Some are based on expert observations (‘Doing Business’ surveys) others on the perceptions and expectations of foreign investors (‘Enterprise’ surveys). These indicators are intended for three purposes: as targets for Bank-funded activities, to enable investors to make better informed decisions about where to do business, and to encourage competition in investment-climate league tables.
For the last decade in India, World Bank assistance has been directed towards improving Indian investment levels both by improving the investment climate, and by increasing the Bank’s measurement of the investment climate. Investment flows have risen dramatically. Annual FDI flows to India, which stood at US$236 million in the pre-liberalisation year of 1990, had grown ten times higher by 2000, then jumped to 20 times higher in 2002, when investment climate reforms were being introduced; and soared to over 170 times the 1990 level by 2008, when investment climate reforms had been in place for more than five years. Furthermore, the Bank has increased its measurement of the Indian investment climate, and its measurements have indicated that clearances are being issued more speedily.
But are these three indicators of progress actually linked? Are clearances faster because measurement is up? Is investment up because clearances are faster? The Bank and those who follow its policy lead do not know the answers to these questions because they have tended not to ask them. In fact, there is evidence to suggest that investors may pay far less attention to investment climate indicators than the World Bank policy presupposes, or that they pay attention to radically different indicators. For example, a close reading of the World Bank’s own 2004 Investment Climate Assessment of India reveals that 70 per cent of respondent firms had not made a pre-investment investigation of the investment climate. So how could it possibly be true that the nature of the investment climate was a strong determinant of their investment decisions?
Furthermore, respondent firms tended to rank as offering relatively ‘better’ investment climates those Indian states which the Bank would rate as ‘poor’. Frequency of inspection visits, management time involved in complying with regulations, costs of regulation, the duration of customs clearance and levels of corruption were all higher in supposedly ‘better-climate’ states. Obviously this sheds doubt on the claim that there is universal definition of what constitutes a ‘good’ investment climate; a doubt which is second nature to anyone familiar with multiple legal cultures.
An additional layer of problems is posed by poor measurement practices. For example, the surveys from which legal system indicators are constructed frequently include questions such as, ‘How much of an obstacle is corruption?’. If an investor replies ‘none’ does that mean there is no corruption, or that it is not an obstacle to them because they know how to navigate it? Indeed, how would you identify investors who actively prefer the kind of efficiency that ‘corruption’ can bring? And what would the Bank be at liberty to do with that knowledge while it wages a war on corruption?
Of course one might argue that the question of whether the targets of investment, measurement and efficiency are linked is merely of academic interest. If investment is up, that is all that matters. But while investment and, for that matter, a good investment climate, may be a means to development, they are not development goals in their own right. The point of development is to enable real people to live happy and fulfilling lives. So it remains important to know whether the resources devoted to improving investment levels are bearing fruit.
The signs are not good. The Bank’s Independent Evaluation Group (IEG) recommended in 2008 that the ‘Doing Business’ team ought to analyse the effects of ‘Doing Business-inspired reforms’ on: (i) firm performance, (ii) perceptions of business managers on related regulatory burdens, and (iii) the efficiency of the regulatory environment in the country’. In essence, it told the Bank to stop assuming that its work was effective.
One might add a request that we stop assuming that the investment climate agenda is not in fact damaging. In India, a number checks and balances, such as Environmental Impact Assessments and Pubic Hearings, have been eroded as a direct result of the effort to speed up clearances. Such an emphasis on speed at the beginning of the investment process risks undermining overall efficiency in the medium to long-run, as those concerns that are not heard before the project begins will surface later once costs are already long sunk. Furthermore, an emphasis on interstate competition for investment draws attention towards gaming investment climate league tables and away from debates over why the game is being played at all. Consider for example Georgia’s literally incredible rank of 11th easiest place to do business in the world in 2010, not to mention its meteoric rise (overtaking Japan and Germany among many others) from 112th in 2004, via a ‘best reformers’ award from the World Bank in 2007.
The time has come for a frank inquiry into who does and should care about legal system indicators. It is heartening to know that the Bank recently introduced a system to monitor and improve the quality of new indicators. But a haunting backlog of information overload and knowledge deficit remains to be cleared.
Amanda Perry-Kessaris is Professor of International Economic Law at the School of Oriental and African Studies, University of London.