Ease of Doing Business isn’t the best way to gauge economic performance. Just see China’s low scores

As India celebrates its 30-place jump in the rankings, the global index should not influence its economic policies.

In the perpetually divided political discourse of India, there is a rare consensus on the need for rapid economic growth – specifically manufacturing growth – to boost living standards and provide jobs. Then why, as a nation, are we obsessed with an index that has marginal relevance when it comes to building such an industrial base? The victory dance last week over India having jumped 30 places to 100 in the World Bank’s Ease of Doing Business rankings for 2018 is a great example of our intellectual establishment’s refusal to see the forest for the trees.

Do not get me wrong. Improving routine bureaucracy that allows people to register businesses and get no-objection certificates for construction faster, and streamlines compliances so that import and export of goods is easier done is worthwhile policy pursuit.

But should such a line of action be made the cardinal current of economic policy in a country of 1.3 billion? This is another matter altogether.

Index that does not explain much

A cursory glance at the Ease of Doing Business Index will underscore its futility as a barometer for economic policy-making and industrial performance. Russia, rank 35 and one of the biggest gainers this year, comes right behind Japan, rank 34. And is leagues ahead of China, which ranks 78. But when was the last time you bought a made-in-Russia car, electronics, clothes or utensils? Very long ago, if ever, because Russia does not really manufacture anything internationally competitive, other than raw commodities of natural gas and crude oil.

And China, the great parable of state-driven industrialisation that now leads the world in the production of everything from cars and steel to electronics and solar panels, ranks a measly 78. No wonder that every year when the index is released, the mandarins in Beijing exude a wry sigh as opposed to the jubilance or anger evident in their counterparts in Delhi. Because the Chinese know something that we do not – the Ease of Doing Business Index does not matter very much.

Over the past three decades, as China consistently scored low on the index, it managed to harness the productive power of hundreds of millions of its people to build the biggest industrial base the world has seen. In the process, it engineered one of the fastest improvements in the living standards of a critical mass of population. It forced countries across the world, from the United States to India, to become addicted to cheap Chinese imports. Why these two narratives – China’s poor rankings on the Ease of Doing Business Index and its rise as an industrial power – coincided is a question rarely pondered upon in the Indian media.

China now leads the world in the production of everything from cars and steel to electronics and solar panels despite consistently ranking low on the Ease of Doing Business Index. (Credit: AFP)
China now leads the world in the production of everything from cars and steel to electronics and solar panels despite consistently ranking low on the Ease of Doing Business Index. (Credit: AFP)

What really matters

The very nature of modern production means that it is underpinned by factors that do not count for much in the Ease of Doing Business Index. Modern production is all about building institutions that combine technology, machinery, managerial prowess and complex processes in the service of mass production of goods. These may vary profoundly from sector to sector. Cars require different machinery and processes than vaccines. Then, there is also the requirement for regular financing and for a market to sell to.

Therefore, would it really matter for, say, India’s car industry if the time taken to start a business is 40 days instead of 30 days in the event the industry as a whole lags behind its peers in South Korea in technical competence of its manufacturing facilities? Similarly, factors such as whether there is access to the latest technology, a definite market to sell to and a banking sector that can lend money at competitive rates would be more important to an industrial sector than whether component imports take three days or nine days to clear customs compliances.

Ground realities

Secondly, within the Ease of Doing Business Index, there is a general unwillingness to account for how work really happens in developing countries. For instance, China in 2018 ranks 172 when it comes to dealing with construction permits. But how does this ranking explain the fact that the country has seen the most ruthless spate of construction booms in the history of mankind. The skyscrapers of Shanghai and China’s infamous ghost cities have happened over the past 25 years.

The answer, quite simply, is that in developing countries like China and India, there is a real discrepancy between the implementation of regulations and their letter. In other words, often a times, a lot of the required “construction permits” are simply bought off through collusion with bureaucrats. In India, for instance, construction on a property is usually not allowed till an environment clearance is on board. However, in practice, most developers begin their construction much before and manage the environment clearance committee when it comes on an inspection visit.

As unethical as this reality may be, it greatly speeds up the processes that may seem time-consuming on paper.

This is not to argue that efforts towards harmonisation and rationalisation of regulations do not constitute a key job of the government. They do, and this is quite obvious.

But, this is to argue that such efforts cannot simply be the bedrock of the government’s economic policy. The government has put its best bureaucratic talent in glib schemes like improving the country’s Ease of Doing Business ranking, or promoting Make in India programmes. These, at heart, do not deal with industry sector-specific issues of technical competence and availability of financing, among others, but focus on an overall promotion of India as a “manufacturing destination”, whatever that may mean.

Meanwhile, the Chinese have been busy designing intricate industrial policies that focus on technology transfers and nurturing young industries through financial subsidies or import protection to ensure China dominates industrial production in the 21st century.

What Prime Minister Narendra Modi should worry about is not whether registering a property takes seven days or 30 days in New Delhi, but why over the course of this 30-rank jump in the Ease of Doing Business Index, Indian exports have persistently declined. Or why, in spite of beating China in the “getting credit” score of the Ease of Doing Business Index by 39 ranks, we import from China six times more than what we export to it.

Akshat Khandelwal is a writer and entrepreneur based out of Delhi. His Twitter handle is @akshat_khan.

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