Current Developments

Cheating Chile

The (il)legality of information and the World Bank’s “Doing Business” ranking

A rare mea culpa emanated from the leading international development institution, the World Bank, last week. The Bank’s Chief Economist, Paul Romer, told the Wall Street Journal: “I want to make a personal apology to Chile, and to any other country where we conveyed the wrong impression.” Romer, who took his post in late 2016, said he had found “irregularities” in the World Bank’s flagship publication, the “Doing Business” ranking. Changes to the ranking methodology had been “politically motivated”, downgrading Chile when the leftist Bachelet administration was in power but upgrading it during the term of her conservative opponent Sebastián Piñera. “Based on the things we were measuring before, business conditions did not get worse in Chile under the Bachelet administration”, Romer said. The apology had a worldwide media echo, in which the left-leaning German newspaper TAZ suggested that the manipulation had not only caused a 40% decline in foreign investment in Chile, but had also helped Piñera win last year’s presidential election against Bachelet.

In this blogpost, I would like to address some legal questions raised by the Doing Business (DB) ranking. I will argue that the Chile case highlights structural problems with knowledge production in international institutions. Addressing these problems requires an international institutional law that adequately frames and legitimates global information governance. This argument is elaborated at length in my 2017 book and in an earlier article, each with fuller references.

Doing Business as global information governance

The DB row is not an isolated event but reflects a general trend towards global information governance. International institutions not only act as negotiation fora, lawmakers or funders. They also act and govern through information and knowledge. The World Bank has been at the forefront of this development since President Wolfensohn declared it a “knowledge bank” in 1996. The more Bank financing has lost importance relative to private capital flows and emerging donor funding, the more the Bank has sought a new comparative advantage in providing expertise and knowledge. Besides technical assistance and advisory activities for specific clients, it has invested heavily in producing “knowledge as a global public good”: research reports, development statistics and indicators which individual countries lack the incentive and/or the capacity to generate.

Among the many indicators published by the Bank, the DB ranking stands out as the most controversial one. Started in 2004 by the Bank’s private sector arm, the International Finance Corporation, the research project intended to measure the “ease of doing business” in 185 legal systems around the world. Questionnaires are sent to lawyers, judges and other experts in those legal systems. Questions concern, for instance, the number of days it takes to register a company or a land transaction, to get a building permit, or to enforce a contract. Responses are quantified and aggregated in a comparative ranking. Common law systems like Singapore, New Zealand or the US typically come out ahead, “civil law” systems are way off (especially when influenced by French law), and “failed” states tail the crowd.

Reactions to DB were mixed: Member states like China and India criticized the ranking, large donors like the US were in support. Numerous recipient countries reformed their business laws along the lines of the DB indicators, including labor law reforms in Georgia which the ILO deemed in violation of binding labor rights conventions. After a trade union campaign, US Congress made further appropriations to be Bank contingent upon excluding the labor law indicators from the ranking. The Bank duly complied, but the rest of the ranking continued as the most-cited World Bank publication of all times. These multiple impacts indicate that DB is not just a technical research publication but a governance instrument. Its use can constitute an exercise of international public authority that can influence political and social conflicts, and sometimes even tip the balance in elections.

Research quality in international institutions

DB has elicited scholarly criticisms mostly focused on the deregulatory bias and methodological weaknesses of the indicators. The upshot is that DB is bad social science: The ranking punishes, for instance, registration procedures which burden market entrants but it ignores systemic benefits in terms of legal certainty and lower transaction costs accruing to all market participants. The validity of the indicators is further cast into doubt by instances of “gaming the indicators”, confirming the Hawthorne effect well known to social scientists. The reliability of data is also questionable: DB does not collect actual raw data but relies on expert opinions, whose perceptions may change with the election of a left-leaning or business-friendly government like in Chile.

Given that the initial DB team did not include a single lawyer, it is unsurprising that the research design also ignores basic tenets of comparative law. The questionnaire does not contemplate that the same rule can have different effects in different contexts, and that different legal arrangements can have functionally equivalent effects. But the very form of the ranking is not an exercise in context-sensitive comparative law, and we will thus never know whether a particular rule measured by DB protects a legitimate interest or solves some collective action problem – or whether it is an unnecessary, maybe even discriminatory obstacle for people trying to make a living.

The poor quality of the DB research is neither a coincidence nor, I would argue, the result of a neoliberal conspiracy. It rather points to structural problems with knowledge production in hierarchically organized international bureaucracies. Chief among these problems is the lack of an adequate legal framework, which has received much less attention in legal scholarship (but see generally here).

The (il)legality of information

While information and knowledge themselves are elusive objects of legal regulation, law can govern institutional activities like collecting, processing and disseminating of information, and it indirectly impacts knowledge production by providing a relevant context for cognitive processes. Legal analysis should thus focus on the international norms governing such informational action and cognitive contexts. This not only offers new perspectives on legal debates about “information interventions” or the “New International Information Order”. It also enables us to transform concerns about the quality and legitimacy of global information governance into arguments about the (il)legality of publications like DB.

Three legal aspects stand out. The first concerns the Bank’s legal competence to engage in projects like DB. While its Articles of Agreement empower the Bank to “publish reports”, they also prohibit interference in political affairs of member states. Intentional manipulation of Chile’s ranking to damage Bachelet and support Piñera would constitute such an interference. Such manipulation has been denied, however, by the DB project leader, Chile-based economist Augusto López-Claros, and Paul Romer later qualified his statements. Irrespective of this factual question, it is legally doubtful whether an influential ranking like DB falls within the exclusive organ competence of the Bank’s management or must rather be authorized by the political organs representing member states. I would argue that knowledge and research activities should be given a general framework in secondary law, which ensures organization, procedures and accountability adequate for research activities.

Secondly, adequate organization and procedure require provisions against conflict of interest and external quality control. Neither exists for DB: The ranking was initially compiled by the same operative unit that advised member states on how to improve their business climate; meanwhile, the project has been moved to the Bank’s research department, the “Development Economics Vice Presidency” (DEC). While DEC is usually headed by a renowned economist hired from outside the Bank – Paul Romer came from New York University –, it is equally part of the Bank’s hierarchical bureaucracy and lacks independence. Besides, there is no external peer review, and accountability is limited to toothless internal evaluations or ad-hoc reviews. As a research project, DB thus lacks an adequate legal framework ensuring its independence and quality. As a policy instrument, it lacks political legitimacy.

Thirdly, do these arguments make DB illegal? For sure, intentional manipulation, if proven, would constitute an internationally wrongful act in line with the ILC’s 2011 Draft Articles (DARIO). The same is arguably true if the absence of a proper legal frameworks results in a ranking that is systematically biased, invalid and unreliable. The Bank would thus be legally obliged to cease the publication of DB in its current form and to enact a proper legal framework for future research of this kind (Art. 30 DARIO). It would also have to “make full reparation for the injury caused” to Chile (Art. 31). This would include damages for the 40 billion US-$ in foreign investment lost to Chile, if their loss was indeed “caused” by DB. There is, however, little empirical evidence for an impact of this magnitude, although the Bank itself does make the (self-interested) claim that DB affects foreign investment flows – a claim that could turn against itself. Then there is the lost election for Bachelet. Would election meddling constitute “moral damage” (Art. 31(2) DARIO) which the Bank must somehow repair? It seems far-fetched, but who knows: Maybe certain lawyers in the US will advance such arguments against Russia some time soon?

Conclusion: Global public goods – make or buy?

To end on more pragmatic note: Despite the trouble with DB, international institutions retain an important role in providing global public goods, including such important information as financial stability statistics or climate change research. Public good theory does not, however, require international agencies to produce these goods themselves; they may also contract out production to external providers better suited for the task. This offers a pragmatic solution for DB: The Bank should publicly tender the DB project and outsource it to a consortium of independent research institutions based in a representative sample of member states. This would not only end the cheating of Chile, but also constitute an overdue gesture towards epistemic justice, demanded by so many critics of the knowledge Bank in North and South.

Michael Riegner is postdoctoral researcher at Humboldt University Berlin and the Law and Society Institute Berlin.

Cite as: Michael Riegner, “Cheating Chile”, Völkerrechtsblog, 19 January 2018, doi: 10.17176/20180119-134740.

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  1. Johan Horst
    19 January, 2018 at 19:34 — Reply

    Lieber Michael,
    vielen Dank für die interessante Analyse dieses Sachverhaltes. Ich bin gespannt, wie das weiter geht.

  2. Adriani Dori
    19 January, 2018 at 22:06 — Reply

    Is there any kind of liability regime in Int’l law for such cases? Could a State sue for defamation but also for loss of profit? Of course, it may be difficult to calculate the concrete amount of loss, but causation should be taken for granted: If they push forward such studies based on the assumption that their positive results may attract investors, shouldn’t the same assumption work in the opposite direction?

    • Adriani Dori
      19 January, 2018 at 22:25 — Reply

      Sorry, reading the post from my phone I did not visualize part of the text. I see the post answered my question already. Congrats for the excellent post!

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