Ease of Doing Business Rankings — Searching under the lamppost (REODB3)

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Doing Business is not for Business Leaders

I have never seen any business person refer to the Ease of Business ranking while making an investment decision. This, not only in media reports but also in my fifty interviews. Turns out that the Doing Business Ranking is not supposed to be an input in investment decision making. The foreword of 2020 Doing Businessfrom the President of the World Bank group says this explicitly

Doing Business is unrepresentative

As has been widely commented upon, the DB scores are calculated at only two places in India. In Mumbai and Delhi. These cities are very different from rest of India. Take registering property for example, which is a component of the rating. Can you imagine the procedures in Mumbai being anywhere representative of procedures in rural Bihar or for that matter in a village anywhere? The internet is filled with stories of people trying to change the status of agriculture land, a challenge not likely to be faced in Mumbai. And yet, rating of India is based just on Mumbai and Delhi. But that is not the only reason DB is unrepresentative.

Missing important factors

There are eleven factors and forty-one sub factors used in calculating the Doing Business score. In my meeting with business leaders, most of these factors never came up. The biggest concern in the minds of these leaders was demand. Most of them felt that if they had more demand for their products or services, their businesses would grow. Now the demand for a product is related to the price. For example, demand for high quality flats in Mumbai is huge but not at current prices which are higher than those in most other cities in the world. Many businesses cannot reduce prices for their products because of high costs. One such cost that came up in many of my interviews was delay in payments. If your customers do not pay you in time, you have to borrow money to meet your expenses. The cost of this borrowing can severely dent your profits and many times even kill your business.

Fatal Flaw

Access to electricity is one of the factors in Doing Business rating. It is composed of four sub factors namely, procedures, time, and cost to get connected to the electrical grid; the reliability of the electricity supply and the transparency of tariffs. Note first that the cost of electricity is not something that is included. For a business that has significant energy intensity, say Aluminum smelting, the cost of electricity may be the make-or-break factor. For this business it would not matter if the supply is reliable if it is very costly. For some other business, say software development, reliability may matter much more than cost. For a new factory, the biggest worry may be getting an electricity connection quickly. What is the point here? That for different businesses, what is critical or even important may be different. Even for a business, what is important changes over time.

Discussion

Let me summarize what I have said till now

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Yogesh Upadhyaya

Yogesh Upadhyaya

Entrepreneur. Economist. Investor. Actor. Technophile. Policy wonk. Comedian. I love to explore places where these worlds intersect.