The Bretton Woods Credibility Crisis
The World Bank and the International Monetary Fund play a critical role in the global economy precisely because their independent research is universally trusted. But following a scandal involving the World Bank's flagship report, urgent action is needed to regain the public's confidence.
A Coup Attempt at the IMF
Kristalina Georgieva, the IMF's Managing Director since 2019, has been a bold leader in confronting the economic fallout of the pandemic, as well as in positioning the Fund as a global pioneer on climate change. The efforts now underway to remove her are not only unjust, but could hamstring the Fund's management for years to come.
NEW YORK – Moves are afoot to replace or at least greatly weaken Kristalina Georgieva, the International Monetary Fund’s managing director since 2019. This is the same Georgieva whose excellent response to the pandemic quickly provided funds to keep countries afloat and to address the health crisis, and who successfully advocated for a $650 billion issuance of IMF “money” (special drawing rights, or SDRs), so essential for low- and middle-income countries’ recovery. Moreover, she has positioned the Fund to take a global leadership role in responding to the existential crisis of climate change.
For all of these actions, Georgieva should be applauded. So, what is the problem? And who is behind the effort to discredit and oust her?
The problem is a report that the World Bank commissioned from the law firm WilmerHale concerning the Bank’s annual Doing Business index, which ranks countries according to the ease of opening and operating commercial firms. The report contains allegations – or more accurately “hints” – of improprieties involving China, Saudi Arabia, and Azerbaijan in the 2018 and 2020 indexes.
Georgieva has come under attack for the 2018 index, in which China was ranked 78th, the same position as the previous year. But there is an insinuation that it should have been lower and was left as part of a deal to secure Chinese support for the capital increase that the Bank was then seeking. Georgieva was the World Bank’s chief executive officer at the time.
The one positive outcome of the episode may be the termination of the index. A quarter-century ago, when I was chief economist of the World Bank and Doing Business was published by a separate division, the International Finance Corporation, I thought it was a terrible product. Countries received good ratings for low corporate taxes and weak labor regulations. The numbers were always squishy, with small changes in the data having potentially large effects on the rankings. Countries were inevitably upset when seemingly arbitrary decisions caused them to slide in the rankings.
Having read the WilmerHale report, having talked directly to key people involved, and knowing the whole process, the investigation appears to me to be a hatchet job. Throughout, Georgieva acted in an entirely professional way, doing exactly what I would have done (and occasionally had to do when I was chief economist): urge those working for me to be sure their numbers were right, or as accurate as possible, given the inherent limitations on data.
Shanta Devarajan, the head of the unit overseeing Doing Business who reported directly to Georgieva in 2018, insists that he never was pressured to change the data or results. The Bank’s staff did exactly as Georgieva instructed and rechecked the numbers, making miniscule changes that led to a slight upward revision.
The WilmerHale report itself is curious in many ways. It leaves the impression that there was a quid pro quo: the Bank was attempting to raise capital and offered improved rankings to help get it. But China was the most enthusiastic backer of the capital increase; it was the United States under President Donald Trump that was dragging its feet. If the objective had been to ensure the capital increase, the best way of doing so would have been to lower China’s ranking.
The report also fails to explain why it doesn’t include the full testimony of the one person – Devarajan – with firsthand knowledge of what Georgieva said. “I spent hours telling my side of the story to the World Bank’s lawyers, who included only half of what I told them,” Devarajan has said. Instead, the report proceeds largely on the basis of innuendo.
The real scandal is the WilmerHale report itself, including how David Malpass, the World Bank president, escapes unscathed. The report notes another episode – an attempt to upgrade Saudi Arabia in the 2020 Doing Business index – but concludes that the Bank’s leadership had nothing to do with what happened. Malpass would go to Saudi Arabia touting its reforms on the basis of Doing Business just a year after Saudi security officials murdered and dismembered the journalist Jamal Khashoggi.
He who pays the piper, it seems, calls the tune. Fortunately, investigative journalism has uncovered far worse behavior, including an unvarnished attempt by Malpass to change the methodology of Doing Business to move China down in the rankings.
If the WilmerHale report is best characterized as a hatchet job, what’s the motive? There are, not surprisingly, some who are unhappy at the direction the IMF has taken under Georgieva’s leadership. Some think it should stick to its knitting and not concern itself with climate change. Some dislike the progressive shift, with less emphasis on austerity, more on poverty and development, and greater awareness of the limits of markets.
Many financial market players are unhappy that the IMF seems not to be acting as forcefully as a credit collector – a central part of my critique of the Fund in my book Globalization and Its Discontents. In the Argentine debt restructuring that began in 2020, the Fund showed clearly the limits on what the country could pay, that is, how much debt was sustainable. Because many private creditors wanted the country to pay more than was sustainable, this simple act changed the bargaining framework.
Then, too, there are longstanding institutional rivalries between the IMF and the World Bank, heightened now by the debate about who should manage a proposed new fund for “recycling” the newly issued SDRs from the advanced economies to poorer countries.
One can add to this mix the isolationist strand of American politics – embodied by Malpass, a Trump appointee – combined with a desire to undermine President Joe Biden by creating one more problem for an administration facing so many other challenges. And then there are the normal personality conflicts.
But political intrigue and bureaucratic rivalry are the last things the world needs at a time when the pandemic and its economic fallout have left many countries facing debt crises. Now more than ever, the world needs Georgieva’s steady hand at the IMF.
Stop Doing Business
The World Bank should no longer publish its Doing Business index, owing to its flawed design and vulnerability to manipulation. The Bank also owes the developing world an apology for all the harm this misleading and problematic tool has already caused.
NEW DELHI – The World Bank’s Doing Business index has been both conceptually and operationally suspect since its inception in 2003, but mainstream economists have only recently started to criticize it. Although the Bank’s own recent acknowledgement of some of the problems is welcome, the index has already caused huge damage to developing countries, and it should be scrapped.
The Bank has already been forced to suspend publication of the index, owing to “irregularities” in its data. The latest brouhaha concerns straightforward number fudging. Apparently, data from four countries – Azerbaijan, China, Saudi Arabia, and the United Arab Emirates – were inappropriately altered, at least for 2017 and 2019 (thus affecting the 2018 and 2020 Doing Business reports). Other irregularities may have occurred, too. The Bank has begun a “systematic review” of the last five years of data, launched an independent audit of the process, and pledged to correct the most-affected countries’ data.
But this is a minor issue compared to all the other concerns with the index. Paul Romer, then the Bank’s chief economist, highlighted some of these in a stinging 2018 criticism of the tool. According to Romer, most of the changes in country rankings over the previous four years had resulted from repeated methodological changes that gave more weight to national governments’ political orientation.
Specifically, Romer said that data for Chile appeared to have been manipulated to show that the country’s business environment had deteriorated under a left-wing government. Chile’s overall ranking fluctuated between 25th and 57th between 2006 and 2017, when the country’s presidency alternated between the socialist Michelle Bachelet and the conservative Sebastián Piñera.
Under Bachelet, Chile’s ranking consistently worsened, while it consistently climbed under Piñera. Romer even offered “a personal apology to Chile, and to any other country where we conveyed the wrong impression.” He implied that the Bank had manipulated the country’s rankings for political reasons, but was later forced to retract that allegation, and resigned from his position two weeks later.
Justin Sandefur and Divyanshi Wadhwa of the Center for Global Development compared the official Doing Business rankings with their own re-created rankings from 2006 to 2018, based on a constant sample of countries and a consistent methodology. They found that the decline in Chile’s ranking during the Bachelet presidencies and its rise when Piñera was in office resulted entirely from methodological tinkering. Chile’s laws and policies barely changed.
As with all cross-country comparisons, followers of Doing Business focus on a country’s rank rather than the value of the index, and the standings generate huge media coverage every year. Even academic researchers have (wrongly) used the rankings as indicators of government support for private investment. As a result, governments vie to improve their country’s ranking in the hope of attracting more foreign investment and boosting their domestic credibility.
Policymakers have sometimes resorted to desperate (and effective) measures to game the system. Most notoriously, the Indian government tweaked regulations in order to improve the country’s index score, enabling India to rise dramatically in the rankings, from 142nd in 2015 to 63rd in 2020.
But again, India’s rise stemmed largely from methodological adjustments, as well as ranking changes caused by small differences in scores across similar countries. Ironically, India’s ranking improved even as its investment rate (as a share of GDP) declined continuously, from 40% in 2010 to around 30% in 2019.
How could the Doing Business index be so off the mark in these two cases? True, strong conflicts of interest can potentially arise when the Bank calculates the index, whether because of its staff’s ideological inclinations or the need to placate big, financially important countries. But the index’s biggest problem is that its design is fundamentally flawed.
The index is supposed to measure a country’s overall business environment, but it really covers only government regulation (except for the tax indicator, which includes taxes as share of gross profit). It leaves out some regulations that affect businesses, such as financial, environmental, and intellectual-property rules. More important, the index does not measure all aspects of the business environment that matter to companies or investors, including macroeconomic conditions and policies, employment, crime, corruption, political stability, consumption, inequality and poverty.
Moreover, the index focuses entirely on the “ease” of doing business and the costs of regulation for companies. It gives no consideration to the benefits of these regulations and whether they create a better overall business environment. Likewise, Doing Business regards taxes only as a cost, and not as a source of revenue that can be used to deliver important economic benefits such as modern infrastructure and an educated workforce.
The overall thrust of Doing Business is thus anti-regulatory: the fewer regulations a country has, the better it performs on the index. The inclusion of the tax rate in the underlying indicators is so egregious that two independent evaluations commissioned by the World Bank suggested leaving it out.
As Isabel Ortiz and Leo Baunach have noted, the index effectively “undermines social progress and promotes inequality.” That is because it “has encouraged countries to take part in the ‘deregulation experience’ including reductions in employment protection, lower social security contributions (denominated as ‘labor tax’), and lesser corporate taxation.”
Ortiz and Baunach are correct to argue that it is time to stop publishing Doing Business. And the World Bank owes the developing world a debt of contrition for all the harm this misleading and problematic tool has already caused.
Is Doing Business Really Dead?
The World Bank’s recent decision to stop publishing its annual Doing Business report is an understandable initial reaction to revelations of data manipulation in favor of certain countries. But the Bank should use this interruption to develop a better report, rather than ending it for good.
ITHACA – Recent days have brought me a storm of emails and calls about the collapse of the World Bank’s most widely watched annual report, Doing Business (DB), which ranks countries by how easily and efficiently small businesses can operate in them. On September 16, the bank announced that it would discontinue the report after an independent investigation by the law firm WilmerHale revealed the Bank’s sordid efforts, starting in 2017 (I left the Bank in 2016, I hasten to add), to manipulate data in order to improve China and Saudi Arabia’s DB rankings. The Bank had suspended publication of the index last year, owing to “irregularities” in its data.
As the head of the World Bank division that produced DB from 2012 to 2016, I found the WilmerHale report disturbing to read. Yes, countries have always lobbied and jostled to improve their rankings. But I never gave in to any of that pressure. Nor, to the best of my knowledge, did any of my predecessors.
It was deeply disappointing to read about how this subsequently changed and what happened inside the Bank, including accounts of junior staff being “publicly threatened” and feeling “powerless to object to carrying out the data improprieties being requested by senior bank management.” This is the kind of behavior one expects under an authoritarian government, not at a premier Bretton Woods institution.
The World Bank deserves credit for commissioning such a transparent investigation, and now it has an obligation to act on its findings. Some senior officials will no doubt be shown the door. But this is also the time to take stock of the entire business of Doing Business.
The bank’s decision to stop publishing DB is an understandable initial reaction. But I would advise the organization to use this interruption to develop a better report, instead of ending it for good.
I have a long and complicated relationship with DB. Many progressive economists have railed against it because of its admittedly neoliberal bias. But the index also highlighted important shortcomings in many developing countries, where cronyism among big business and government, along with high bureaucratic costs, crush individual enterprise and cripple small businesses. When I was the Indian government’s chief economic adviser, I found DB’s data useful for pushing reforms that would help the small players.
At that time, I had no idea that I would one day be in charge of the division producing the report. During my transition, I felt like a restaurant patron who had suddenly been asked to run the kitchen. It was an eye-opening experience for me to discover how the DB economies were evaluated. I could see that there was room for improvement, but what truly impressed me was the transparency and integrity of the exercise. It was an expensive operation in which the Bank collected data meticulously from all the economies – 189 at the time – and then constructed the rankings without regard to who won or lost.
We improved some of the data and the selection of items that we included in the index. But any such change would alter some of the rankings, giving the impression that some countries were doing better or worse than before, when in fact the shifts were entirely due to the changes in our criteria. For that reason, we had to hold back on many planned improvements.
So, what might a new, improved DB look like? For starters, the bank should switch to collecting de facto data. Currently, the bulk of the DB ranking is based on countries’ de jure laws – the rules and regulations in the books – rather than on what actually happens on the ground. My own back-of-the-envelope calculation was that two-thirds of the ranking depended on the de jure.
This causes an obvious problem. Properly devised cross-country rankings, like the pre-2017 DB, spur competition among governments. But authoritarian governments in particular can change their rule books through top-down orders – and thus improve their index score – even if this makes little difference to people’s lives.
Gathering de facto data will require independent surveys and some randomized data collection, making DB more expensive to produce. But the World Bank can easily bear the additional burden.
Second, DB currently does not include an indicator regarding labor laws and regulations (it did once have, but it was dropped). This is an unfortunate omission, which a revamped DB report should redress.
Finally, every time the DB report came out during my years at the Bank, I would be at pains to explain that it was about doing business. Achieving a high ranking must not be an all-consuming goal, because the health of a country’s economy also depends on fairness and social justice. But once such a game gets started, it is difficult to persuade countries that other things matter besides business.
The World Bank now has an opportunity to correct this by creating a supplement to the DB report that ranks countries in terms of “Being Just.” The BJ supplement would assess how fair and just a country’s laws and regulations are. This can start as a small exercise, with a BJ ranking being published alongside the DB ranking.
Such an initiative would be bound to generate interest among researchers to investigate the connections between being good for business and being fair and just. More importantly, it would create incentives for countries to excel in both areas. Last but not least, it would offer the World Bank an opportunity to rebuild its reputation for producing useful – and impartial – rankings.
After “Doing Business”
Following its recent business-environment rankings scandal, the World Bank will have to overcome a deep trust deficit and take drastic steps to restore public confidence in its data. Any new efforts it undertakes in this area should meet four minimum criteria.
WASHINGTON, DC – Earlier this year, the World Bank commissioned me and five fellow academics to develop recommendations on how to improve the methodology behind its annual Doing Business report, which ranked countries on the quality of their business regulations and their overall business environment. The report had been a lightning rod for controversy since its inception in 2003. While it generated glowing coverage in the global business media, it was also subject to constant criticism for its perceived anti-regulation, anti-union, and anti-tax slant.
On September 1, we submitted our final recommendations, calling for a major overhaul of Doing Business including ending the practice of ranking countries. Two weeks later, the World Bank announced that it was scrapping the report entirely after a separate investigation by an outside law firm concluded that data had been deliberately manipulated in order to alter some countries’ rankings, notably those of China and Saudi Arabia.
Setting aside the debate over what really happened in the past, the end of Doing Business has important consequences. We have no doubt that the world needs a tool to measure countries’ conditions for business development and attractiveness for foreign direct investment, and that the data from such a project are highly relevant to both researchers and business and government leaders.
The World Bank has already declared its intention to keep working on business-climate issues. But to re-establish itself in this domain, it will have to overcome a deep trust deficit and take drastic steps to restore public confidence in its data. Our ideas about how to fix Doing Business could now serve as minimum criteria that any new effort in this area should meet.
First, the World Bank should not build a new index to rank countries, as Doing Business did. Such aggregate indices are inevitably arbitrary, and the rankings invoke normative judgments that go far beyond the available evidence. Even prior to the recent data manipulation scandal, it was clear that the methodology behind many of the individual Doing Business indicators needed to be overhauled.
The core problem was that Doing Business did not actually survey businesses, or measure the real-world costs of doing business for a representative set of small and medium-size enterprises. Instead, it relied on subjective judgments from a small group of experts, who were invited to assess the costs of regulation for a hypothetical firm that was often quite unrepresentative in many of the countries the Bank evaluated. The emphasis on de jure assessments needs to be replaced with de facto conditions.
As luck would have it, separate World Bank surveys have periodically asked actual firms’ managers some of the same questions posed by Doing Business: about the time required to register a business, get a construction permit, clear goods through customs, and so on. Firms’ own answers, it turned out, bore no relation to those of the Doing Business experts. If there is a successor to Doing Business, it has to start from real data, not hypotheticals.
A second set of issues concerns assumptions about the right policies or regulations, which are implicit in any business-environment ranking. For some indicators, such as delays in registering a business, less is clearly better. But for others, like the corporate tax rate, the optimal policy is the subject of vigorous academic debate.
The tax issue became increasingly awkward for the Doing Business report in recent years. As 130 countries finalized plans this year for a global minimum corporate tax rate, the index continued to encourage a race to the bottom in corporate taxation.
Third, any serious attempt to measure a country’s business environment must consider government efforts to fix market failures and provide essential public goods. But the World Bank’s broad vision of how to promote a good business climate, as embodied in the Doing Business index, suffered from some severe blind spots. For the private sector to flourish, apparently, government mostly needed to get out of the way.
This view made no allowance for public investments in basic infrastructure such as roads, telecommunications networks, and power grids, all of which are fundamental to doing business but were entirely absent from the report. Absent, too, was any reference to crime prevention and public order, a skilled workforce, or investments in research and development.
Finally, there is the question of data credibility. Greater transparency would be a good start. The raw data underlying the Doing Business report were never publicly available, so the analysis could not be independently replicated. Excessive focus on rankings and lack of access to the data resulted in a product that was vulnerable to political pressures and data haggling.
But transparency rules can never ensure against deliberate manipulation. Ultimately, the World Bank will have to convince data users that it has built a functional firewall between its analytical work and its lending operations. To that end, the Bank should abandon the practice of selling advisory services on how to improve outcomes in the statistics it directly measures.
The demise of Doing Business presents the World Bank with an opportunity to reclaim its intellectual leadership in global development through a renewed commitment to collecting and analyzing credible data. Arguing that the scandal was unfortunate but that the methodology was right won’t cut it. The Doing Business rankings – that result from the aggregation of indexes – were always dubious, because they did not provide an accurate picture of conditions on the ground and left no place for crucial public investments, sensible taxes, or necessary regulations. Any future effort to assess the business environment in member countries must address these shortcomings.
This commentary is also signed by the other members of the External Review Panel for Doing Business: Laura Alfaro, Alan J. Auerbach, Takatoshi Ito, Şebnem Kalemli-Özcan, and Justin Sandefur.
WASHINGTON, DC – Despite setbacks like the Great Recession and the COVID-19 pandemic, the world economy has had a massively successful run since World War II. That success was underpinned by the post-war global economic system and its central institutions: the International Monetary Fund, the World Bank, and the World Trade Organization (previously the General Agreement on Tariffs and Trade). In joining the Bretton Woods institutions, countries around the world agreed to subject their economic behavior to an international rule of law.
These institutions all have governing bodies with representatives from member states, as well as highly qualified technocratic staff to carry out their work. The periodic reports they produce have been essential sources of information and analyses. But one of these reports, the World Bank’s annual Doing Business index, has become the source of enormous controversy.
The point of Doing Business was to report on each member state’s regulatory environment, elements of which include legal procedures, wait times, start-up costs, the efficiency of the judicial system, and the accessibility and reliability of basic utilities like electricity. These and many other factors determined each country’s overall ranking. In the 2018 report, for example, New Zealand ranked highest, and Somalia the lowest.
While no measure is perfect, the procedure for determining the rankings was transparent, and the indicators in each report were as objective as possible, even if they did rely also on anecdotal evidence. The Doing Business reports were highly respected and thus widely used, not only by national policymakers as an indication of how their country’s regulations and performance compared with others’, but also by independent researchers and firms and financial institutions contemplating investments abroad. It was not uncommon for a head of government to instruct his ministers to pursue policies geared toward climbing the rankings.
Many observers, including me, regarded the Doing Business reports as the World Bank’s single most important publication. The Bank published the individual results alongside the overall ranking, so anyone who questioned the weights could apply her own. While some governments instituted Potemkin reforms – all façade and no substance – there were many more instances of Doing Business-inspired policies that reduced costs and increased productivity. As with all publications from international economic institutions, Doing Business’s credibility was the key to its success.
But following the 2018 report, there were complaints about the data that had been used, leading the World Bank to commission the highly regarded law firm WilmerHale to investigate. Its report, issued last month, found serious irregularities with respect to China’s ranking in the 2018 report. The investigators report that Kristalina Georgieva, the Bank’s then-CEO (second in command) who has since become managing director of the IMF, urged staff to reconsider the results for China, and then “explored … ways to change the methodology to raise China’s ranking.” The report also points out that the Bank had an interest in placating China, because it was seeking Chinese support for a capital increase at the time.
All told, the investigators provided sufficient evidence of Georgieva’s involvement to raise serious doubts about Doing Business’s credibility and integrity. The current president of the World Bank, David Malpass, has suspended publication of the 2021 report and discontinued future ones. The Bank will surely examine and amend its procedures to prevent similar efforts at manipulation in the future.
Credibility is essential for the critical work the IMF and World Bank do. Both employ highly respected researchers, world-class economists and statisticians, and dedicated officials. They know they are civil servants and not politicians; all are highly committed to their jobs. True, in some cases (some of which are known to me), there has been pressure at the political level to support a certain lending program or policy position. But a central part of the leadership’s job is to shield staff from undue interference in their reports and analyses.
Attempting to massage the ranking for one country in a cross-country report is egregious not only because it undermines the credibility of the report but also because it harms the other countries whose rankings are changed as a result. When a country falls in the rankings, its ability to attract foreign investors and businesses can be diminished.
Like Caesar’s wife, IMF and World Bank leaders must be well above suspicion in overseeing these institutions’ work and safeguarding the integrity of the data on which that work relies. Georgieva’s reported actions certainly raise serious doubts about her commitment to the integrity of the data, including in the context of her new role.
If an IMF managing director is thought to be amenable to pressures to alter data and analyses, the credibility of the Fund’s work will be greatly diminished, if it is believed at all. It is one thing for the managing director to urge the Board to approve a program of questionable merit based on a report providing an honest account of the situation. It is quite another thing to pressure staff to alter the numbers.
Should Georgieva remain in her position, she and her staff will surely be pressured to alter other countries’ data and rankings. And even if they resist, the reports they produce will be suspect. The entire institution’s work will be devalued. That prospect alone should be enough for the IMF’s political masters to find a new managing director whose commitment to the integrity of the work is not in question.