The World Bank’s Simplistic Claims on Business Regulations and Inequality

The World Bank is once again using its flagship publication, Doing Business 2018, to make unfounded claims that more “business friendly” regulations are key to lowering income inequality.

This annual report ranks countries in terms of their “business-friendliness,” based on the World Bank’s assessment of regulations related to property registration, construction permits, taxes, and a number of other indicators.

In a review of last year’s edition, I pointed out that the World Bank asserted that weaker business regulation contributed to decreased inequality on the basis of correlation results for only two of the ten regulation categories for which it publishes indicators. The Bank declined to divulge results for the other eight categories.

This year’s 300-page report, released October 31, repeats the claimed connection between weaker regulations and less inequality by observing that the 20 countries receiving their best (i.e. most business-friendly) scores — almost all of which are advanced economies — have a lower Gini coefficient than the 20 countries that receive the worst scores.

Most countries in the latter group are torn by severe civil or political conflict. It includes Syria, DR Congo, Afghanistan, Central African Republic, Libya, Yemen, South Sudan, Venezuela, and Somalia. Leaving aside the fact that the state of chaos in most of these countries is such that the government is probably in no position to enforce any kind of regulation, it seems ludicrous for the Bank to imply that the only thing these conflict countries have to do to achieve more equal income distribution is to deregulate business.

The report makes similarly specious claims of an association between good Doing Business scores and growth of employment. It doesn’t bother to point out that lack of employment growth in Somalia may have more to do with the fact that the country has been in civil war for the past three decades than that Doing Business has given it the worst country rating.

Although Doing Business 2018 has been sub-titled “Reforming to Create Jobs,” the report acknowledges that the claimed association between these World Bank ratings and employment “cannot be interpreted in a causal fashion.” Despite this, it makes broad, unsubstantiated assertions about the benefits of its anti-regulation agenda similar to those it has been making over the 14 years that Doing Business has been published (DB 2018 is the fifteenth edition).

The 2018 report shows a shoddiness that one might have hoped would be corrected when the Bank’s 600-strong Development Economics Group assumed oversight of the publication four years ago. For example, it states: “Reforming in the area measured by Doing Business can be particularly beneficial to employment creation when those reforms take place in the areas of starting a business and labor market regulation.” A footnote provides three academic articles that are supposed to justify the assertion, but none of them deal in the slightest with labor regulations.

In 2009, when millions of workers were losing their jobs at the height of the Great Recession, Bank management decided to suspend an earlier Doing Business indicator on labor flexibility because of one-sided assertions about the benefits of labor market deregulation. (the World Bank continues to compile data on labor regulations and presents it in an annex to the report, but the data are not included in Doing Business scores or rankings.)

Since then, the Bank has made efforts to gain a deeper understanding of labor and employment issues and in 2013 devoted its annual World Development Report to the theme of “Jobs.” That report included an extensive review of economic research on the supposed negative impact of labor regulations on job creation that Doing Business repeatedly alleged. The World Development Report 2013 concluded that “most estimates of the impacts [of labor regulations] on employment levels tend to be insignificant or modest.”

Doing Business 2018 studiously ignores this finding and instead repeats the myth about the benefits of labor market deregulation. The labor regulation annex cites one study in support of its claim that “more flexible labor regulation could increase employment” — a ten-year-old World Bank staff paper titled “Are Labor Regulations Driving Computer Usage in India’s Retail Stores.”

The World Development Report on jobs also found that several labor regulations played a role in reducing income inequality. Research in several institutions is showing that deregulation has been an important factor in explaining increased inequality in many countries. Ongoing research at the Bank’s sister institution, the International Monetary Fund, is expected to conclude that labor market deregulation was a significant driver of declining labor shares in the national incomes, and thus increased income inequality, in several economies in recent decades.

Additionally, Doing Business has given penalty points to countries whose total tax rate exceeds a certain threshold. They include in this measure taxes on profit, dividends, property, capital gains, and financial transactions, as well as labor taxes and government contributions to pensions, health and safety, parental leave, etc…  This year’s threshold is  26.1 percent of corporate profits. The incentive to keep taxes and social contributions from companies at modest levels, by giving better scores to low-tax venues, is in clear contradiction with the World Bank’s stated objective of giving governments the means to provide essential public services, especially to the poor, and reducing inequality.

The shoddiness and inconsistency of Doing Business would be almost laughable if the influence of the report were not so far-reaching. It is the World Bank’s highest-circulation publication and both the Bank and the International Monetary Fund have used the report’s indicators to pressure countries to reduce regulations, sometimes through loan conditions.