Simeon Djankov has done a good job with the World Bank’s Doing Business (DB) survey (see here for positive comments of mine). However as time goes by, it is less clear to me that the type of data collected in the DB survey really matters to the big picture of Western countries—that is, per capita income levels and real growth.
A recent example is New Zealand. The country has slipped in the rankings of the Heritage – Wall Street Journal Index of Economic Freedom (IEF) from third place last in 2004 to sixth in 2008. However, it ranked second in the latest ranking of the DB survey behind Singapore.
As Roger Kerr (see here) mentions: “The freedom indexes [Heritage and Fraser] are a much more comprehensive indicator of a country’s economic health than the World Bank’s annual Doing Business survey.” The DB survey focuses on regulations affecting the costs to start a business, property registration, contract enforcement, etc. As Hernando De Soto has shown for 20 years, these are very important factors in developing countries. However, OECD countries all offer reasonably good conditions for doing business. While scoring high in the DB survey will make some difference in terms of economic performance (since these costs affect the level of entrepreneurship), it is not clear to me that the differences among OECD countries are such that DB scores would be a huge factor in the differences in per capita income and real growth (has somebody done the study?).
Rather, what really matters for OECD countries in my view is the size of government spending, the level of taxation, the structure of the tax system, the level of public debt, a sound money, and openness to trade. In some of these areas, New Zealand is now scoring worse than in the recent past. The IEF mentions that both total government expenditures and tax rates are high. New Zealand has scored worse this year in 5 of the 10 categories of the IEF.
To be fair, the differences among the countries in the top 10 are (somewhat) small. Moreover, it might be hard to discern the impact of being sixth instead of third. New Zealand still displays good performance on many levels. However, what matters is the long term impact of high government expenditures and taxes. These two issues are a drag on the economy, as they reduce the level of entrepreneurship. Eventually this shows in income per capita level and growth rates. As Kerr explains: “New Zealand’s trend rates of productivity and GDP growth have been sagging at a time when the economy should have been booming, given record terms of trade.”
While NZ scores well in the DB survey, the signal the IEF sends is of a different nature. Moreover, the country fell to 24th place in the latest issue of the World Economic Forum’s Global Competitiveness Report (here). All this shows that “New Zealand has been making policy changes in the wrong direction” (Kerr) and this is the real issue. It explains why Kiwis have not become tigers (see here and here). Many policy choices are very difficult to reverse once they have been made, and it may take nothing short of another crisis to change directions. These important policy changes (that went in the wrong direction) are not captured in the DB survey, which is why it may not be as relevant (to Western countries) as I once thought it was.