Bertrand du Marais (E85): “The World Bank caused significant economic damage with its Doing Business reports”

This summer, the World Bank announced that it was discontinuing its Doing Business reports following a swathe of irregularities. It’s no trivial matter: used by credit rating agencies, the results of these reports put a strain on borrowing capacity and diverted the investment strategies of a great many governments, weighing down their growth for more than 15 years. Bertrand du Marais (E85), Government Advisor, is here to tell us more. 

ESSEC Alumni: What was the World Bank’s Doing Business report? 

Bertrand du Marais: This annual report, translated into several languages, was the World Bank’s most read publication. For 17 years, it compiled the Ease of Doing Business Index, the world’s definitive ranking of national legal systems according to how well they facilitated business.

EA: Why did the World Bank decide to discontinue the publication of the Doing Business report on 16 September? 

B. du Marais: The World Bank made this decision after an independent inquiry confirmed serious manipulation of the data. The grades awarded to a number of countries, including China and Saudi Arabia, were inflated for political reasons, under pressure from the World Bank’s top-level managers – in post at the time of the events but no longer today – including Kristalina Georgieva, current managing director of the IMF, and Simeon Djankov, the former Bulgarian minister of finance.

EA: Methodological biases were also uncovered...  

B. du Marais: Indeed, this fraud was accompanied by systemic biases at every stage of compiling the index. Firstly, the data were obtained from an opinion poll sent to a small panel composed mainly of Anglo-American lawyers, most of whom were out of touch with the realities of doing business in developing countries. Secondly, the questions were based on a case study indicative of a more theoretical approach to business life, rather than actual current practices in the systems being assessed. Thirdly, respondents were asked to grade local laws on a binary scale, according to the presence (1) or lack (0) of certain instruments that were seen as being effective, but were in fact heavily inspired by Anglo-American law. Lastly, the results were compiled to the arithmetical mean, without any weighting, which in particular exaggerated the litigious nature of the law, concealing the fact that this was also an instrument for reassurance and balance between parties. In fact, the whole strategy was a mistake: inspired by textbook law rather than law in action, it was satisfied with measuring the discrepancy between the real world and the fantasy world of Anglo-American economists.

EA: You raised the alarm when the first Doing Business report was published back in 2004. What signs had you spotted? 

B. du Marais: I was already familiar with the methodology upon which the Doing Business report was based – its creators, Andrei Shleifer and F. Lopez de Silanes had published it in 1998 in a paper entitled “Law and Finance”. I immediately noticed both the bias inherent in its design, and its potentially devastating effects on financial markets in poorly graded countries, where borrowers were at risk of having to pay a premium (spread) in compensation for their poor score. That was why I immediately launched a rigorous, scientific critique with the entire Place de Paris, which was for once speaking with one voice... from lawyers to notaries, and the chancellery in Bercy and the Banque de France. We published our findings in 2006 in French and then in English.

EA: What impact did this warning have?

B. du Marais: Our work was taken up by a number of scientists, including economists at the International Labour Office, who clearly saw that the Doing Business report was also leading to an erosion of employee rights. In the short term, the initiative led to France’s score climbing 17 places in two years, a performance that has never been repeated since in any ranking that included France... And most importantly, our arguments were featured in an initial internal audit conducted by the World Bank in 2008. What happened next was even more outlandish: the American unions got hold of it and began lobbying Democrat congresspeople and Barack Obama’s government, leading to a resolution ordering the President of the United States to remove the “Employing Workers” sub-indicator from the global index and the rankings. Coincidentally, at the same moment Michael Klein, vice-president of the World Bank who was then responsible for the Doing Business report, decided to that the time had come for his well-earned retirement, while Simeon Djankov, the chief economist on the Doing Business report, returned home to Bulgaria...

EA: And yet, the World Bank kept publishing the Doing Business report...

B. du Marais: It’s all the more appalling given that the complaints never stopped coming in. In 2013, an independent audit conducted by Nelson Mandela’s former minister of finance confirmed the biases and methodological shortcomings we highlighted. In 2018, Paul Romer, chief economist at the World Bank, resigned after publicly expressing his concerns about the possible manipulation of China’s score. Eventually, in summer 2020, the World Bank was forced to “pause” publication of the report in order to investigate the manipulation of data that has now been proven.  

EA: How would you explain this reluctance?

B. du Marais: It’s not unreasonable to think that the report served powerful interests: all those who needed an immediate, straightforward, and media-friendly indicator to assess the risks of a legal system that was foreign to them; all those attached to the supremacy of Anglo-American law; all those who benefit from the removal of guarantees that a balanced legal system should provide; all those working towards the hegemony of an economic doctrine in which legislation, and even state intervention in general, can only ever do harm. That encompasses a lot of people...

EA: And on the flip side, who were the main losers due to the bias in the Doing Business report? 

B. du Marais: The Doing Business report directly harmed two categories of stakeholder: developing countries, on the one hand, who invested heavily in meeting its criteria, sometimes through counterproductive reforms; and on the other hand, every economic stakeholder in poorly or under-graded countries (potentially including France), for whom borrowing got more expensive – because credit rating agencies relied heavily on the Doing Business report, therefore transferring the rankings’ bias into their own evaluations.

EA: Is it possible to assess and repair the damage caused by the Doing Business reports? 

B. du Marais: That’s a very interesting question, and all the more so given that the damages are potentially significant, in both practical and financial terms. For states, the redress can only be political, while acknowledging that the countries affected generally need funding from the World Bank... and that the World Bank remains a public international organisation, enjoying special immunity. The liability of credit rating agencies could also be sought, but it would be difficult to put into practice, as most of the players on the market are American companies and classed as press agencies, which grants them protection under the First Amendment that protects freedom of speech. However, these immunities and exceptions do not apply to natural persons, unless they are protected by diplomatic immunity.

EA: What do you think the World Bank is going to do as a result of this matter? 

B. du Marais: Well, firstly we can see that Kristalina Georgieva is still head of the IMF. It is also worthy of note that the current chief economist at the World Bank, Christina Reinhart, appointed in May 2020, is known to have made “mistakes” with her co-author Kenneth Rogoff, by showing that high levels of public debt reduced growth, in a paper that became a classic... This affair clearly shows that there is a lot of work left to do in adjusting the ethics of economists as a profession.

EA: How can we stop this kind of scandal from happening again? 

B. du Marais: One of the difficulties lies in the success of these rankings based on a summary indicator that is supposed to sum up, in a single grade, a legal system’s entire complex reality. The network of researchers and practitioners that I coordinate within FIDES (Forum on Interactions Between Law, the Economy, and Society) is fighting for detailed and comparative economic evaluations of legal systems, which would set out to compare, across a smaller number of similar countries, the economic effectiveness of a few instruments as they are used in the real world and, most importantly, in acknowledgement of the diversity in legal cultures. The “one size fits all” dogma (which was one of the subheadings in the first Doing Business report) based on a universal standard is a myth, or even a con.

Interview by Louis Armengaud Wurmser (E10), Content Manager at ESSEC Alumni 

Want more content? Join us now so that we can keep bringing you news about the ESSEC network.