World Bank China-Rigging Scandal – Bad For Business

World Bank GroupSome investors and campaigners expressed dismay on Friday at revelations that World Bank leaders pressured staff to boost China’s score in an influential report that ranks countries on how easy it is to do business there.

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. The rankings have instead become a revealing gauge of how the World Bank itself does business under political pressure. 

Subsequently, after these findings, The World Bank decided to discontinue these rankings. This decision could make it harder for investors to assess where to put their money.

“The more I think about this, the worse it looks,” said Tim Ash at BlueBay Asset Management, adding that the reports published since 2003 had become important for banks and businesses around the world.

“Any quantitative model of country risk has built this into ratings. Money and investments are allocated on the back of this series.”

An investigation by law firm WilmerHale has found that World Bank chiefs including Kristalina Georgieva – now head of the International Monetary Fund – had applied “undue pressure” to boost China’s scores in the “Doing Business 2018” report.

At the time, the Washington-based multilateral lender was seeking China’s support for a big capital increase.

Georgieva said she disagreed “fundamentally with the findings and interpretations” of the report, which was released on Thursday and had briefed the IMF’s executive board.

Advocacy group Tax Justice Network welcomed the investigation by the ethics committee.

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 seems 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 galvanize genuine reforms in some big economies, including China. 

Charles Robertson, Chief Economist at Renaissance Capital, said ease of doing business scores had been losing credibility for years. Some countries employ investment firms, including his own, and even former government leaders to advise them on how to improve their rankings.

“There have been wide divergences between some countries corruption ranking(s) and the ease of doing business scores, which implies that these were only face-value improvements rather than reflecting underlying economic change,” he said.

“As an economist, though, it would a real shame if we lose access to the underlying data. It is really interesting, for example, to know that it takes a company in Brazil 900 hours to process taxes, whereas for somewhere else it take only 70,” Robertson added.

Emerging markets-focused investment manager Ashmore Group engaged a third-party data provider that used the Doing Business findings as one of their sources, but ultimately relied upon its own research for investment decisions, said Gustavo Medeiros, Ashmore’s deputy head of research at the investment firm.

“When companies are looking to do foreign direct investment, the report is a useful roadmap to understand where the potential problems may be and then they can go and do the due diligence,” he added.

 

Source: Reuters and The Economist

 

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