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5.3.2.3. BEE Ranking and Benchmarking

Ranking and Benchmarking Reports

International BEE ranking and benchmarking reports—which compare enabling environment conditions across regions or countries—have gained popularity in recent years as effective tools for conducting BEE baseline assessments, facilitating dialogue and the identification of key competitiveness constraints or opportunities, and providing a means of measuring ongoing improvements in the enabling environment. These ranking or benchmarking reports are usually published on an annual basis but range significantly in terms of content and utility since they cover different countries and indicators, and use a variety of methodologies.

Some of the more popular benchmarking reports, such as the World Bank's "Doing Business" and the World Economic Forum's "Global Competitiveness Report," have been widely recognized as effective tools for fostering healthy competition between countries and in stimulating stakeholder action toward reforms. However, these reports are not without their limitations and critics. For example, the Doing Business report has a relatively narrow focus, using indicators that only measure the regulatory costs of doing business but do not touch on other major business environment factors such as infrastructure or macroeconomic stability. The Doing Business methodology has also been subject to criticism since the survey respondents from each country are sometimes as few as one, and usually come exclusively from the largest business city.[1] Some critics have even raised concerns that the Doing Business indicators and survey display a bias against civil law systems, favoring the common law legal system.[2]

In comparison, the World Economic Forum's Global Competitiveness Report employs a much broader concept of the business environment when ranking countries by using qualitative and quantitative methods to assess BEE components such as infrastructure, health and primary education, and higher education. However, the Global Competitiveness Report also has its limitations since it covers fewer countries than Doing Business (134 countries in the 2008-2009 report) and has displayed a trend of interviewing larger companies with an international presence when doing in-country surveys; therefore, small and medium-sized enterprises' perspectives may not be factored into the Global Competitiveness Index.[3]

Although no single ranking or benchmarking report provides a comprehensive and complete assessment of every aspect of a country's business environment, when used together, the reports can help provide a more accurate picture of a country's business climate, and serve as a good starting point for and measure of necessary reforms.

World Bank's Doing Business

The World Bank's Doing Business publication[4] is the most well-known benchmarking report and boasts the most expansive country coverage. Since 2004, the series has ranked countries according to their performance in relation to select business environment indicators designed to measure the cost in time and money to domestic small- and medium-sized businesses of conducting certain transactions in the course of their normal business life cycle. In 2004, Doing Business reported on 135 countries and five indicators. By 2009, coverage had expanded to 181 countries and 10 indicators:

  • Starting a business
  • Dealing with licenses
  • Employing workers
  • Registering property
  • Getting credit
  • Protecting investors
  • Paying taxes
  • Trading across borders
  • Enforcing contracts
  • Closing a business

The Doing Business data are collected through surveys and consultations with local professionals, including lawyers, business consultants, accountants, freight forwarders and government officials, who routinely administer or advise on legal and regulatory requirements. Respondents provide answers in the context of a standardized case scenario which specifies the legal form of a business, its size, its location and the nature of its operations. [5]

In 2008, the Independent Evaluation Group issued a report on the Doing Business indicators that highlighted several key limitations that should be taken into consideration when interpreting the data.[6]

The collected data refer to businesses in the economy’s largest business city and may not be representative of regulation in other parts of the economy. To address this limitation, the World Bank launched the Subnational Doing Business project (see next section).

  1. The data often focus on a specific business form--generally a limited liability company (or its legal equivalent) of a specified size. This may produce results that are not representative of the regulation on other businesses, for example, sole proprietorships.
  2. Transactions described in a standardized case scenario refer to a specific set of issues and may not represent the full set of issues a business encounters.
  3. The measures of time involve an element of judgment by the expert respondents. When sources indicate different estimates, the time indicators reported in Doing Business represent the median values of several responses given under the assumptions of the standardized case.
  4. The methodology assumes that a business has full information on what is required and does not waste time when completing procedures. In practice, completing a procedure may take longer if the business lacks information or is unable to follow up promptly. Alternatively, the business may choose to disregard some burdensome procedures. For both reasons the time delays reported in Doing Business 2009 could differ from the perceptions of entrepreneurs reported in the World Bank Enterprise Surveys or other perception surveys.

In addition to touching on the limitations of the indicators, the Independent Evaluation Group report also provides concrete recommendations for improvement. Another recently issued report that touches on the strengths and limitations of the Doing Business indicators is called Uses and Abuses of Doing Business Indicators.[7] The report discusses the most frequent misuses of the Doing Business indicators and suggests more appropriate ways of interpreting and using the data to maximize impact.

World Bank's Subnational and Regional Doing Business

In response to growing awareness of the limitations of the Doing Business series' focus on the "largest business city" in a country, the World Bank launched a Subnational and Regional Doing Business project.[8] The purpose of this initiative is to use subnational indicators to capture differences in business regulations and their enforcement across locations in a single country or region. They provide data on the ease of doing business, rank each location, and recommend reforms to improve performance in each of the indicator areas.

The first Subnational and Regional Doing Business reports[9] were issued for Brazil and Mexico covering 13 cities in each country for the 2006 period. Since then about 15 subnational and regional studies have been published covering China, Colombia, India, Nigeria, Morocco, [10] as well as expanded coverage (31 cities) of Mexico. Other subnational studies under way include Central Asia, Indonesia, the Russian Federation, Southeast Asia and Ukraine.

A major benefit of these reports to local governments and other stakeholders is the ability to compare their business regulations with other cities in the country or region and with the 181 economies that Doing Business has ranked. Mexico City, for example, can compare itself not only with national economies like Colombia or Spain, but also with those of Rio de Janeiro, Alexandria and other cities around the world. The reports also identify ongoing reforms and existing good practices within the country or region. The ranking of the best-performing city on each indicator can be combined to show how the country could rise on the global Doing Business rankings if it were to replicate the good practices that already exist in the country. These subnational studies point to significant differences in the speed of reform and the ease of doing business across cities in the same economy.

World Economic Forum's Global Competitiveness Report

The main goal of the Global Competitiveness Report (GCR) is to provide a picture of a nation’s economic environment and its ability to achieve sustained levels of prosperity and growth. Published by the World Economic Forum based out of Geneva, Switzerland, the GCR uses qualitative and quantitative methods to measure the comparative strengths and weaknesses of national economies. The first GCR was published in 1979 and its coverage has expanded each year since. The 2008-2009 Global Competitiveness Report polled 12,297 business executives in 134 countries.[11]

The cornerstone of the GCR is the Global Competitiveness Index, which scores countries on a total of 131 variables and groups them under twelve pillars:

  1. Institutions (public and private)
  2. Infrastructure
  3. Macreconomic stability
  4. Health and primary education
  5. Higher education and training
  6. Goods market efficiency
  7. Labor market efficiency
  8. Financial market sophistication
  9. Technological readiness
  10. Market size
  11. Business sophistication
  12. Innovation

Variables are calculated from both publicly available data and the Executive Opinion Survey. The survey, which sollicits the input of business executives, is a key feature of the GCR because it provides valuable qualitative information for which hard data sources are scarce or nonexistent. In addition to the GCR, the Executive Opinion Survey data inform several other publications by the World Economic Forum and serve as a major component of research by a number of international and national organizations, government bodies and companies.

Countries are scored and ranked according to each variable and pillar as well as in terms of their overall competitiveness. The scores and rankings of individual variables allow competitive strengths and weaknesses to be identified for each country. The GCR also classifies economies into five groups based on Michael Porter's schema of what drives economic growth at different levels of development:

  1. Stage 1: Factor-driven (GDP per capita less than $2,000)
  2. Transitional from Stage 1 to Stage 2 ($2,000-3,000)
  3. Stage 2: Efficiency-driven ($3,000-9,000)
  4. Transitional from Stage 2 to Stage 3 ($9,000-17,000)
  5. Stage 3: Innovation-driven (over $17,000)

In comparison to Doing Business, the World Economic Forum's GCR employs a much broader concept of the business environment when ranking countries, using qualitative and quantitative methods to assess BEE components such as infrastructure, health, primary education and higher education. However, the GCR also has its limitations since it covers fewer countries than Doing Business and has displayed a trend of interviewing larger companies with an international presence when doing in-country surveys; therefore, small and medium-sized enterprises' perspectives may not be factored into the Global Competitiveness Index.[12] Nonetheless, with big name supporters like Michael Porter, the GCR is still one of the most widely referenced and utilized reports when assessing country competitiveness.

World Bank’s Enterprise Surveys

The World Bank's Enteprise Surveys[13] are available on almost 86,000 firms in 110 countries. Serving as a complement to the Doing Business reports, the data from the Enterprise Surveys cover business perceptions and dozens of indicators on the quality of the business environment. In recent years, the Enterprise Survey team has worked to move all survey data to the web and standardize the methodology across all regions. Previously, regions and even country teams could add whatever questions they thought were appropriate, without regard for the cross-country comparability of data. Surveys are carried out by private contractors working for the World Bank.

An October 2008 entry on the the World Bank Doing Business blog[14] shares four ideas on how best to use the survey results and online database:

  1. Use them as purely descriptive sources, to show what the typical business in a developing country looks like. 'One day in the life of a business in ..." can teach us a lot about what it is like to be an entrepreneur. What you worry about, how you organize your production, how you deal with the government. One can ask some specific questions: why are there no large businesses in developing countries; do entrepreneurs separate their family finances from the business finances, or do they run a common pool; how are investment and hiring decisions made; how are new export markets opened. It is remarkable that no analysis like this has been done to-date.
  2. Use the data to quantify the effect of specific reforms. This is done in tandem with Doing Business data on reforms. For example, Croatia has been a consistent top reformer in Doing Business lately. Use the 2002, 2005 and 2007 enterprise data to see whether businesses have noticed the effects of, say, the property registration reforms. If not, why? If yes, how have they benefited? This combination of data sources can lead to a new sub-field: reform impact studies, that can in turn inform the relative importance of policy advice in one area vs another.
  3. Do analysis across regions within a country. In some of the large emerging economies, the Enterprise Surveys cover thousands of firms that can be separated by location and sector. This allows for analysis of the impact of regulation and institutions: doing so within a country eliminates many "alternative hypotheses." For example, one could study the effect of court efficiency across Mexican or Brazilian states on the number of new contractors a business has. A study of this type is Mohammad Amin's study on labor regulation in India, forthcoming in the Journal of Comparative Economics.
  4. Study the divergence between perceptions and reality. This can be done in certain topics. For example, the survey asks businesses to rate the complexity of labor regulations; and then separately asks them to say how they would have behaved differently had regulations been more flexible. If a manager said that labor regulation was a big burden, but then also said he would not change his employment strategy if the regulation were made more flexible, a problem arises. In essence, he doesn't know what he is talking about. If so, this analysis tells us something about the usefulness of the perceptions part of the Enterprise Survey, and more generally about the usefulness of all other perceptions surveys - like Transparency International, the Global Competitiveness Report, etc.

World Bank’s Worldwide Governance Indicators

The Worldwide Governance Indicators (WGI)[15] reports aggregate and individual governance indicators for 212 countries and territories over the period 1996–2007, for six dimensions of governance:

  • Voice and Accountability – measuring perceptions of the extent to which a country's citizens are able to participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.
  • Political Stability and Absence of Violence – measuring perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.
  • Government Effectiveness – measuring perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies.
  • Regulatory Quality – measuring perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.
  • Rule of Law – measuring perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence.
  • Control of Corruption – measuring perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests.

The aggregate indicators combine the views of a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. The individual data sources underlying the aggregate indicators are drawn from a diverse variety of survey institutes, think tanks, non-governmental organizations, and international organizations.

The Heritage Foundation’s Index of Economic Freedom

The Index of Economic Freedom (IEF) is a series of 10 economic measurements created by the Wall Street Journal and The Heritage Foundation to measure the degree of economic freedom in the world's nations, using statistics from a wide range of publshed data sources as well as organizations like the World Bank, the IMF, and the Economist Intelligence Unit. First issued in 1995, the Index defines the highest form of economic freedom as "an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself." The specific freedom indicators are:

  • Business Freedom
  • Trade Freedom
  • Monetary Freedom
  • Government Size
  • Fiscal Freedom
  • Property Rights
  • Investment Freedom
  • Financial Freedom
  • Freedom from Corruption
  • Labor Freedom

Aggregating across these ten measures, the Heritage Foundation assigns countries to five broad categories: 1) Free, 2) Mostly free, 3)Moderately free, 3)Mostly unfree, 4)Repressed. The majority of USAID countries listed in the Index are categorized under Moderately free, Mostly free or Repressed.

Challenging the IEF's premise that greater economic freedom leads to greater prosperity, some critics such as Jeffrey Sachs[16] question why, if economic freedom as measured by the Index is what brings prosperity, countries like China, Russia, and Vietnam that have undemocratic systems of government and thus get low ratings in the IEF have managed to grow so rapidly.[17]

The 2009 Index reported on 183 countries and can be found here: http://www.heritage.org/Index/

The Global Entrepreneurial Research Association’s Global Entrepreneurship Monitor

The Global Entrepreneurship Monitor (GEM) is a not-for-profit academic research consortium between the London School of Economics, Universidad del Desarrollo in Santiago, Chile and Babson College that aims to make high quality international research data on entrepreneurial activity readily available to a wide audience. GEM is the largest single study of entrepreneurial activity in the world. Initiated in 1999 with 10 countries, GEM 2008[18] reports on 43 countries, but only about a dozen of them are countries where USAID works and none are in Africa. The three main objectives of the GEM are:

  • To measure differences in the level of entrepreneurial activity between countries
  • To uncover factors determining national levels of entrepreneurial activity
  • To identify policies that might enhance national levels of entrepreneurial activity.

Information on entrepreneurial activity (entrepreneurs and business owner-managers as a percentage of the adult population) is collected through a survey of individuals called the GEM Adult Population Survey. GEM also collects information on nine Entrepreneurial Framework Conditions [19] and compiles a “red tape index” that rates national expert perceptions of regulation affecting new and growing businesses and can be compared to the World Bank’s Doing Business indicators.[20]

Footnotes

  1. Snodgrass, Donald. 2008. Alternative Business Enabling Environment Ranking: A Review.
  2.   Methodological Limits of Doing Business.
  3. Snodgrass, Donald. 2008. Alternative Business Enabling Environment Ranking: A Review.
  4. World Bank's Doing Business.
  5. Doing Business Methodology.
  6. Doing Business: An Independent Evaluation: Taking the Measure of the World Bank-IFC Doing Business Indicators.
  7. Uses and Abuses of Doing Business.
  8. World Bank's Subnational and Regional Doing Business Studies.
  9. World Bank's Subnational Doing Business Reports.
  10. USAID Improving the Business Climate in Morocco Project Website.
  11. World Economic Forum's Global Competitiveness Report.
  12. Snodgrass, Donald. 2008. Alternative Business Enabling Environment Ranking: A Review.
  13. World Bank Enterprise Surveys.
  14. World Bank Doing Business Blog.
  15. Worldwide Governance Indicators Project.
  16. Sachs, Jeffrey, The End of Poverty: Economic Possibilities for Our Time (2006)
  17. Snodgrass, Donald. 2008. Alternative Business Enabling Environment Ranking: A Review.
  18. Global Entrepreneurship Monitor.
  19. Entrepreneurial Framework Conditions.
  20. Snodgrass, Donald. 2008. Alternative Business Enabling Environment Ranking: A Review.