Civil Society Recommendations to Doing Business Independent Review Panel

Civil Society Recommendations to Doing Business Independent Review Panel
1. Doing Business must be reformed to better fulfil the World Bank's mandate to
eradicate poverty and the IFC's development goals
The Doing Business indicators do not represent or serve well the needs and priorities of the
majority of poor micro and small-scale entrepreneurs (MSEs). The “model” firm on which Doing
Business is based is a medium-sized formal business operating in an urban setting. This is not the
reality of the majority of businesses in developing countries.
Many of their priorities for being able to “do business” identified in research by CAFOD and others,
and indeed reflected in the World Bank's own enterprise surveys are not featured in Doing
Business. For example, corruption has a real impact on risk and competitiveness, but is not
considered by Doing Business.
The Doing Business team have begun to address this deficiency – by beginning to include a new
indicator on access to electricity. Whilst Doing Business is not intended to measure everything that
matters to inclusive private sector development – for example, health and education policies –
much more needs to be done.
It is not just the areas of reform that are of concern for their lack of relevance to the majority poor
entrepreneurs, but also the nature of reforms promoted under topics that are included. For
example, Zambia ranks well on the Access to Credit indicator, whilst the majority of firms cite this
as their major constraint when surveyed.
In order to improve the relevance of Doing Business to poor small business owners, the World
Bank should:
− broaden consultation to specifically get viewpoints of MSEs, and firms in rural areas,
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tackle topics that matter to these groups, including corruption, and
address reforms that suit them.
Without making these changes, the Doing Business project will remain mostly irrelevant to the
majority of businesses struggling to do well in developing country markets, and do little to promote
the livelihoods ambitions of poor entrepreneurs, or to achieve the development imperatives of the
World Bank and IFC. In such case, the panel should consider recommending to take the Doing
Business project outside of the Bank to be under the remit of an institution with whose purpose
it is more closely aligned.
2.
Doing Business must be used in an appropriate way in policy formulation
As recognised by the Doing Business team, the project is not intended to provide a blueprint for
regulatory reform. It is poorly designed for such a purpose. It captures what is easily measurable,
without any deeper analysis and in a relatively unscientific way.
Consequently, the World Bank recognises that the reforms listed might not be appropriate in all
contexts, might not be the most important reforms in those economies, or might not highlight
important trade-offs between “Doing Business” and other objectives.
For these reasons, it is important that the Doing Business indicators are not used inappropriately to
guide regulatory reforms, as they do not provide the necessary complexity of information, the full
picture of what reforms are needed or the different implications of choices that should guide such
decisions.
Therefore, it is inappropriate to promote Doing Business reforms in countries as being the “right”
thing to do or to set direction of regulatory reform. To avoid such incentives arising, the World
Bank should:
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Not use Doing Business in CPIA
Recommend that Doing Business is not used by donors as benchmarks in aid
programmes
Not rank countries according to their Doing Business “scores”.
3. Doing Business must be used alongside specific tools and consultations
The usefulness of a tool such as Doing Business – even an improved version - is in highlighting
possible areas of concern and starting a debate on regulatory reform in countries. However, this
usefulness is undermined if this broader analysis and debate does not take place.
Therefore, the World Bank must make efforts to ensure the following are available to and used in
developing countries, if the Doing Business is to apply to them in any way:
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Broader enterprise surveys (that include poor, rural, informal and small enterprises)
consultations with broad range of stakeholders (including trade unions and civil
society)
Subject specific tools/reports, for example on Taxation policy reform.
4. Doing Business must not be promoted inappropriately
The reforms promoted in Doing Business are only a small part of what needs to be done to achieve
successful, inclusive private sector development in developing economies.
It is inappropriate, therefore, that Doing Business should be subject to such a disproportionate
promotional effort, compared to – for example health or education indicators or other private sector
development tools, such as enterprise surveys.
Considering the influence of the Bank's advice in client countries, whilst it is important to draw
attention to the need for regulatory reform, it is equally important to avoid that Doing Business
reforms are given undue prominence
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Review the use of Doing Business by advisory services such as FIAS
Reduce Doing Business media and promotion budget & review how Doing Business
is portrayed in the media
Cease to rank countries as this generates unwarranted interest.
5. The Employing Workers Indicator should be permanently removed from Doing
Business
There is no proven link between reforms promoted by the EWI and jobs, growth or other economic
outcomes, as found by the IEG, among others, contrary to assertions by Doing Business of a linear
relationship between levels of labour regulation and economic outcomes such as employment
levels. This is consistent with the findings of the World Bank’s World Development Report 2013
(WDR 2013), which found that most studies indicate that labour regulations only have an
“insignificant or modest” impact on employment levels. An IFC Jobs Study (January 2013)
published the results of an extensive enterprise survey of 45,000 firms in 106 developing countries.
It revealed that labour market regulations were mentioned by only 3 per cent of firms surveyed as
constituting obstacles to job creation.
Until the EWI was suspended by the World Bank in Doing Business 2011, the IFIs used the EWI to
pressure countries to reduce worker protection legislation, sometimes through loan conditions.
Since EWI measures the absence of labour regulation, the best ratings were given to countries that
did away with worker protection legislation, never had any or were known for their lack of respect
for workers’ rights.
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Discussion to replace EWI with a more balanced indicator which includes scoring countries on
workers' protection and social protection provisions have not progressed significantly, and the
option to reinstate an EWI does not seem to have been ruled out, despite the fact that it puts
forward a one-sided view of labour regulations.
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The Bank should permanently exclude the EWI from Doing Business and,
instead, develop a balanced approach on labour regulations outside of Doing
Business that encourages countries to create decent jobs, provide good
social protection and apply the core labour standards. The WDR 2013
potentially provides the basis for developing such a balanced approach.
The Paying Taxes Indicator needs to promote fair, equitable and efficient tax
systems
Tax should not be presented by the World Bank as an unnecessary burdensome cost to business
that needs to be minimised for supporting private sector development. The total tax contribution
sub-indicator and even the title of the indicator itself - “Paying Taxes” implies that paying tax has a
negative impact on businesses.
Instead the bank should be helping to create fair and equitable fiscal systems which provide a
solid basis for the establishment of macroeconomic conditions, and under which governments can
provide sustainable and robust frameworks and institutions to support the business environment.
Tax continues to represent the most sustainable and predictable source of income for all countries
and fundamentally helps governments to deliver the essential frameworks, institutions and services
that are needed for businesses to operate. Reducing tax rates and therefore tax revenues can
actually undermine states’ ability to create an enabling business environment.
What should matter most to businesses are not the tax rates per se, but indicators that measure
the state’s capacity to use tax revenues to create a sustainable and resilient enabling business
environment. The current indicators create a wealth of data but nothing that proves the benefits of
tax payments for promoting the robust profitability and long-term sustainability of business. 1
Although the World Bank has ceased to advocate a zero tax rate, the current ‘total tax payable’
sub-indicator can incentivise states to progressively reduce tax rates that affect corporations to an
arbitrarily low level. This can produce a race to the bottom where the tax rates are concerned, in
the states’ attempt to compete against one another for Foreign Direct Investment, thus leading to
revenue foregone. As the IMF states2, the risk is that this will ultimately be to their mutual harm,
with each country ignoring the adverse impact that its own tax-cutting has on others, and
preventing the possibility of mutual benefit from limiting such tax competition. In addition, including
quasi-taxation payments, such as payroll contributions to healthcare, creates particularly perverse
incentives in this regard.
Second, it can force the state to use other taxes, such as taxes on labour and consumption, to
compensate that revenue loss. The shift of the tax burden to labour and consumption could lead to
more regressive tax systems and increased inequality and as recent research shows, even have
damaging consequences for growth3. It can reduce the population’s purchasing power, thus having
a potential negative impact on businesses’ performance in that market. In addition, a shift of the tax
burden to labour and consumption could raise serious issues of fairness, raising issues of noncompliance and even leading to higher risks of political and social unrest, which also bring relevant
threat for business development and success.
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3
http://www.pwc.com/gx/en/paying-taxes/pdf/paying-taxes-2011.pdf
Keen, Michael, and Mario Mansour,( 2010b), “Revenue Mobilisation in Sub-Saharan Africa—
Challenges from Globalisation II – Corporate Taxation,” Development Policy Review,
Vol. 28 (September), pp. 573–96.
Santiago, A.O. and Jiae, Y. (2012), Tax Composition and Growth: A Broad Cross-Country Perspective, IMF Working Paper
No. 12/257
3
According to research by IMF in sub-Saharan Africa4, those countries that are not rich in natural
resources have almost not been able to increase their tax-to-GDP ratio over a period of 25 years.
During the same period, the average statutory corporate income tax rate (CIT) in 40 countries in
sub-Saharan Africa has fallen markedly, from about 44 per cent to 33 per cent. This can put
pressure on states’ capacity to play their role effectively, including what is required to develop an
enabling business environment. Conversely, VAT tax revenue increased in all countries in subSaharan Africa, except for Cote d’Ivoire, Tanzania and Central African Republic. This trend
increases the tax burden on ordinary citizens, increasing inequality, reducing purchasing power
and increasing risks of non-compliance and political and social unrest, all these factors playing a
negative impact on businesses.
Doing Business also ignores the impacts of tax evasion and avoidance by multinational
companies, even though this can have particularly damaging consequences for small businesses
in developing countries, and can result in a small business owner in Ghana (a small beer bar),
paying more taxes than the major industrial brewery next door 5. The inability to raise sufficient
revenues has also led to unsustainable external borrowing by many developing countries.
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The ‘Paying Tax’ indicator is flawed and drives poor policy practice. Overall the
indicator needs to move to a trajectory which drives policymakers to establish fair,
equitable and efficient tax systems, as a means to creating an environment that
allows business to flourish in a sustainable manner.
Most urgently, the total tax contribution sub-indicator can have a negative impact on
governments’ fiscal systems, population and business, and needs to be suspended.
Doing Business must consider promoting transparency in tax systems and tax
administration. Unhindered access to tax information for citizens empowers them to
demand accountability from their governments and ensures that tax revenues are
used judiciously to provide infrastructure and services on which businesses thrive.
Statement on behalf of the following organisations:
11.11.11. – Coalition of the Flemish North-South Movement, Belgium
Bretton Woods Project, UK
CAFOD, UK
Center of Concern, USA
Christian Aid, UK
CNCD – 11.11.11., Belgium
Cordaid, Netherlands
Debt and Development Coalition, Ireland
Diakonia, Sweden
Eurodad, Europe
Fundar, Analysis and Research Center, Mexico
Integrated Social Development Centre (ISODEC),Ghana
International Trade Unions Confederation
Jesuit Centre for Theological Reflection, Zambia
K.O.O. – Coordination Office of the Austrian Bishops’ Conference for International
Development and Mission
Norwegian Debt and Development Forum
Oxfam International
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5
See note 2.
Hearson, M. & Brooks, R. (2010), “Calling time: Why SAB Miller should stop dodging taxes in Africa” , Action Aid
4
Save the Children, UK
Urgewald, Germany
5