Ease of doing business and M4P

While looking through the World Bank Doing Business survey indicators and trying to reconcile Afghanistan's ranking with the reality of the situation here and with the specific objectives of our project, two thoughts came to me:

1. There are specific ways in which the survey fails to reflect the realities of doing business in Afghanistan and can give a misleading impression of how things are here; and
2. A broader concern that the emphasis in the headline title of "ease of doing business" risks missing the importance of effective regulation of certain ways of doing business.

Of course the Doing Business survey has to work on globally comparable indicators, which means that there are inevitable compromises in the quality and relevance of those indicators for any particular country. However, it is worth thinking about these points because the Doing Business Survey is influential, it is frequently quoted as a reference in measuring Afghanistan's progress towards creating the conditions for sustainable economic growth.

If the survey is misleading in material ways and missing some important points in relation to Afghanistan, then clearly the headline ranking needs to be treated with some caution, rather than quoted without care (as it has been by both critics and supporters of Afghanistan's progress).

To illustrate the first point, I would like to focus on the "getting credit" indicator, where Afghanistan ranks 128th (2011). The indicator has four key components; strength of legal rights, depth of credit information, public registry coverage and private bureau coverage. In each area, apart from strength of legal rights, Afghanistan scores zero.

Under strength of legal rights the survey looks at several legal provisions, for example the law allowing for the use of movable assets as collateral. On this particular measure Afghanistan scores well, it does have a law on movable assets. But will lenders rely on it? They would have to be very brave. The legal provision is in effect almost unenforceable and therefore irrelevant. The problem is not with the statute, but with the way that the court system operates. As a result, bank lending is almost exclusively secured on real estate.

So by taking a mechanistic approach, rather than looking at the reality of the situation in the country, this indicator overstates the level of development. On the other hand the limitations of the survey to public and private credit agencies misses the point that in Afghanistan a thriving informal credit industry plays a hugely significant role in the economy.

Various reports on the hawala system (including from the World Bank) have pointed to its importance as a means of making transfers and also providing short-term trade finance. This kind of finance is very important in a country where trade is the lifeblood of the economy. When making lending decisions, the Hawaladar do not (and would not) rely on public registries or private bureaux, instead they typiclly look at personal reputations and family connections. Thus in a country where such issues matter enormously, there is a viable informal mechanism that is probably just as effective as any more formal system would be at meeting immediate market needs (if not more so).

Would things be any better (in other words would economic growth be faster) in Afghanistan if additional credit related laws were enacted or credit agencies were established? The answer is that in the long-run these things will be a "good thing", but it has to be remembered that there are opportunity costs (parliamentary time, judicial training, loss of reputation linked to unenforceability etc) associated with such reforms and right now there are more pressing priorities. Not least of which would include getting the commercial court system working at the most rudimentary level and strengthening the governance and operations of the formal banking sector.

On the second point regarding the headline "ease of doing business" ranking, the issue is that ease of doing business is looked at in isolation of the responsibilities of doing business. Whereas in M4P, the two need to be looked at together.

The DB survey isn't directly concerned with issues like consumer protection or employee rights (addressed as a special topic, not in the main ranking) or environmental protection etc, so this is not a criticism of the survey itself, more a reflection on the need to balance responsibilities as an integral part of the M4P approach to economic development. It goes without saying that our project is particularly concerned with the poor, as producers, labourers or consumers. Typically, these are the people who most need protecting when making it easier for firms to do business.

If markets are to work for poor people, there need to be adequate safeguards in place (ensuring a growth in the quality as well as the quantity of income). This may not always be consistent with the notion of ease of doing business. In Afghanistan, where strong tribal and family affiliations link many politicians back to their roots, both patronage and protection play important roles. Understanding the nuances of these social and cultural systems is one of the keys to understanding how markets can play a role in Afghanistan's economic development.

We are now moving towards selecting focus sectors and using market analysis to identify key constraints to sector development. It is important that our analysis recognises teh specifics of how market systems work in Afghanistan and that the ease of doing business (in a wider sense than in the DB survey) needs to be balanced with responsibilities, thereby avoiding our work being perceived as an external intervention that somehow threatens the way that markets currently work. It is important that we recognise the role and strength of protections that exist today before we intervene to change the way that markets work. Basically, the objective will be to ensure that there are adequate mechanisms in place to support transition before destabilising current systems.

Taking this approach, achieving "systemic" change will be an incremental process, building on current systems and carefully co-ordinated with a wider development process, rather than something that happens overnight.



Note: An independent review of the Doing Business survey in 2007 made a number of important recommendations, and addressed in general terms some of the Afghan specific comments above. Nevertheless, it does no harm to think through some of these issues once more and to realise the complexity of the environment in which we seek to intervene.