Creating a 'Goldilocks' business climate

WASHINGTON, DC: Whenever the odds seem stacked against human progress – when economic growth looks set to remain feeble, when too many countries appear destined to grow old before they become rich, when climate change seems out of control – it is worth remembering the distinctive virtue of our species. Human ingenuity is the reason why predictions of global doom, which have proliferated throughout our history, have never materialised.

It was ingenuity that defused the so-called “population bomb,” the 1970s threat that “hundreds of millions of people” would starve to death as rapid population growth exhausted finite supplies of food. Instead, agricultural innovations such as high-yield, pest-resistant crops caused global food production to grow faster than the population in nearly every part of the world. Equally, it was human ingenuity that brought deadly diseases – from HIV/AIDS to COVID-19 – under control. If climate change is tamed by the middle of this century, you can bet that human ingenuity will have been the main factor.

But progress is seldom the fruit of a “eureka” moment. Instead, human ingenuity delivers when governments, private enterprises, and individuals act in ways that benefit entire societies consistently over time. Such outcomes depend on conducive conditions, cultivated by the appropriate mixture of rules and practices. Recognising that sustained economic development usually reflects system-wide business success, we at the World Bank Group describe these conditions as “the business climate” or “the business-enabling environment.”

For too long, though, we focused more on what governments can do for the good of business than on what governments and businesses can do together for the good of all. Thus, in a crucial first step to correct the imbalance, our new Business Ready report aims to build a comprehensive dashboard that, by 2026, will allow anyone to dial in the precise settings needed for vibrant private-sector development across 180 economies. Using this tool, policymakers can start to create the conditions to reduce poverty, advance shared prosperity, and accelerate the transition to a low-carbon economy.

The goal is to encourage healthy competition among businesses and countries, and to discourage “a race to the bottom” (one of the unintended consequences of Doing Business, our previous effort to help countries establish the right conditions for private-sector development). Our new analytical framework recognises that there is more to a healthy business environment than the “ease of doing business.” It accounts for the possibility that reducing the “cost of doing business” can unintentionally raise the costs for society at large.

Accordingly, Business Ready assesses not just the regulatory burden on enterprises – how long it takes to start a business, for example – but also the quality of regulations. Do labour laws protect workers from being arbitrarily fired? Do they inadvertently make women workers less competitive than men and discourage them from seeking work?

Beyond assessing the rules and regulations that govern business, Business Ready examines the public services needed to transform intentions into reality. Do public utilities provide reliable water and electricity? Do governments make it easy for businesses to fulfil their tax obligations and comply with environmental and social safeguards?

The result is a breathtakingly detailed dataset that encompasses nearly 2,000 data points per economy. One can now zero in, for example, on the frequency of power outages suffered by firms, how long it takes to file and pay taxes, or the average cost to settle a commercial dispute. Since comparable data of this quality are unavailable anywhere else, Business Ready is an essential public good. The trove of insights it offers will enable businesses to make better decisions about where and how they operate, spur governments to adopt better policies by learning from one another, and help researchers everywhere to join the effort to get global private-sector development right.

While this year’s edition covers just 50 economies, next year’s will include 100, and our coverage in 2026 will expand to about 180. With each iteration, we will refine the report’s design and methods to reflect lessons learned. Why not wait for the methods to be perfected before publishing the data? Simply put, the world lacks the luxury of time – development delayed is development denied – and getting feedback from the intended beneficiaries of an assessment is a big part of getting the assessment right. In any case, in a dynamic global economy, accuracy will always be a moving target.

The data and methods used are more rigorous and more transparent than used in Doing Business. They consolidate the judgements of more than 2,500 business-climate experts, as well as the survey responses of more than 29,000 businesses. They are more exhaustive than anything that has been attempted so far by an international institution, and they are of immediate value to the 50 economies covered. Moreover, all data collected for this report are now publicly available – and verifiable – on our website.

Analysis of this year’s data leads to two general observations. First, there is a sizeable implementation gap. Countries tend to be better at enacting regulations to improve the national business climate than at providing the public services needed to ensure actual progress. Fortunately, the gap shrinks when the quality of regulations improves.

Second, while richer economies tend to be more business-ready, a country need not be wealthy to create a good business environment. Among the 50 economies assessed this year, several developing economies rank among the top ten in several categories: Rwanda for public services and operational efficiency; Colombia for its regulatory framework and public services; and Georgia for its regulatory framework and operational efficiency.

This suggests that progress is possible for most countries, and that governments should step up their efforts to become business ready. But they should do so not merely to win national bragging rights or to chase the uncertain promise of a big surge in foreign investment. The rewards are far more encompassing. When correctly chosen and carefully sequenced, business reforms can simultaneously accelerate economic growth, boost productivity, and help reduce carbon emissions. Establishing a “Goldilocks” business climate will create the conditions for human ingenuity to flourish, and that is exactly what the world needs at a time of slowing growth, rising debt, and accelerating climate change.

This commentary has been adapted from the World Bank’s October 2024 Business Ready report.

Indermit Gill is Chief Economist and Senior Vice President for Development Economics at the World Bank.

Copyright: Project Syndicate, 2024.

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