Let’s look beyond the ranking

  • Opinion
  • Saturday, 07 Nov 2015

World Bank’s Doing Business report is equally useful as a guide for regulatory improvements

RELEASED late last month, the Doing Business 2016 report by the World Bank gives the Malaysian government the chance to again promote the fact that the country is among “the top 20 economies in the world with the most business-friendly regulations”.

Like it was last year, Malaysia is ranked 18th among 189 economies in this year’s comparison of business regulation for local firms.

In a statement responding to the report, International Trade and Industry Minister Datuk Seri Mustapa Mohamed regards Malaysia’s slot in the top 20 as the World Bank’s acknowledgement of what he calls the country’s significant improvements in regulatory processes.

He points out that in the latest ease-of-doing-business ranking, Malaysia is ahead of Switzerland (26th), France (27th), the Netherlands (28th), Japan (34th), the United Arab Emirates (31st), Thailand (49th), China (84th) and India (130th). Singapore is the only Asean country placed higher than Malaysia.

In welcoming the report’s assessment of Malaysia, he says, “It’s yet another affirmation of the efficacy of the Government’s efforts to resolve operational inefficiencies and review procedures and regulations under the Government Transformation Programme and the Economic Transformation Programme,”

Mustapa also attributes the country’s Top 20 status to the work of the Special Task Force to Facilitate Business, better known by its Bahasa Malaysia acronym, Pemudah.

“The fertile eco-system that helps nurture our economic expansion can be directly traced to the strong public-private partnership exemplified by Pemudah. This close collaboration at the most senior levels of the Government and the private sector enables both sides to highlight blockages in the system and align policies and procedures accordingly,” he adds.

And indeed, the Doing Business report is an important yardstick for what the task force does, which is essentially to get the public and private sectors to work more closely to enhance public service delivery and improve the business environment in Malaysia.

Pemudah’s annual report 2014 even says the task force is synonymous with leading and coordinating multi-faceted initiatives to improve Malaysia’s ranking in the Doing Business reports.

If that’s the case, we ought to have a firm idea of what the reports are all about.

In his foreword to the Doing Business 2016 report, World Bank senior vice-president and chief economist Kaushik Basu explains that the annual publication sheds light on the state of health of economies. But it does not rely on detailed diagnostics of the relatively more visible features (such as growth) and various macroeconomic parameters (such as the public debt).

Instead, it draws its supporting data from underlying and embedded characteristics, such as the regulatory system, the efficacy of the bureaucracy and the nature of business governance.

“An economy’s scores on Doing Business indicators are somewhat akin to a measure of concentrations of various proteins and minerals in the human blood,” he says. “They may not seem important to the lay observer, but they have huge long-run implications for an economy’s health, performance and growth.”

The World Bank has been publishing the Doing Business report since 2003. This annual exercise focuses on regulations and regulatory processes involved in setting up and operating a business. Doing Business 2004 covered about 130 countries and its data was on five topics – starting a business, hiring and firing workers, enforcing a contract, getting credit, and closing a business.

The current report incorporates data from 189 economies in relation to 10 areas of business regulation – starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. This information is used to develop the ease-of-doing-business ranking, the report’s centrepiece.

The report also includes data on the regulation of labour markets but it doesn’t figure in the ranking.

Since the Doing Business 2006 report, Malaysia has never been ranked lower than 25th. Our best position was 6th, in Doing Business 2014, followed by 12th the year before. In the other years, the rankings ranged between 18th and 25th.

What’s particularly interesting is our strong showing in the areas of getting credit and protecting minority investors.

This year, for getting credit, the World Bank team has measured movable collateral laws and credit information systems, while for protecting minority investors, the team has looked at minority shareholders’ rights in related-party transactions and in corporate governance.

Since Doing Business 2007, Malaysia has ranked 4th in protecting minority investors every year, except for Doing Business 2015, when it was placed 5th. That’s an impressive display of consistency, especially when you consider that the World Bank’s methodology is always evolving. For example, Doing Business 2015 introduced three new measures of minority investor protection.

That same year also saw changes in how getting credit is analysed. The World Bank decided to expand its measures of legal rights of borrowers and lenders, and the sharing of credit information.

In Doing Business 2007 and 2008, Malaysia was ranked 3rd in terms of ease of getting credit. And for the next six years, it was 1st. However, when the indicators were tweaked for Doing Business 2015, Malaysia dropped to 23rd. And in Doing Business 2016, Malaysia is placed 28th in the getting business category.

This reversal underscores the point that the Doing Business report is not just about rankings. It’s also a guide on how to do better.

Basu of the World Bank says the report has inspired hundreds of regulatory reforms worldwide. “The report not only highlights the extent of regulatory obstacles to firms through the compilation of quantitative data for more than 40 subindicators but also identifies the source of business environment constraints,” he adds. “This helps governments identify well-defined areas of action and design reform agendas.”

Fortunately, it appears that Malaysia is in a position to get the most out of the report. Mustapa says Pemudah will continue to collaborate with the International Finance Corporation of the World Bank to examine the target areas for improvement.

“The relatively high rankings accorded to Malaysia by the World Bank and World Economic Forum (in the Global Competitiveness Report) are encouraging. But as we compete for a larger slice of investments in the highly complex global economy, Malaysia has to keep upping our game,” he urges.

It’s good to be 18th out of 189, but it’s perhaps better to be constantly improving.

Executive editor Errol Oh is ambivalent about rankings. They are useful, no doubt. but can also mislead and lull us.

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