Latin American Business Environment Statistics Push Governments to Reform

By Tanwina Hossain
July 29, 2008

While proving to be an effective and necessary tool, panelists agreed that the World Bank’s “Ease of Doing Business” (EDB) index overlooked critical aspects of a nation’s business environment. An event at the Inter-American Dialogue on July 29, 2008 focused on the World Bank's index as well as other trends related to Latin America's business climate.  The annual index is a joint World Bank-IFC publication which ranks 178 countries based on their regulatory environment and the ease with which businesses can operate. On hand to discuss their insider knowledge of the methodology and limitations of the EDB index were panelists Pamela Cox, Vice President for Latin America at the World Bank, and Victoria Elliott, the principal author of an independent critique of the EDB index by the World Bank’s evaluation department. Panelist Everett Santos, president of DALEC LLC and former Latin America CEO at Emerging Markets Partnership, provided his observations and predictions for the Latin American business climate.

The EDB index is sometimes inconsistent with real-world findings, such as Brazil’s low ranking (122) coupled with its demonstrated high level of FDI flow. Cox pointed out that Brazil was one of four Latin American countries (along with Chile, Colombia, and Mexico) in which 90% of FDI to the region was concentrated. This led some to question whether the report accurately reflected the sentiments of the foreign business community and to what extent it was taken into consideration when making investments and business decisions.

Among the shortcomings of the index, Cox pointed out that the rankings are really “a snapshot of the largest city in the country.” Santos reiterated that doing business outside the big cities was not well reflected in the experiences described in Doing Business. It was called to the panel’s attention by the Dialogue’s Dan Erikson that perhaps using informants who are lawyers living in capital cities throughout Latin America, usually employed by U.S. firms, could lead to politicized interpretations of regulation and business environment, possibly explaining Venezuela’s surprisingly low rank at 172.

Due to the tacit implication that minimizing regulations would lead to a higher ranking, Cox worried that governments would be pressured to decrease regulations haphazardly in industries where they are much needed. Elliott added that the rankings “only capture the burden of regulations, not the positive benefits of environmental or health regulations.” According to Elliott, the index also does not measure the quality or efficiency of regulations; it only measures the written law’s intended usage.

Despite the noted shortcomings of the EDB index, panelists and discussants were eager to point to its usefulness as a starting point for discussions on policy changes. When asked who the real audience of the report was, Elliott answered, “Doing Business is explicit. This is not a report directed at foreign businesses. It is directed at governments, so they know the pressure points in the economy.” Ambassador James Spalding Hellmers of Paraguay, who was in attendance, reiterated that the Congress of Paraguay often used findings in the EDB index as proof that regulatory policies were either working or that reform was needed in order to make the country more attractive to foreign investment. It was generally agreed upon that the index was helpful in drawing a larger picture of the state of a nation’s business environment, especially in conjunction with other reports and rankings indexes.

All three panelists agreed that the lack of infrastructure and capital growth in Latin America were impediments to continued economic growth at the fast-paced rates of 5% or more that the region has seen in recent years. Santos remained optimistic as he noted that the region had recovered remarkably well following the 1997 crisis due to sustained political and macroeconomic stability, increased reserve levels, and a decrease in corruption levels. “Clearly, we are going through a time when Latin America is disengaging its hooks from the U.S.,” he proclaimed. While it remains to be seen whether the region will continue to outpace growth in much of the rest of the world despite the economic slowdown in the United States, reports such as the EDB index will continue to play an important role in shaping business regulations, especially after its expected revisions in the next year to take account the critiques of Elliott’s independent evaluation committee.