India jump of 30 places to 100 in the Doing Business 2018 rankings, as reported by media houses and publicised by the Bharatiya Janata Party last week, may sound spectacular. However, the World Bank discourages comparisons with the previous year’s performance.
The World Bank explained that the rank of a country is relative to the performance of other countries, and that the agency overhauled its methodology between 2013 and 2015. Instead, it suggested focusing on “Distance To Frontier” scores. While governments and international investors look at the overall Doing Business ranking, the Distance to Frontier is a more relevant indicator of conditions faced by domestic small and medium enterprises.
An ease of doing business ranking shows only how much a country’s regulatory environment has changed relative to that in other economies.
A Distance to Frontier score, on the other hand, shows how much the regulatory environment for entrepreneurs in an economy has changed over time in absolute terms.
India’s Doing Business 2018 ranking is based on data from two major business cities – Mumbai and Delhi. The data for Doing Business 2018 was collected between June 2, 2016, and June 1, 2017.
Why comparison does not work
According to Indira Chand, senior communications officer at the World Bank’s Global Indicators Group, a country’s rankings are not comparable over time. “DB [Doing Business] rankings are not comparable over time due to methodology revisions,” she said. “During 2013-2015, in fact, DB methodology underwent a major overhaul.”
Chand added, “For comparable data, we recommend that you use the ‘Distance to Frontier’ scores, which are an absolute measure of progress by a country. The rankings, on the other hand, are relative, and hence subject to reform actions taken by other countries.”
Distance to Frontier scores were introduced in the Doing Business 2015 report.
Doing Business underwent methodological revisions – the introduction and expansion of measures over the years. To account for the expansion of methodology, the World Bank recalculated Distance to Frontier scores of previous years. Thus, Distance to Frontier scores of only Doing Business 2016-2018 can be compared.
Understanding Distance to Frontier
The Distance to Frontier measure shows the distance of each economy from the frontier, which represents the best performance observed on each of the indicators across all economies in the Doing Business sample since 2005. The score is out of 100 with 0 representing the lowest performance and 100 being the frontier.
India’s Distance to Frontier score in Doing Business 2018 is 60.7, which means it is around 40 percentage points away from the frontier. This year, New Zealand ranked first with a Distance to Frontier score of 86.5, followed by Singapore with 84.5.
India’s Distance to Frontier score improved by 4.7 percentage points in Doing Business 2018 from 56 in Doing Business 2017.
India was listed by the World Bank as one of the top improvers this year, having implemented reforms in eight out of 10 areas in a single year.
India’s performance over the past 15 years is also commendable for having implemented 37 reforms, the highest in South Asia. Sri Lanka follows with 22 reforms and Pakistan with 19.
How did India perform on each parameter?
We see that India’s performance improved the most in “Paying Taxes”, followed by “Getting Credit”.
However, certain indicators did not show much progress in the last two years.
Data not representative of the whole country
Doing Business collects data only from the largest business city of an economy. However, for countries with a population above 100 million, data from the second biggest city is also included. Thus, the data for India is from Mumbai and Delhi.
Doing Business collects sub-national (other cities) data for countries. India’s latest available data at the sub-national level (17 cities) is of 2009.
Does data reflect ground reality?
BOOM asked the World Bank if the eight reforms undertaken by India reflect the reality on the ground.
“Four of them reflect the practices and user experiences on the ground level, three are more legal in nature, and one is about availability of information,” said the World Bank.
These are the reforms undertaken in the eight areas:
Based on the World Bank’s response, the reforms in the eight areas can be classified as the following for their impact:
Measuring ease of doing business
The data is sourced from laws and regulations of countries, expert respondents, governments and World Bank regional staff. It is collected through questionnaires, conference calls, written correspondence and visits by the World Bank team.
Almost two-thirds of the data for Doing Business indicators comes from the reading of relevant law and regulation forms. The report also incorporates responses from around 13,000 professionals across 190 countries.
This article first appeared on Boomlive.com.