cyprus, Singapore, Mauritius etc., for the purpose of which shell companies are extensively used. The TJN’s own estimates show $312 billion is lost to tax evasion and avoidance annually.

As part of the BEPS initiative, the U.S. treasury proposed a global minimum corporate tax of 15% on multinationals last year — below 21% minimum it was seeking on foreign profits of US-based multinationals – so as to be more acceptable to the OCED-G20 countries and about 100 other associate countries which are signatories to the BEPS.

India too is a signatory to the BEPS. Interestingly, 80% or more of of India’s FDI inflows and outflows are routed through these tax havens raising questions about round-tripping and tax avoidance.

India’s dramatic rise in DB rankings

When the DBP was junked by the World Bank, the immediate corruption allegations were specifically about data manipulations for four countries — China, Azerbaijan, Saudi Arabia and the UAE — by the bank’s executives. In the case of Azerbaijan, its rank was manipulated downward, while those of the other three pushed upward.

But there were other countries too which were subject to such manipulations. For example, in 2018, the bank’s chief economic advisor and Nobel laureate (2018) Paul Romer had apologised to Chile for a data manipulation to mark a decline in its DB ranking which he described as “conveyed the wrong impression” about the business environment in Chile. He resigned from his position the same year.

India’s name didn’t figure but concerns remain.

India’s ranking skyrocketed after 2014 in the DB ranking. From 142 for the year 2014 its ranking jumped to 63 for the year 2019 (among about 190 countries) and then came the shocker from the World Bank that it was junking the DBP.

Higher the rank, the better a country is considered for ease of doing business.

A part of the secret of India’s dramatic improvement in ranking came in October 2017 — the year India’s rank jumped from 130 to 100, accompanied with loud cheers from the Indian government. That was the post-demonetisation and post-GST economic disruptions (twin shocks that began the process of derailing the economy).

When questioned closely by a national daily, Junaid Ahmad, the Country Director for the World Bank in India, said the underlying DBP’s data for India (in its October 2017 ranking) didn’t capture demonetisation and GST. His explanation: “Our set of indicators don’t capture everything. Demonetisation and other factors are not captured in our set of indicators. We are very precise because we do a comparison across 190 countries.” Ahmed said the impact of these developments would be captured in the next year’s ranking. Talking specifically about the GST, however, he said: “I don’t think we can predict (India’s rank in the) next year or the year after that. It all depends on how the government continues to persevere in its implementation.”

The next two years saw India’s rank jump further up, from 100 to 77 in 2018 and 63 in 2019. This was when the economic slowdown continued and businesses, particularly MSMEs were badly hit.

Why does World Bank get it wrong?

The best explanation came from economists Devesh Kapur and Arvind Subramanian. In October 2021, they elaborated on it which needs to be read in some details for better understanding of the multiple factors at play.

They wrote: “Something is rotten on 19th Street in Washington DC. And on both its sides, occupied by the Bretton Woods institutions, the World Bank (Bank) and International Monetary Fund (IMF), respectively. As evidence, consider the following roll-call of individuals and ask what is common to them: Paul Wolfowitz, Jim-Kim, David Malpass, Rodrigo Rato, Dominique-Strauss Kahn, Christine Lagarde, and Kristalina Georgieva.

“The obvious one is that they are seven of the eight most recent heads of the Bank and IMF. The second commonality is that they have all become heads via a dual monopoly selection procedure: Only an American can head the Bank and only a European can head the IMF. That is the result of a long-standing arrangement among the western powers to share the spoils.

“The third commonality is that the personal integrity of each of them has been called into question, the most recent being the revelations of malfeasance at the World Bank where data was apparently massaged to make at least two major countries — China and Saudi Arabia — look better than they would otherwise have been. Liberals and conservatives are converting this into a battle of political interests, cherry-picking the evidence, when in fact what is at stake is integrity, not ideology, as Justin Sandefur of the Center for Global Development has carefully documented recently. Indeed, both Democrat and Republican administrations in the U.S. and their counterparts in Europe have been complicit in that roll-call.”

As the statement demonstrates, replacing DBP with BEEP may not really change much until the underlying problems are fixed.

Kapur and Subramanian had flagged other aspects of the World Bank’s functioning in an earlier article in 2018. In the context of the Latin America’s debt crisis, they wrote how “…through its structural-adjustment lending, the World Bank, along with the International Monetary Fund, effectively became a debt collector for creditors”.

This wasn’t an isolated instance. They listed several episodes involving the bank and observed: “This is not just some oversight; during all of these episodes, the Bank knew that its responsibility was to act as an advocate for its poor clients. Instead, it decided — every time — to kowtow to its most powerful shareholders and their vested interests (such as Big Pharma and the financial industry), arguably in exchange for additional resources for its soft-loan window (the International Development Association) and, less frequently, capital increases for the International Bank for Reconstruction and Development (IBRD) and International Finance Corporation.”

Add the concerns the issues of corruptions and personal integrity of the people heading the bank (and the IMF), the overall picture is not very encouraging.

Then there is another aspect to the bank’s functioning.

The World Bank “remains firmly committed to advancing the role of the private sector in development”, said its 2021 statement announcing the shutting down of DBP. Its 2022 note on BEEP says the “objective” is again private sector development, although its “twin goals” are “eliminating poverty and boosting shared prosperity”.

But as the TJN’s analysis of the BEEP mentioned, neither does the World Bank explain nor does it acknowledge the “causal” relation between private sector development on the one hand and ‘growth’, ‘equality of opportunity’ and ‘sustainability’ on the other that its pre-concept note presents in a graph. The TJN declares that it is “unaware of any causal relationships of this sort”.

Here is yet another.

The pre-concept note on BEEP doesn’t even mention inequality, let alone worry about its sharp rise (surge of wealth to the top 1% or 0.1%) in the post-World Bank-IMF push for neo-liberal economics (promoting private business interests through deregulation, privatisation and free capital flow etc.), starting with 1980s’ structural adjustment programme (SAP) when poor countries approached them for loans. Economist Thomas Piketty and his colleagues have produced a series of studies in the past few years to demonstrate a direct link between a sharp rise in inequality and the neoliberal economic push globally by World Bank-IMF, including India.

This is, however, not to suggest that the World Bank-IMF’s neoliberal push for private sector has not done any good. It has. India, for example, registered a quantum jump in economic growth after the 1991 liberalisation (at the behest of these institutions), lifting millions out of the poverty in the process, until the twin shocks of demonetisation (2016) and GST (2017) derailed the economy. Opening up international trade and free capital flows have benefited many other countries too, notwithstanding many flaws and failings.

The point is, prudence demands adequate caution and close examination when the World Bank rolls out the DBP in its new avatar as BEEP.