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August 2013

Doing More with Doing Business: Vietnam Provincial Competitiveness Index

On its 10th anniversary, the World Bank’s Doing Business project is under serious scrutiny. Some would go so far as to call it an outright attack—designed to roll back or even get rid of the index—allegedly driven by countries unhappy with their Doing Business rankings or by disgruntled Bank economists dubious of the index’s methodology.

But the push-back has been strong. At an April conference hosted by the Center for Strategic and International Studies and moderated by the Center’s Dan Runde, development leaders and economists such as Paul Wolfowitz, Andrew Natsios, Michael Klein, Simon Johnson, and Eric Berglof expressed shock that the Bank would consider terminating or outsourcing this important product. Michael Klein, to take just one example, defended the index’s role in supporting inclusive economic growth through its emphasis on rule of law and appropriate regulation—essentially encouraging countries where business success is determined by merit, not by connections. The consensus was that although Doing Business is imperfect, it remains a valuable navigational tool to guide reform efforts across more than 170 countries.

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DAI’s extensive experience promoting business environment reform supports that conclusion. Doing Business has proven to be an important benchmarking tool, particularly when combined with data from Transparency International, the World Economic Forum’s Global Competitiveness Report, World Bank statistics on gross domestic product, and other sources. The index provides useful comparative data and trends across countries to guide reforms at the national level.

Doing Business was also inspirational in the design of the Provincial Competitiveness Index (PCI), an index DAI designed a decade ago under the U.S. Agency for International Development (USAID)’s Vietnam Competitiveness Initiative to support reform at the subnational level in Vietnam. Widely acknowledged to have played a powerful role in reforming the domestic regulatory environment faced by foreign and domestic enterprises, the PCI may offer its “parent” index a few pointers as Doing Business matures and evolves in its second decade.

What Could Doing Business Learn From The PCI?

Doing Business brings together a suite of indicators that speak to the ease of setting up and running private enterprises in a given country—how long it takes to register a business, for example. But showing how countries stack up against their competitors is one thing; showing how local jurisdictions within a country favor or disfavor business is quite another. That’s where the PCI comes in.

The PCI was designed by a DAI team—led by Dr. Edmund Malesky, now a political economist at Duke University—under the auspices of the USAID Vietnam Competitiveness Initiative (VNCI). We used statistical sampling methods similar to those employed by Doing Business, with the objective of measuring economic governance and ranking 63 provinces and cities. In December 2004, I presented the index’s conceptual framework at the World Bank office in Hanoi to a group of Vietnamese development economists familiar with Doing Business. Despite their initial misgivings, one leading economist broke the ice by saying the rankings would give low-ranking provinces the information they need to improve their performance.

In comparison with Doing Business, Vietnam’s PCI offers three important adjustments that allow it to better support reform efforts at the subnational level.

  • It overcomes the “de jure” focus of Doing Business on changes in laws and regulations by directly surveying firms—up to 10,000 domestic and 2,000 foreign enterprises—on the operational effects of regulations and administrative procedures. By contrast, Doing Business surveys law firms to assess changes in laws and regulations. Laws on paper are often very far from reality in emerging markets.
  • The nine PCI indicators are tailored to the regulatory issues most pertinent to enterprises in Vietnam. For example, market entry costs are important in both the PCI and Doing Business, but PCI asks questions specific to Vietnam’s licensing and registration procedures. Over time, as the PCI findings are publicized and attention is focused on problem provinces, the costs of registration have been reduced from 20 to seven days in the median province. Sensitive issues such as corruption and transparency are surveyed in the “Informal Charges” and “Legal Institutions” indicators, with an eye to shedding light on issues common in Vietnam, such as negotiating tax liability with officials or the availability of provincial investment plans.
  • We made a concerted effort to publicize the PCI rankings nationwide. As a result, they attract attention which has, in turn, spawned healthy competition among provinces to learn from reform efforts in the highest-ranked provinces. These local experiences are typically far more relevant and transferrable than experiences in other countries. Even at the national level, the PCI provides feedback to policy makers who are working on behind-the-border trade and regulatory issues in their efforts to comply with bilateral and multilateral trade agreements.

Since 2005, USAI/VNCI and its partner the Vietnam Chamber of Commerce & Industry (VCCI) have produced eight annual PCI reports. The PCI team has conducted more than 150 diagnostic workshops in 60 provinces to stimulate dialogue between the local government and private sector, identify critical issues brought into the open by the PCI, and shape appropriate reforms. Initially, VCCI and our own team were concerned about the political sensitivities PCI rankings might arouse in a relatively closed political environment where there was little dialogue and minimal data available. But over time, Vietnamese officials, business leaders, economists, and journalists learned about the sampling methodology and construction of the index and accepted it as a valuable means of improving the business environment, encouraging enterprise growth, and attracting investment.

Leadership Matters

Perhaps the single most compelling message to come out of the PCI process is this: leadership matters. The PCI proved the concept of “the governance premium,” based on both hard data and perception data: provinces with higher PCI rankings have generated greater prosperity and economic growth (holding natural endowments constant); provincial authorities have the ability to reduce the costs and risks of doing business in their jurisdictions, thereby creating more jobs and greater prosperity.

In considering the PCI’s success in adapting the best ideas of Doing Business at the subnational level, I would highlight three factors:

  • All politics is local: the index effectively taps into the political and economic motivations of the provincial leaders and governments—their desire to attract investment and stimulate growth—as the impetus for reform
  • Local ownership: VCCI is a highly competent, committed local partner whose legitimacy and mandate reinforces its advocacy role; we were able to augment and benefit from its brand as a reform champion
  • The power of the media: the PCI team—both VCCI and USAID/VNCI—effectively engaged radio, print, television, and digital media to disseminate the rankings and illuminate the business issues underlying them

Relatively quickly, the PCI became a credible, evidence-based outlet for private-sector concerns, trusted by local and national leaders to guide reforms. Based on the PCI experience, we believe Doing Business has significant potential to evolve in its second decade to meet the critical challenges of transforming underperforming economies. It could readily be adapted not just to report de jure conditions at the national level, but also to survey on-the-ground realities facing enterprises at the national and subnational levels, where most enterprises in emerging economies interact with regulators. The work of Doing Business is not done.


Photo of Jim Winkler

Jim Winkler is a Senior Trade and Investment Advisor at DAI.