World Bank corporate ranking manipulated in favor of China

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a independent investigation published by law firm WilmerHale on September 16 revealed that senior World Bank staff rigged data in the 2018 and 2020 editions of its flagship “Doing Business” report to strengthen China’s ranking. The conclusions highlight China’s willingness to interfere in multilateral institutions to advance its economic interests, and the challenge of maintaining the integrity of the current international system.

The investigation revealed “direct and indirect pressure” on staff members by the former CEO of the World Bank, Kristalina Georgieva, now director of the International Monetary Fund, and the former president of the World Bank, Jim Yong Kim. Operating in a “toxic culture,” staff members acknowledged that the changes “were inappropriate” but “expressed fear of retaliation”By Georgieva’s main assistant. While Georgieva disagreed with the findings, the World Bank decided to stop the next “Doing Business” report on “ethical matters, including the conduct of former officials of the Board as well as current and / or former staff of the Bank”. Jonathan Wheatley of the Financial Times described how the bank manipulated China’s overall score:

WilmerHale said attempts were made days before the release of Doing Business 2018 to raise China’s ranking from 85, including incorporating data for Hong Kong into its scores. When these efforts did not yield the desired results, according to the report, Georgieva “became directly involved”.

The law firm’s report, Investigation of Data Irregularities, alleged that Georgieva asked Simeon Djankov, one of the founders of Doing Business, to guide the report through to publication and that Djankov then “worked with management. of Doing Business to identify changes in China’s data that score the country and increase its ranking ”.

He said three indicators of business conditions – setting up a business, obtaining legal rights and paying taxes – were changed, raising China’s score by nearly one point and raising its ranking by seven places to 78. [Source]

The effort to please China appears to have been driven by China’s important role in the World Bank as the third largest shareholder. Reuters’ Andrea Shalal and David Lawder described how the bank’s capital increase in 2018 gave China leverage to strengthen its ranking:

The report says the push to improve China’s ranking came at a time when the bank’s management was “consumed with sensitive negotiations” over a major capital raise and China’s disappointment at a lower than expected score. .

Georgieva told WilmerHale investigators that “multilateralism was at stake and the Bank would have ‘very serious problems’ if the campaign missed its targets,” the report said.

The World Bank announced in 2018 a $ 13 billion paid-up capital increase that raised China’s stake to 6.01%, from 4.68%. [Source]

Paul Wiseman to The Associated Press explained the Context and role of the World Bank’s Doing Business report:

In 2002, the bank introduced the report, whose annual rankings highlight which countries have adopted pro-business policies and which have not – and to what extent they are improving or declining. The bank, which collects information from tens of thousands of accountants, lawyers and other professionals in 190 countries, rates how easy it is to start a business, get a building permit or get online to the electrical network.

[…] Although intended to measure how governments treat domestic businesses, rankings have often been interpreted by media and investors as a proxy for the number of countries that welcome foreign investment. [Source]

Opinions are divided on the importance of the report. The Associated Press quotes an analyst who argues that the the report is an integral part of global trade assessments:

Timothy Ash, strategist at fixed income manager BlueBay Asset Management, said he “cannot overstate” the importance of the Doing Business report for banks and companies trying to assess risk in a country particular.

“Any quantitative country risk model has built that into the ratings,” Ash said. “Money and investments are allocated on the back of this series.”

He added that if an analyst at a bank or rating agency had done what is alleged, “I bet he would be fired and be subject to regulatory investigation.” [Source]

Others argue that the importance of the report has always been overstated. As a contributor to Bloomberg’s opinion pointed out, the report has suffered continuously from a discrepancy between economic discourse on paper and the realities on the ground, naturally leaving room for bureaucratic exploitation:

On the one hand, it is a harbinger of what is likely to happen as Beijing bureaucrats begin to occupy positions of greater influence in multilateral institutions. More and more, the sense of grievance officially mandated by China will guide the operations and choices of these institutions.

On the flip side, the standoff between the Beijing public relations army and World Bank economists only underscores why the index has always been problematic. If China is truly only the 85th best place in the world to do business, why has it carved out the lion’s share of foreign direct investment in the emerging world during the two decades that the index has operated?

The point is, the clue itself was incredibly limited in scope. He didn’t actually measure the improvements in business usability in the field. Instead, it relied on the analysis of the reforms on paper, as well as a few interviews with pillars from various national institutions.

[…] What I’m saying isn’t that the World Bank is open to influence from well-connected insiders; I don’t know why this should surprise anyone. The real problem is that its flagship index has been so easily manipulated in response to this influence. If purely cosmetic changes could produce such large changes in position, then the index itself should never have been invested with such significance. [Source]

Regardless of the report’s own meaning, its manipulation bodes ill for the future of international institutions and multilateralism. As Quartz’s Tim Fernholz reports, China’s pressure on the World Bank and other international institutions risks undermining the very order they are supposed to maintain:

International institutions are needed more than ever to define clear rules for economic activity, but their legitimacy is threatened. The World Bank, the International Monetary Fund and the World Trade Organization face the stress of nationalist policies. The rise of China, which has benefited disproportionately from these institutions even as it undermined them, makes coherent global politics even more difficult.

The World Bank in particular has seen the private sector replace it as the developing world’s largest lender. But as world powers seek to restructure the global economy to accommodate failures of the Washington consensus and challenges like climate change, bodies like the World Bank are vital. Manipulating statistics for ideological ends doesn’t just undermine confidence, it undermines the Bank’s own arguments about the kind of economic factors that make businesses more successful.

As it stands, Georgieva is now the top IMF official, and although she says she “doesn’t agree[s] fundamentally with the findings and interpretations of the investigation, ”his credibility suffered a severe blow. Each data produced by the World Bank will henceforth be suspected of having an impact on one or more privileged stakeholders. And it will be more difficult to convince emerging markets that they need to adopt beneficial reforms if the overt recognition of doing so can be bought by countries that don’t do the job. [Source]

This is not the first case of accusations of Chinese pressure on World Bank reports. In 2015, the The World Bank deleted a section from its China Economic Update report that criticized China, after what many observers interpreted as undue pressure from Beijing. In 2018, the same year that the first falsified “Doing Business” report was released, the World Bank released a report titled “How will the Belt and Road Initiative reduce trade costs?Its publication was criticized by some analysts who argued that the report’s strong support for the BIS was based on questionable assumptions and published at a sensitive time in the deployment of the BRI, akin to a form of “relationship management” with Beijing.

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