Less Bureaucracy Is Good, But Not Good Enough!

Why do we fall, Bruce? So we can learn to pick ourselves up – Thomas Wayne to his son (Batman).

The Georgian Government’s pride and joy of the previous years has been its high standing in the World Bank’s Ease of Doing Business index. Investors, policymakers, and economy-watchers around the world have opened editions of magazines like The Economist to see full-page advertisements about why Georgia is ‘different’ among Post-Soviet countries when it comes to doing business. A line such as “Georgia is different because we are the World Bank’s number 1 reformer for 5 years” said it all.

Georgia’s Doing Business ranking peaked at #9 and 8 in the world in 2013 and 2014, respectively, after vigorous actions by the new Georgian administration to strengthen judicial independence and better secure property rights. In the following two years, however, Georgia went down in the Index: to #15 last year, and to 24 in the most recent ranking released on October 26, 2015.

What could possibly go wrong?

CINDERELLA LOSING HER GLASS SLIPPER?

Georgia’s performance (see chart) in the Ease of Doing Business index is a Cinderella story. In 2006, the country ranked in 100th place, but, thanks to a rapid and effective reform process, by 2010 it climbed all the way to 10th position, ahead of some of the most eminent economic powers in the world, such as Germany and Switzerland. Despite recent setbacks, Georgia maintains its official title as the fastest reformer in the Ease of Doing Business over the past 12 years, closely followed by Rwanda (incidentally, Rwanda’s largest bank, Bank of Kigali, is chaired by a prominent Georgian banker, former PM and ISET’s chair, Lado Gurgenidze).

But what did this achievement mean in reality? How could Georgia be possibly ranked ahead of Germany on any conceivable indicator of economic performance?

For lack of a convincing answer, Doing Business methodology has always been subject to harsh criticism from within and outside the World Bank Group. First and foremost, the Index grossly under-delivers relative to its well-selling name. De facto, until 2014, Doing Business had been measuring freedom from, and (to some extent) efficiency of government regulations (a classical example is # of days to register a business). Yet, to measure how easy it is to do business (as opposed to registering a business), one would have to look at many other factors which Doing Business had ignored ‘for simplicity’. Such are things like, for example:

• quality of infrastructure

• availability of input suppliers and service providers

• size of internal and external market

• labor force quality (skills and ethics)

• access to finance

• property rights

While slashing suffocating regulations and redundant bureaucracy, Georgia could not achieve nearly as much progress on any “doing business” factors that require patient construction and nurturing rather than swift revolutionary actions. Removing regulations – and even corrupt officials – is an easy task, provided the political will is there. Re-educating the entire labor force takes generations.

THE EASE OF GOING UP AND DOWN IN INTERNATIONAL INDEXES

To do justice to Georgia’s reformers, they did implement a number of highly successful constructive reforms such as moving almost all government services to online platforms and opening amazingly efficient public service halls. Yet, despite a lot of improvement, Georgia’s infrastructure is still light years away from Germany; its peanut-sized market is still hardly an attraction for multinational companies seeking to maximize the bang for their buck; whoever decides to invest in Georgia – for emotional or any other reasons – would still have to invest in own supply chain and services, given that very little would be available from local providers; and so on and so forth.

The many shortcomings in its business environment did not stop Georgia from progressing to almost the very top of the Ease of Doing Business Index. They did not stop Georgia from progressing for one simple reason: until 2014, the Index had largely ignored or discounted many of those things that businesses really care about. And by the same token, while Georgia’s seemingly worse performance in the Ease of Doing Business in 2015 and 2016 certainly works great inserted into an opposition party’s stump speech, the only thing it reflects is a change the World Bank’s methodology. Yes, a change that, finally, after almost a decade of criticism, brings the methodology of Doing Business a bit closer to what its name actually implies.

An independent panel, appointed by the President of the World Bank, reviewed the methodology and practice of Doing Business in October 2012. The resulting report issued in June 2013 expressed concerns about both coverage and relevance of Doing Business indicators, as well as its potential to be misinterpreted as a one-size-fits-all template for development. Nevertheless, a recommendation was made to retain the Doing Business report with some modifications to its methodology, institutional structure, name, and communication strategy. The methodology had been retooled over two years, in 2014 and 2015, with some additional changes expected in the coming years.

The revised methodology, while maintaining the same basic structure, adds new indicators (e.g. quality of land administration systems, quality of construction regulations and controls, reliability of electricity supply, and quality of the judicial process). These new indicators focus on quality of regulation or infrastructure issues that are more challenging for developing countries, such as Georgia. To take another example, Georgia’s has been downgraded to 78th on “trading across borders” after this indicator has been revamped in 2016 to better reflect the actual structure of Georgian trade.

SHOULD “DOING BUSINESS” BE SIMPLE OR COMPLICATED?

For all its simplicity – and maybe thanks to it – the good old Doing Business Index did perform a useful function. It motivated governments to implement deregulation reforms and improve the quality of existing regulations. It was able to perform this function because, until 2014, it covered areas that are mostly under direct government control. A government that wanted to look good on the Index could do so in a very short time. And many governments, starting with Georgia, jumped on the opportunity to do so.

For example, Azerbaijan made huge strides in Doing Business after its government became envious of Georgia’s success. Did it make Azerbaijan a truly good country for doing business? No, it is still as corrupt and as clan-dominated as ever before. However, having fewer and more efficient regulations was a good thing for Azeri businesses and citizens.

No government can instantly improve its ranking on far more comprehensive indices such as the Global Competitiveness Indicators (GCI) compiled by the World Economic Forum. Progress in GCI is painstakingly slow because it requires a lot of investment in things like infrastructure, innovation systems, free trade agreements, etc. Hence, GCI is not as effective in motivating myopic governments that are only interested in achieving quick results (before the next elections). It is particularly weak in incentivizing governments of developing countries, such as Georgia, which by definition would never be able to top the world on the quality of infrastructure or labor qualification.

A more complex and realistic Doing Business is likely to lose in the amount of attention it is getting in Georgia and elsewhere in the developing world where it provided governments with a unique opportunity to shine. Still, by keeping its focus on certain actionable aspects of the business environment it will continue to perform an important role in promoting good governance reforms.

ONE STEP BACK, TWO STEPS FORWARD!

The fact that Georgia went back in the new Doing Business may deny Georgian officials a platform to sing the praises of a top-10 ease-of-doing-business economy. At the same time, the new methodology helps highlight and monitor progress in areas that are key for strengthening Georgia’s competitiveness. Improvement in some of these areas (contract enforcement, quality of judicial processes, and reliability of electricity supply) is already reflected in the 2016 Doing Business report. Additional progress may be achieved thanks to closer economic ties and easier ‘trade across borders’ between Georgia and the EU.

Put simply, rather than constituting a setback, the 2016 Doing Business Report should be seen as an opportunity for Georgia to “learn how to pick itself up” once more.

Olga Azhgibetseva, Charles Johnson, and Eric Livny