Professor of Global Political Economy Robert Wade responds to an FT opinion piece by Jeffrey Sachs on the World Bank’s decision to discontinue its controversial ‘Doing Business’ report. Professor Wade writes further on the history of the annual report and the manipulation of statistics associated with its ranking system.
One can agree with Jeffrey Sachs in his defence of the World Bank over the Doing Business report and specifically of the Bank’s former CEO and now Managing Director of the IMF, Kristalina Georgieva – and still say that the Bank should seize the opportunity of the crisis to tighten the procedures by which it arrives at sensitive statistics.
A small number of powerful governments frequently put a range of pressure on the Bank to do what they want – in terms of appointments to senior positions, lending to favored countries, not lending to not-favored countries, and manipulating statistics. Senior Bank managers have to balance these pressures against complying with the rules and norms of professional integrity. This is the inevitable “underwear politics” of multilateralism.
The recent investigation of the Doing Business report revealed the surprising lack of written procedures directing how the report was to be assembled – which meant that when a manager pressed for results-oriented decisions the staff were sometimes not able to present a written rule barring the action. It also revealed that staff thought whistle blower protections were too weak for them to safely complain upwards. These are two obvious areas for action to improve the reliability of the Bank’s sensitive statistics – and not just those of the Bank.
Letter to the Financial Times, Robert H. Wade, 28 Sep 2021
Background to the World Bank’s annual ‘Doing Business’ report
Since the early 2000s the World Bank (WB) has published an annual report on the “ease of doing business” in each of some 180 countries. The resulting Doing Business (DB) reports are one of the two top WB annual flagships, the other being the World Development Report. Countries – governments, financial firms – typically give high importance to their ranking, believing their ranking affects the cost of foreign capital and the amount of foreign capital – so, believing it affects millions, even billions of dollars. The ranking is done by a small team, at first in the Finance and Private Sector Development vice-presidency, then moved to the Development Economics vice-presidency.
It has not been “trouble free”, to put it mildly. An investigation in the early 2010s – initiated by the Brazilian Executive Director frustrated that Brazil was consistently ranked low – found that some of the sources contracted by the DB team (for example, in big international accounting firms) had been playing a double game: taking fees from WB for supplying relevant information on the various indicators of “ease of doing business”, and taking fees from governments for advice on how to raise the country’s ranking – which might encourage them to submit to the WB statistics massaged favourably for the country. Another scandal in the mid 2010s went with the resignation of the then chief economist, Paul Romer.
The scandal which blew up in September 2021 led to the WB discontinuing the DB report – a big step, given its flagship status. Whistleblowers in the WB revealed that in 2017 the top management of the Bank – chief of staff for president Kim, and CEO Kristalina Georgieva (now Managing Director of the IMF) – had put lots of pressure on the statistical professionals in the DB team to ensure that, in the report to be released in 2018, China did not fall in the ranking from its previous rank of 78 to 85, as the preliminary calculations showed, and preferably went up from 78. In response to the whistleblowers’ evidence, the WB’s Office of Ethics and Business Conduct contracted a Washington DC law firm to investigate.
Publication of the law firm’s 14-page report in mid-September 2021 revealed a litany of “inappropriate” behaviours on the part of senior managers, directed at raising China’s rank from 85 back up to its former rank of 78, and preferably higher than 78. The senior managers have subsequently rejected the law firm’s findings – including, emphatically, Kristalina Georgieva. Some critics, including the editors of the Financial Times, have called for her to resign from Managing Director of the IMF.
This is background to my letter above. Here I give two examples of the point in the letter that senior managers of organisations like the World Bank, which produce very sensitive statistics (with a lot of resources at stake according to what the statistics say), are under constant pressure from powerful countries to “massage” the statistics in their favour. (“Powerful countries”: recently at a big international gathering, representatives of a coalition of 120 mostly small-ish developing countries, with Costa Rica one of the leaders, pressed their agenda on the US ambassador. “We represent 120 countries”, they urged to him. “Yes, but you don’t count”, was his brusque reply.) The senior managers have to balance the threats and inducements of this pressure with respect for scientific integrity and professional norms. We badly need a proper sub-field of the political economy of statistics, to explore how international statistics are compiled and manipulated – because (shock, horror) some of them are manipulated from time to time.1
Example number one concerns what happened when in May 1999, during the Balkan wars, the US military bombed the Chinese embassy in Belgrade, allegedly accidentally. The Chinese government demanded reparations. The US Treasury replied that reparations were out of the question. When the Chinese insisted, the Treasury indicated that it might prevail upon the World Bank to give China something it wanted, as indirect compensation. The US Treasury Secretary had long practice of telling the president of the World Bank what he wanted him to do and bawling him out on the telephone when he did not adequately comply.
The Chinese wanted the World Bank to lower China’s per capita income to below the IDA threshold, which China was approaching. IDA, the soft-loan arm of the Bank, makes very cheap, long-term loans available to countries whose average income is below a certain level. But more than continued access to IDA loans the Chinese government wanted some more years of eligibility for a concession extended to companies from IDA-eligible countries, that they can put a 7.5% uplift on bids for World Bank contracts and be treated as equal to bids from companies in non-IDA-eligible countries. 7.5% of a big infrastructure contract can be a lot of money!
The World Bank was applying a 20% uplift on the Chinese government’s own GDP per capita calculation, on grounds that the Chinese accounting for the “informal sector” was insufficient (that is, the World Bank said the informal sector made a bigger contribution to GDP than China’s statistics said). The Chinese government proposed that removal of the uplift would be sufficient to extend IDA privileges – and implicitly, sufficient compensation for the bombing.
Following triangular communications between China, the US Treasury and the president of the World Bank, the order came down from the president for China’s average income to be lowered in line with the Chinese request, by finding a way to justify removing the 20% uplift. Unfortunately, the professional statisticians in the relevant unit refused to comply. The uplift should be reduced, they agreed, but gradually, in line with improved accounting for the informal sector.
This put the head of the unit in a quandary, her career in the Bank at stake. The president’s office gave an instruction which her professionals said would violate professional standards.2 She therefore hired a consultant from the British statistical office, with no experience of China or other developing countries, and sent him to Beijing. There, the Chinese persuaded him of their improved informal sector accounting. He wrote a report recommending removal of the 20% uplift, and returned to Britain. The professionals fought to reduce the amount of the cut. In the end China’s per capita product was reduced by less than 20%, but still enough to give time for China to take more advantage of IDA privileges.
The Bank prepared figures with a lag, and in 1999 was working on the figures for 1998. The World Development Report figures for GNP per capita show China’s GNP per capita for 1997 as $860 (current $US), and $750 the following year; a substantial fall of $110, in line with China’s wishes. Strangely, the growth rate in 1997-98 was recorded in the same table as + 6.5%.
Who knows what puzzlement the legions of analysts have experienced as they inputted these figures. Was $750 for 1998 a typo? No, because the figure for the following year, 1999, also remained well down on the 1997 figure. Yet the growth rates did not make sense if the level figures were correct.
Example number two concerns China’s participation in the big international price surveys carried out by the International Comparison Program (ICP), based in the World Bank. The price surveys provide the data for calculating countries’ purchasing power parity (PPP) income, which in principle gives a more accurate measure of the relative purchasing power of countries’ average incomes than the average obtained by converting GDP in national currency into a common currency (the US dollar) at market exchange rates. Equally the PPP conversion is used for translating international poverty lines into national currency and then for calculating poverty headcounts. So countries’ poverty headcounts are very sensitive to their PPP incomes.
Although a growing number of developing countries had participated in the ICP since the 1980s, the Chinese government refused, until the price survey undertaken in the first half of the 2000s and published in 2005. Previously, the calculations for China’s PPP income had been based on extrapolations from elsewhere. When the time came for a new global price survey in the early 2000s the Chinese government agreed to participate, subject to certain conditions: the survey would be limited to urban areas, and to only 11 cities. Moreover, China’s statistical office interpreted the instruction in the ICP handbook that the products should be “internationally comparable” to mean that the surveyors should sample in the department stores rather than the market stalls (Brooks Bro shirts in Beijing are more comparable to shirts in the West than shirts sold in Beijing street markets, while the latter are more “representative” of shirts in China). The unsurprising result was that China’s prices were considerably higher than had been previously estimated, and therefore the purchasing power of its GDP was considerably lower than previously estimated. The results also meant that China had hundreds more millions of people living below the international “ordinary” poverty line than previously estimated.
Is it plausible that the statistical office did not know in advance the effects of its restrictions? If it did know, did it – or its political bosses – intend to produce these effects? After all, China operates internationally with two hats: one is as emerging superpower which must be present at the top tables of global governance; the other is as a poor developing country, far down the league of average income, which cannot be expected to undertake global responsibilities – such as signing up to international agreements to limit climate change. The new PPP numbers were mostly irrelevant to China’s policy makers; but could be useful in international contexts where China was wearing the second hat.
These two stories illustrate how some much used international statistics are vulnerable to manipulation by interested parties, and should not always be taken at face value. They underline that the political economy of statistics is a lagging field of study. National and international statistical offices always operate in the tension between professional standards of objectivity and political insistence on certain results. Whenever a measure is used as a performance target, the organisation that produces the measure is vulnerable to this tension. As the Chinese proverb says, “Officials make the figures, and the figures make the officials”.
2I was working in the World Bank at the time of this incident, and my source was Michael Ward, a World Bank statistician working on China. He later wrote an excellent account of the history of the UN’s achievements in building statistical capabilities at national and international levels: Quantifying the World: UN Ideas and Statistics, Indiana University Press, 2004.
The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.
Photo: World Bank Group Headquarters., Washington D.C. Credit: World Bank / Simone D. McCourtie on Flickr.