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Sunday, October 24, 2021

How World Bank leaders put pressure on staff to alter a global index

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THE WORLD BANK’S Doing Business rankings, which are followed closely by leaders in China, India and elsewhere, are supposed to gauge how easy it is to do business in 190 countries. But the rankings have instead become a revealing gauge of how the World Bank itself does business under political pressure. In so doing, they have also created a dilemma for the bank’s sister institution, the IMF.

In January the bank appointed a law firm to investigate allegations that the scores for China and three other countries (Azerbaijan, Saudi Arabia and the United Arab Emirates) had been altered. Its findings, released on September 16th, provide a startlingly frank, blow-by-blow account of the bank’s efforts in 2017 to engineer an improvement in China’s ranking. According to the investigators, the amendments reflected pressure from aides to Jim Yong Kim, the World Bank’s president at the time, “presumably” at his direction. And the effort was ultimately led by Kristalina Georgieva, who was then second-in-command at the bank and is now the boss of the IMF.

It was an awkward time for the bank. Some of its harshest critics were in office in America’s Treasury Department, as part of President Donald Trump’s administration. Many of the bank’s biggest clients could borrow larger sums, with fewer strings attached, from China or the financial markets. And the distribution of shares and, therefore, voting rights in the bank was hopelessly outdated, failing to reflect the rise of emerging economies.

Since a country’s votes in the bank are tied to its financial contributions, a solution seemed obvious. The bank should raise more capital from its members, with emerging economies contributing a larger share than in the past. But to get America and Japan to agree to that, the bank needed China to accept a smaller increase in its financial contributions (and therefore its vote share) than the country’s economic size would warrant, so that it did not become too influential. The bank’s leaders thus found themselves in a paradoxical position. They wanted to keep China happy so that it would agree to stump up less money for the bank than was merited for such a big economy.

But even as the bank was losing prominence as a lender, its Doing Business rankings were becoming ever more visible, grabbing the attention of some of the world’s most powerful people. Both Vladimir Putin of Russia and Narendra Modi of India had set high-profile targets for lifting their countries in the rankings. Li Keqiang, China’s prime minister, had put a team of perhaps 40 people in place to improve China’s lowly position (78th at the time).

At Mr Li’s urging, China’s reformers set about cutting red tape with some gusto. The country’s officials told World Bank staff how much they were looking forward to seeing China rise in the rankings. Sadly many of these reforms took place too late to make the cut for the Doing Business report scheduled for release in late 2017. Although China’s score had improved, it was set to fall to 85th place, because other countries did even better. (“I think I’m going to cry,” one aide to Mr Kim wrote in an email when told that China would drop.)

In October 2017, after the rankings were ready for the printer, Mr Kim’s aides discussed ways to improve China’s position with the Doing Business team. Perhaps China’s score could include Macau? (But the bank had no data for the city.) Perhaps Hong Kong? (Too politically touchy.)

At that point, Ms Georgieva was put in charge of the issue. According to the investigators, “a small group of Doing Business leaders”, helped by Simeon Djankov, who had created the rankings in 2003, ultimately found a way to improve China’s score on the ease of starting a business, obtaining credit and paying taxes. They decided, for example, not to count two procedures (opening a bank account and obtaining financial invoices) required to start a business. And they undid a previous correction to China’s score on the legal rights of secured creditors.

How arbitrary were these tweaks? One staff member told the investigators that there was a “reasonable question” about China’s scores on these matters. And it is plausible that was what Ms Georgieva also believed. But the investigation makes clear that these tweaks were an attempt to improve China’s ranking, not an attempt to improve the bank’s method. And an internal review by the bank itself, released in December 2020, said that the tweaks were “not justified by the Doing Business methodology or by any new information provided to the Doing Business team”.

The investigation’s findings pose two immediate questions: what should now happen to the rankings? And what should happen to Ms Georgieva? The fate of the Doing Business rankings has already been decided. The bank has said it will abandon the exercise. That is perhaps inevitable, given the damage to their reputation and credibility. This is not their first scandal: Paul Romer resigned as the bank’s chief economist in 2018 after saying he could not defend the integrity of the rankings. Still, the project’s demise is a pity. Ranking countries against each other was gimmicky, but it won the attention of leaders in pursuit of bragging rights. By measuring concrete regulations that governments can feasibly change, the scores helped to galvanise genuine reforms in some big economies, including China. (It is also true that some governments “gamed” the rankings, carrying out superficial reforms designed to improve their score without much improving life for businesses.)

Some people see the episode as proof of “Goodhart’s law”, which states that when a measure becomes a target, it ceases to be a good measure. But the Doing Business rankings were always intended to motivate as well as measure, to change the world, not merely describe it. If these rankings had never captured the imagination of world leaders, if they had remained an obscure technical exercise, they might have been better as measures of red tape. But they would have been worse at cutting it.

And what about Ms Georgieva? “I disagree fundamentally with the findings and interpretations of the investigation,” she said in a statement on September 16th, without elaborating. When she was picked to run the fund in 2019, some wondered if Ms Georgieva, a life-long technocrat, had the political nous and diplomatic finesse to handle the more prominent IMF role. Now it seems she was too diplomatic for her own good. In helping to keep China happy, she may have thought she was helping to salvage multilateralism. But critics of multilateralism will have a field day with these findings, citing them as proof that international institutions like the one she now runs cannot stand up to China.

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