Last Monday, I went to a presentation by Simeon Djankov (see photo) on Doing Business 2006 at the Cato Institute (you can watch the event here).
I am big fan of Djankov’s work. He is one of the economists who works in the footsteps of Andrei Shleifer, and his contribution to the field of development and growth is remarkable. In collaboration with Shleifer and others, he has published many good papers, among them: The Regulation of Entry, Who Owns the Media, Courts, and The New Comparative Economics (many of them published in the QJE). This last one inspired Pete Boettke, Chris Coyne, Pete Leeson, and I to publish The New Comparative Political Economy.
Djankov’s work is extremely relevant for Austrians, as he explores institutions, the divide between the de jure and the de facto, the role of policy, etc. His work at the World Bank (WB) is most compelling and is one of the results of the last decade of research he has done with Shleifer.
A few years ago, Djankov and others at the WB started the Doing Business Database (DBD). The idea was to develop a comprehensive assessment of the institutional conditions in which business takes place both at the de jure and de facto level. This would measure business regulations and their enforcement, including assessing the ease of business entry, the regulation of exit, the enforcement of contracts, property rights, and more. Three years later, the WB team has accumulated and continues to accumulate a wealth of data about business conditions around the planet.
While I am generally not a fan of what the WB does, one must admit that its research branch has generated quite a bit of useful material in the recent past. Other organizations (including private ones such as the McKinsey Global Institute) have been interested in business conditions and how to measure them. However, I believe DBD is the best indicator available.
DBD provides a good assessment of the true conditions for entrepreneurship as understood by Austrians (the Economic Freedom Network Index does that too). In contrast to the Global Entrepreneurship Monitor for instance, which consists of accumulating data on business start-ups, DBD doesn’t measure entrepreneurship (which is not possible anyway) but tells us about the conditions in which entrepreneurial activity may take place. While entrepreneurship in the Kirznerian sense encompasses much more than strict business activity, having a good sense of the nature of the business conditions on the ground is informative. It gives us a good idea as to whether the general environment is conducive to innovation and to noticing overlooked gains from trade.
According to Djankov's presentation, the policy impact of the project is already big and is becoming bigger every year (they have tracked policy changes since 2004). Officials in many countries throughout the world have come to him and his team and asked how to improve their country’s performance. And this is not only developing countries or economies in transition, but also OECD countries. In other words, the DBD rankings offer strong institutional and policy incentives for governments to improve their business conditions. Because DBD includes many indicators, policymakers have a variety of levers to use to improve business conditions (e.g. licenses, ease of hiring, etc).
In 2006, New Zealand tops the overall rankings. New Zealand has made a special effort in the last two decades to clean up its regulatory regime. The Ministry of Economic Development in liaison with the New Zealand Treasury worked very hard on this (as I witnessed myself when I was there). It is now paying off. The overall rankings also show that some economies in transition, such as Lithuania and Estonia are fast becoming places with vastly improved business conditions. I am hoping this will influence other EU members. France's rank is 44, which is bad but not surprising. French officials quickly dismissed the database as having any relevance to the reality of the French economy. The US ranks third, which is perhaps better than one could have expected. This ranking provides an explanation for the strong resilience of the US economy.
The Nordic countries, about which I have recently blogged, are in the top 20 (Norway is ranked 5, Finland is 13, and Sweden is 14). This goes to show that the entrepreneurial environment in those places is often better than admitted. While I agree with some of the comments made on my posts (e.g. Sweden’s population is more heterogeneous than I thought), DBD provides evidence of the reasonably good institutional context for business in the Nordic countries (which was one of my points).
In some ways, DBD shows that Austrian ideas are becoming successful. This is because at the end of the day, DBD is a good assessment of the conditions for entrepreneurial activity (again, it is not perfect, as entrepreneurship goes beyond strict business activity). Along with the Economic Freedom Network Index, it should become one of the tools of the practitioners of economics.
Comments