Using the World Bank Doing Business Ranking to inform economic reforms in Japan

Jamal Haidar, Takeo Hoshi 21 October 2015

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As Timothy Besley argues in a recent paper in the Journal of Economic Perspectives, the Doing Business ranking published annually by the World Bank has become an authoritative resource for academic researchers, practitioners, and policymakers (Besley 2015). Given the extent of attention the ranking has attracted, it is natural that its methodology has been scrutinised closely, with many criticisms levelled against the ranking itself, and especially against government attempts to improve their country’s position in it.

There are two major criticisms against the Doing Business ranking. First, it does not look at all aspects of the cost of doing business. Proponents of this view (e.g. Hausmann 2013) argue that countries should use the ranking information as a catalyst for economic growth policy debates, rather than focusing too much on improving their position. The second criticism is about the ways the Doing Business data are collected, and the ways the relevant surveys are designed. More specifically, there are concerns about whether the construction of the surveys fosters a bias against taxes and regulations (Besley 2015).

These criticisms are sensible and apply, at least, to particular countries.  But, as Besley (2015) argues, “nobody should use the measures from the Doing Business project without first understanding the details of how they are collected and what they do and do not measure.”  If we understand the limitations, the Doing Business ranking can be a very effective tool to inform policy debates on encouraging dynamic business activities that help economic growth. Also, there is a growing consensus in economic research that the quality of business regulation and the institutions that enforce it are major determinants of economic prosperity (Besley and Burgess 2004, Alesina et al 2005, Klapper et al 2006, Ciccone and Papaionnou 2007, Haidar 2009, 2012, and Djankov et al 2010, among others).

In a recent paper, we used the Doing Business ranking to inform policy debates in Japan (Haidar and Hoshi 2015). As a part of economic reforms – the so-called third arrow of Abenomics – the Abe administration aspires to improve Japan’s ranking so that it becomes one of the top three OECD countries.  We examine what it would take for Japan to achieve this goal.   

As many critics point out, just trying to improve in the ranking is not enough to achieve higher economic growth. Improving the business environment that is measured by the ranking may not be sufficient if it is not accompanied by complementary factors that are not measured by the ranking.  Looking at concrete economic reforms that would improve the ranking, however, we can get a good idea of what are at least necessary to restore growth for Japan.

After identifying 31 economic reforms that would improve Japan’s position in the Doing Business ranking, we classify these along two dimensions.  The first is whether the reform requires a legal change or if it is simply administrative.  The second is the extent of expected political resistance to the reform, which we try to gauge by conducting an original expert survey of political scientists who are informed on Japanese politics.

The Doing Business ranking is often used in the context of institutional reforms in developing countries, but we find it is useful for considering economic reforms in Japan.  Because many of the problems with the ranking are more serious for developing economies, one could say that applying it to an advanced economy like Japan is less problematic. For example, one flaw of the Doing Business ranking is that it does not capture important components of a country’s business environment, such as corruption, infrastructure, skills, and security. These challenges are less severe in Japan than in various developing economies.

Identifying potential economic reforms to improve the ranking is rather straightforward because the World Bank publishes detailed tables that summarise the information it collects. For example, Japan is ranked 27th among the 31 OECD countries in ease of starting a business.

Looking at the information used to come up with this ranking, we identify several reforms that Japan can implement to reduce the cost of starting a business. 

First, Japan can eliminate the requirement for a company seal. Currently, an entrepreneur is required to make a company seal and register it. These two procedures take about four days. The company seal is required by law, and the associated fee is about ¥10,000 for a machine-carved seal or ¥20,000 for a hand-carved seal.

Second, Japan can make business registration administrative rather than judicial.  This would significantly reduce the number of days that it takes to establish a business in Japan.

Finally, Japan can create a one-stop shop for business registration. To start a business in Tokyo, entrepreneurs need to visit eight separate regulatory agencies.  A one-stop shop would allow entrepreneurs to register with all the regulatory agencies in a single visit and open their businesses faster.

Overall, we identify 31 reforms that Japan can implement to reduce the cost of doing business.  When we classify these potential reforms along the two dimensions mentioned above (if it requires a legal change and if it is expected to run into high political resistance), we find six reforms are simply administrative changes and are likely to face low political resistance. Eight administrative reforms are expected to face a medium level of political resistance. Only one reform is administrative and expected to face high political resistance.

There are 16 reforms that require legal changes, four of which are expected to face low political resistance. Among the remaining 12, nine are expected to face medium political difficulty and three are expected to face high political resistance.

Thus, most of the reforms are expected to encounter a medium level of political resistance at most. Moreover, about half of these reforms (14 to be exact) do not require legal changes. These reforms should be easy to implement if the government is willing to do so. 

By implementing just those reforms that do not require legal changes and are not likely to face strong political opposition, Japan could improve its ranking from its current 19th among OECD countries to 13th, if other countries do not improve their business environments. To reach the top three is a little bit more difficult, and would require Japan to implement all the reforms except those that are likely to face high political resistance. Since the assumption that the other countries do not reform while Japan does is unrealistic, Japan will also need to carry out some politically unpopular reforms in in order to be one of the top three high-income OECD countries in terms of ease of doing business.

Achieving this alone, however, would not be sufficient to restore growth to Japan. Fortunately, improving the business environment is just one of the many economic reform areas proposed in Abenomics. It will be important to implement other growth enhancing reform areas as well.

We show a way to utilise the Doing Business ranking to inform economic reform discussions while understanding the limitations of this particular ranking in the Japanese context.  The approach can be applied to other advanced economies, and with a few additional cautions, to developing economies.

References

Alesina, A, S Ardagna, G Nicoletti, and F Schiantarelli (2005) “Regulation and investment”, Journal of the European Economic Association, 3(4): 791-825.

Besley, T and R Burgess (2004) “Can labor regulation hinder economic performance? Evidence from India”, Quarterly Journal of Economics, 119(1): 91-134.

Besley, T (2015) “Law, regulation, and the business climate: The nature and influence of the World Bank Doing Business project”, Journal of Economic Perspectives, 29(3): 99-120.

Ciccone, A and E Papaioannou (2007) “Red tape and delayed entry”, Journal of the European Economic Association, 5(2): 444-58.

Djankov, S, C Freund and C Pham (2010) “Trading on time”, The Review of Economics and Statistics, 92(1): 166-173.

Haidar, J I (2009) “Protecting investors and economic growth”, Economics Letters, 103(1):1-4.

Haidar, J I (2012) “The impact of business regulatory reforms on economic growth”, Journal of the Japanese and International Economies, 26(3): 285-307.

Haidar, J I and T Hoshi (2015) “Implementing structural reforms in Abenomics: How to reduce the cost of doing business in Japan”, NBER Working Paper 21507.

Hausmann, R (2013) “What to do with Doing Business?” Project Syndicate.

Klapper, L, L Laeven and R Rajan (2006) “Entry regulation as a barrier to entrepreneurship”, Journal of Financial Economics, 82(3): 591–629.

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Topics:  Competition policy Microeconomic regulation

Tags:  World Bank, Doing Business, Japan, Abe, Abenomics, ease of doing business, barriers to business, entrepreneurship, ranking, politics

PhD student at the Paris School of Economics, University of Paris 1 Pantheon-Sorbonne

Henri and Tomoye Takahashi Senior Fellow at the Walter H. Shorenstein Asia-Pacific Research Center, Stanford University

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