Investors would be looking at eight or nine countries and trying to decide where they should go, their eyes quickly go to the ranking and where the country stands, says the Chief Economist of the World Bank.

Kaushik Basu is the Chief Economist of the World Bank and the lead on the annual Doing Business report whose 2016 edition was released this week, with positive news of a 12-rank improvement by India for ease of doing business. The exercise of data collection and analysis underlying the compilation of the report is a complex one, and Professor Basu, who was earlier the Chief Economic Advisor for the Indian government during 2009-12, spoke about the report’s methodology, what the results mean for India under the Modi administration and challenges it could face in sustaining this such regulatory reform. Edited transcript:
The 2016 Doing Business report has in some senses been a pat on the back for India, whose ranking has improved four places. Is this a signal to critics of the Indian government to be more patient about the pace of reforms, or do the report’s findings also point to an unfinished agenda for the Modi administration to tackle?
First let me clarify a little bit. It has improved four places if you back-calculate and do it by the same criteria. But if you take where India stood last year and where it stands this year, it is an improvement of 12 places in terms of ranking. In history, when you look back at this, you are going to look at each year’s ranking so this year will be marked as year where it was 12 places that India moved up. So to that extent it is actually quite a remarkable achievement. No matter which measure you use, it is quite a remarkable achievement because it is a large country that is doing this.
Having said that India still stands at 130th among 189 countries and, really, it has no business being there. It has still a very great distance to go, and for India now it is not impossible to think in terms of moving into the top 100 by next year, which means going from 130th to 99th or 98th. It is not impossible, countries have done that. For big countries as cumbersome and complex as India, it is harder. But this improvement that we have got this year is a pat on the back but it is also a reminder to buck up and carry on, because there is a great distance to go. It is not an easy task for India.
The DB report alludes to India’s impressive progress in advancing its frontier score or absolute score since 2004 – how much does this matter, compared to the relative score or progress?
There are two things that we look at: the absolute index of where you are and how much you improve. With that, no matter how other countries do, if you do well on that, well that is good. On the ranking, if a whole class of students is studying very hard to do better, then even if you actually do better, it does not mean that your ranking improves. That is always the challenge with ranking.
The ranking is nevertheless important, because global investors coming in with Foreign DirectINVESTMENT (FDI) are looking at eight or nine countries and trying to decide where they should go, their eyes quickly go to the ranking and where the country stands. Even if you have improved on your own but if you have lost out on rankings, there are lots of examples in history of doing business, of that happening to countries. Your neighbouring countries, not geographically but in terms of ranks, have done better, and they cross over.
In that sense, both are important, but rankings are important because investors very often look at that for the first [assessment of the country’s ease of doing business].
Again on methods – the report cautions that in most cases the entire gamut of regulatory reform has not been captured in the ranking. What does this mean for a vast country such as India, where corruption has been noted to be rampant in some states though the report focuses on Delhi and Mumbai? How does this affect the “true” ranking for India?
Let me tell you two things about what we try to capture. One is, we have made some effort over the last two years to move away from the quantity of regulation measurement to the quality of regulation, because at times there is almost an ideological predilection that very conservative thinkers have that the less the regulation the better.
But in a complex economy you need a lot of regulation and in fact some of the so-calledMARKETeconomies, by most measures will have many more regulations. The U.S. will have many more regulations than Eritrea will have. So it is not the quantity of regulation it is the quality, it is intelligent regulation, and we have made a lot of changes, trying to look not at the quantity, because you do need a lot of regulation. You cannot run a modern economy without that. I want to stress that. We have moved toward the quality of regulation, looking at that better and tracking countries on that.
[Regarding the focus on specific cities] Our data collections centres are Mumbai and Delhi. In all big countries we have two centres of data collection and in smaller countries we have one centre of data collection. One thing I should clarify, in these two centres we go and then ask questions about country-wide practices. Nevertheless, where you are collecting does bias it a little bit. A lot of the data collection is: how does your country do in terms of the law on paper? On that, there isn’t too much variation across regions. On paper, Mumbai, Chennai, Ahmedabad will not be very different [but] practices can be very different.
That comes in with corruption as well. We don’t measure corruption. We ask: How many days does it take you to get a license? Maybe with bribery you get it sooner, but that does not affect our measure. [There is] a plus and minus to that. As soon as you get into corruption measurement there is a subjective element, you have to collect the data in ways that are very often very difficult. We stay away from that.
But there are people who have made this very valid criticism, that corruption is so important in so many countries, that not to collect that is a handicap, if so indeed it is handicap. But on the plus side our statistical exercise shows that our measure correlates very well with the incidence of corruption in countries. Where countries do very well with ease of regulation, corruption is less. So though we do not collect corruption data directly what we do collect happens to correlate very well with corruption.
While India has performed well on some indicators such as Protecting Minority Investors, it has done less well on important criterion of Enforcing Contracts and Registering Property. Does this reflect the fundamental difference between legislative reforms, which can be relatively quick to carry out, and implementation issues, which can be problematic owing to the multiplicity of actors and perverse incentives?
There is a little bit of that, and there are people who have said that things in India move faster when you look at the de facto rules rather than the de jure. When you look at the de jure it is very cumbersome.
But there is another thing that I can tell you since I worked in India for a short period in government from the outside of government. When you’re outside of government trying to get things done in interaction with government, it’s very cumbersome. Most people in India, since in India the bureaucracy is a lifetime job, most people who are in the bureaucracy don’t get to experience the interface with the government because they are in it almost for life.
I went from the outside of the bureaucracy to the inside and there was a point in time when I realised that for things for which I had to stand in queues and endless paperwork to get a driving license when I’ve done everything right but they’re giving me a run for my money to file an income tax return – all that goes much easier if you’re inside [the bureaucracy]. So it is not as if just through de jure things are much easier if you’re outside the system things. Outside the system in India is very cumbersome.
Doing Business only picks up a slender aspects of doing business. There are so many other things in life that you have to attend to when you are doing business. We pick out a couple of salient things, measure that, aggregate it. What about the things that are left out? To me those are as important, just that we pick up a couple of important things, ten indicators, and within them a couple of sub-indicators, many things that we are not recording, but those are also important.
The hope again is that through our indicators we are giving a signal to the country [to say] attend to the ones that we are measuring but there is also a lot that we are not able to measure, which are as important and you should take your time and work on those.
From many accounts, including the Doing Business report and U.S. business interests, it would appear that a core obstacle in India is dispute resolution. Could BilateralINVESTMENT Treaties, such as the one New Delhi has long been discussing with Washington, be key instruments to mitigating uncertainty and risk-aversion of potential investors?
Apart from our measure, when you get into a contract with another country over something, very often there is a pressure that [follows, which says]: Look, clean up this sector, the way you are doing this, before we come in. Indeed it plays a role.
I will give you an example from the educational sector. If India were to formally sign up contracts with top American universities that they would have a campus in India, those universities will bring some pressure [to say]: You have to change these six or seven University Grants Commission rules and unless you change those, we cannot operate. Those are worthwhile pressures but you have to keep in mind when it is working with business there is also international crony capitalism. So there are certain regulations which are probably good for the economy. Through international crony capitalism you can get pressure to remove those regulations, because then it will be a free for all. Yes, good pressures can come from bilateral treaties but there are also bad pressures that can come. Colonial history is full of examples where an outsideINVESTMENT comes and makes you change the rules, not so much for your benefit but for the benefit of the company that’s come in. The East India Company is a good example that goes a couple of hundred years back. In the end you have to keep your eyes wide open as you go into this.
Your association with the inside track on India’s policy strategizing dates back to 2009 at least, give us a sense of whether the trajectory of ease of doing business in the country has shifted gears or is continuing along a rather constant long-term trend of gradual improvement.
The importance of Doing Business you will see if you go back to the Economic Survey of India in 2008-09, when I was Chief Economic Advisor. There was always a lot of use of Ease of Doing Business. So way before I knew I would have anything to do with Ease of Doing Business I was making use of it. I would go up to the Finance Minister [who was later] the Prime Minister with these, stressing that India ought to work on that.
At the political level there was always sympathy that you have to work on that. At the bureaucratic level there is resistance, usually, and you can see that this is addressing the bureaucratic challenge. What we are seeing over the last one or two years is the bureaucracy now coming together with the political leadership in the country to try to affect this.
Would you call that a major paradigm shift?
That is an important and positive change.
Is that the one key that had to be turned to unlock the potential for greater Ease of Doing Business?
There are three things that you need, which I have always stressed, for a country like India to do well. One is infrastructuralINVESTMENT. You need better ports, roads, and so forth. A great distance to go there but on that India’s investment to GDP rate is now well over 30 per cent so those things are improving.
Ease of doing business and bureaucratic hurdles – I had always stressed that this was the second one. That is much harder, but I am very heartened that for the first time, that is moving.
There is a third one. India is a diverse society and you have to have measures for inclusiveness, what at the World Bank we callSHARED prosperity, that all segments of people feel a part of the society. This at first sight sounds like it has nothing to do with economics, but I think in the long run it has a lot to do with the economy.
How do you think we are performing in terms of inclusiveness? You have spoken in the past of the importance of mass welfare schemes for the bottom 40 per cent of the population.
In the World Bank, after I came in, we have now brought in two goals. Over and above poverty alleviation we have now brought in something called shared prosperity, which is basically drawing special attention in every country to the marginalised, to the ones who are being excluded, to bring them in. That is often very hard because there are vested interests who don’t want that. So we have stressed that at the World Bank and I would stress that in the case of India. India being innately a very diverse society like the U.S. it is very important to pay attention to that. It is not central to the short-run economy but it is very important to the long-run development of the economy.
Is that through mechanisms such as rising inequality, the risk of civil unrest and such?
Those things can destabilise, and also you also have to realise that there is human capital among the poor disadvantaged groups. If you provide them with education and healthcare, this requires the government to spendMONEY on education and healthcare, then you begin to include that [segment of the population].
And it’s not just that. It is also social and political effort to draw people in, into the mainstream. That is extremely important.
In that sense do you feel that we are on a good trajectory now? Because there have been shifts in the last few years in terms of specific allocations to certain programmes versus, under the rubric of state autonomy, giving states a free hand to allocateMONEYwithin their own budgets.
Over the last seven or eight years India has been working fairly well on that. This is moving away from Doing Business but this is something else that we track. We just released our Global Monitoring Report, where we track poverty. In India, poverty from 2005, which is the last time when purchasing power parity numbers came in, is going down very steadily now. There have been some changes in the way this is being measured that has been affected in India, whereby it may go down even more, and this is not a spurious statistical thing but it is genuine.
But there are other dimensions on which India does not do well. There is a lot of stunting. There is a lot of malnutrition. So you have to reach out to marginalised and excluded groups through economic policy and interventions and the government has to spend money on that.
The UPA government launched schemes to tackle some of these issues, including the NREGS, food security, right to education and so forth. Is it possible that budgetary reallocations at the state level could impact the way that these interventions work on the ground?
When I was in government I had argued that we need to work on the redesign of the way in which we give benefits to the poor, so that leakage is much less. In India you get about 40 per cent of the grain that is meant for the poor leaking out. There are ways of plugging this and we have to work on plugging this. This affects the poor disproportionately and it also affects your fiscal calculations, because you spend a huge amount of money and only 50 per cent is going where you are trying to send it and 40 per cent is a budget deficit being run up for no reason.
Going back to the DB report, how do you think it is going to be taken up in India? A lot of people watch it very closely.
Given that India has, since last year, declared, that India wants to move up this particular ranking, this will be watched very closely. But we know from the experience of some other countries that usually when you start big reforms on the ease of doing business, the first year you get some movement and you get more movement in the second and third years.
Also, our data goes up to June 1, 2015. Any changes made on June 2 will not be registered. We do know that India was continuing to make changes in June and July, which will be picked up in next year’s report. Really, for India to push to be in the Top 100 is not impossible.
What are the challenges that the Indian government may face in achieving this, for example could it be impacted by a lack of buy-in from the states?
The challenge that you can face is that you can pay disproportionate attention to gaming the system. American universities are ranked by lots of central ranking authorities. At times universities without making any deep changes will make changes only on those indicators where they get marks for that. So it is also possible for countries to just pay attention to what the World Bank is measuring and not make the deeper changes. But we hope, no matter how it is done, once you begin to work on this it is a movement in the right direction. There are very important changes that have been made [in India]. The improvements that you have seen in India’s rank are substantial.