Some central questions in international development are how to measure progress, make sound cross-country comparisons, and build the case for political and economic reforms. Multilateral institutions such as the World Bank play the role of repositories of credible, accessible, and up-to-date information that serves as an international benchmark for progress. Access to information is the basis for evidence-based policymaking and can serve as a catalyst for necessary reforms.
The World Bank recently convened a conference to present research around its Doing Business index at my alma mater Georgetown University. The keynote speaker, Tim Besley of the London School of Economics, discussed the importance of World Bank data that is publicly available and internationally recognized as a reliable source of evidence-based policymaking.
The Doing Business Survey focuses on two main sets of indicators: regulations and legal institutions. The regulation indicators are the number of procedures, time, and cost involved in starting a business, to obtain a construction permit, getting access to electricity, registering property, paying taxes, and the ability to trade across international borders.
The second bucket of indicators is related to the strength of legal institutions including ease of obtaining credit, the legal provisions to protect investors, as well as the ability of businesses to enforce contracts through the judicial system, and the time and cost for businesses to resolve insolvency. These indicators point to the centrality of the political and legal institutions in a given country, which determine the strength and effectiveness of the state and in turn the business climate. While states can enact business friendly policies, the key is in the enforcement of these policies, which is determined by a state’s institutional capacity.
The centrality of political and legal institutions is highlighted in the research presented at the conference. Using data from the subnational level in Italy, Francesco Bripi of the Bank of Italy showed that reducing the regulatory burden for business in terms of cost and time leads to a significantly higher entry rate of new firms.
Leora Klapper of the World Bank echoed the importance of efficient institutions to the ability of entrepreneurs to swiftly react to opportunities in the economy. In her research, Klapper showed that countries with higher levels of financial development and a better business environment allowed entrepreneurs to start new businesses when the economy is booming and to quickly withdraw during an economic slump. On the other hand, countries with less developed financial systems rob entrepreneurs of flexibility to swiftly react to market forces. Limited access to credit and the absence of investor protections and bankruptcy legislation curtail entrepreneurial activity. Furthermore, better regulations enable countries to overcome high levels of unemployment in the long term.
Bob Rijkers of the World Bank looked at historical data on countries experiencing significant levels of unemployment and their ability to overcome joblessness. He terms these countries “economic miracles” and defines their success as “swift, significant and sustainable reductions in unemployment.” From a policy perspective this means that reducing unemployment and generating jobs is based on sound regulation with “contract enforcement and the security of property rights” at the core of the strategy.
The value of the Doing Business survey is that it highlights the centrality of political and legal institutions to creating a sound business environment, contributing to economic growth and job creation. Ultimately, these factors will enable countries to escape from the poverty trap and get on the road of economic development. The survey rankings allow leaders, civil society, and national governments to identify challenges, recommend targeted economic and political reforms and pursue evidence-based policymaking.
Over the past 30 years, CIPE’s work has advocated for systemic change that addresses a myriad of challenges through democratic and economic reforms around the world. The centrality of political and legal institutions is at the heart of the development work we do.
Teodora Mihaylova is a Research Assistant at CIPE.