International

Why World Bank Rankings Rankle

We all like lists. We all like rankings — a natural way of constructing a hierarchy of life: the good, the bad and the in-between.

But what happens when lists go bad? When rankings are skewed to the point of real impact on pocketbooks, economies and, ultimately, people?

Thus, news this past week, as reported by The Wall Street Journal, that the World Bank’s annual ranking of countries, defined by “ease of doing business,” has been skewed a bit. The culprit? Fingers point to what the financial publication said were “politicized” methodologies.

And where there’s politics, peril is close behind, at least for some. As the WSJ noted, the annual ranking of countries was compromised by the aforementioned methodologies, which span the relative ease of starting businesses and obtaining credit, among other metrics.

World Bank Chief Economist Paul Romer, serving in that role for the last two years, said irregularities were tied to an annual update of methodology. Revamped rankings over the last four years are in the offing. Look for company rankings, then, to shift. At the top of the most recent list were New Zealand and Singapore, and at the bottom, Somalia.

One casualty of the rankings may have been Chile, which, as the WSJ noted, was ranked at number 55 last year, down markedly from a position of 25 10 years ago. Said Romer, those rankings drifted downward due to new metrics driving the survey, but which did not reflect true shifts in the climate for doing business. “I want to make a personal apology to Chile — and to any other country where we conveyed the wrong impression. Based on the things we were measuring before, business conditions did not get worse in Chile under the Bachelet administration.”

Politics were possibly at play, as rankings improved when Sebastián Piñera, a conservative, was president, compared to when socialist Michelle Bachelet served in that role.

As the methodologies and rankings get sussed out, the ripple effect may make waves. The rankings are scrutinized by businesses and policymakers. The question then becomes what stock might be taken in the rankings, which help drive capital investment decisions.

The impact has been visible for Chile, not just in the rankings, but in the aftermath. Bloomberg reported Monday (Jan. 15) that the current administration, under Bachelet, is weighing what the fallout may have been across the economic sphere. The newswire noted that GDP growth has been the slowest, as measured across the past four years, in roughly three decades (Chile’s own ranking had been roughly in the mid 50s through that timeframe). In the wake of that slowdown, Piñera takes office as president again later this year, having won the election last month.

The headline numbers are thus: GDP growth slipped from 6.1 percent annualized in 2011 to 1.6 percent in 2016, to rebound a bit last year to roughly 2.2 percent as measured by the third quarter of last year.

We mentioned ripple effects: Last month, Chile said that it was setting up offices in Germany, the United States and Japan to spur foreign investment. The offices are being run by InvestChile, an agency tasked with getting investors to commit capital to Chile. Foreign direct investment (FDI) has declined on a slump for mining-related activity as demand for resources slipped.

FDI fell from $24 billion as measured in dollars to $11 billion, from 2014 to 2016.

The “Doing Business” report, then, may have a vicious cycle, or a virtuous one, given the year and given the feedback that comes through. Consider the fact that Bachelet has asked for, and the bank has agreed to, an investigation into whether the rankings were off. The list may be ranked on its own with a  jaundiced eye going forward, if the rankings were … rank.

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