Saturday, August 22, 2009

Why (many) development economists don't know shit

For any of you economics-of-development buffs out there, here is a scathing academic critique (pdf unfortunately) of the widely-read Doing Business reports issued by the World Bank. The report's subtitle says "measuring business regulations," but givers of development aid (including the US and EU) often use it as a proxy for general liberalization, and make it a condition for countries to receive aid. Academics are also enamored with the reports, and many a complex econometric regression has relied on its data.

The problem is that the data don't capture the reality on the ground very well. I'm not really in the mood to summarize the paper, but a major issue is ex ante vs. ex post costs – that is, whether ease-of-registration in the beginning is gained at the expense of a lot of hassle later when disputes have to be adjudicated. Doing Business measures the fixed costs, but neglects the later costs that are incurred if a business has to prove things that in a system weighted towards ex post costs would already have been taken care of. The author's point isn't that a system of ex ante costs is necessarily better, but just that the World Bank doesn't take the later costs into account at all.

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