IMF & World Bank: How do they differ?

The IMF and World Bank are called the ‘Bretton Woods Twins’. John Maynard Keynes labelled IMF & World Bank as “Master Fund” and “Miss Bank” respectively. This assignment of gender reveals the functions of the two Institutions quite well.

(Note: This characterisation plays to the gender stereotypes. Apologies for that but it does serve the purpose well.)

International Monetary Fund, called the “Master Fund” by Keynes is narrowly focused on macroeconomic imperatives like stabilizing currency exchange rates, financing balance of payment deficits and advising borrowing governments to make the requisite changes in its economy. It is seen as a meaner of the two twins. In 1991, as India battled with its balance of payment crisis, India had to knock on the doors of IMF. The Indian economy, which had been a closed one till that time was forced to liberalize itself. They call it ‘structural adjustment’ measures.

IMF’s help is conditioned on the country’s promise to change itself. That does have an overtone of a tight-fisted gentleman (or not-so-gentle man). If you want to be more generous in your perception of IMF, think of it as your father who tries to discipline you once in a while when you go off the road. If your finances are not in shape, he will lend you but only if you promise to mend your ways of handling your finances. And yes, like all fathers, he too thinks that he knows what’s best for you: Free Market.

At IMF, you’ll find mostly professional economists and financial experts. IMF publishes reports which sound pretty highfalutin like Global Financial Stability Report & World Economic Outlook.

World Bank, or officially the International Bank for Reconstruction and Development (IBRD), is primarily aimed at financing economic development. ‘Development’ is a softer word that the more muscular term “economic growth” & thus the label “Miss. Bank”, a nourishing institution looking at development as just as sound economic fundamentals but as quality healthcare, education, water, infrastructure, etc. It is seen as more benign than IMF.

World Bank’s current projects in India can help you understand its purpose. It collaborates with Government of India on a project called ‘Atal Bhujal Yojana’ which is a plan for managing groundwater. Similarly Tejaswini project is for Socio-economic empowerment of Young women and adolescent girls. Its contribution to schemes like National Nutrition Mission, Projects on Climate resilient agriculture, etc gives you an idea that World Bank is focused on a broader definition of development.

World Bank comprises of IBRD and International Development Association (IDA) which gives loans at concessional rates to poor countries. At World Bank, you’ll find a whole range of people like economists, engineers, urban planners, agronomists, statisticians, lawyers, portfolio managers, loan officers, project appraisers, as well as experts in telecommunications, water supply and sewerage, transportation, education, energy, rural development, population and health care, and other disciplines. World Bank’s report do not sound as intimidating as that of the IMF’s. They are Ease of Living Index Report, Universal Health Coverage Index, Remittance Report, etc.

IMF and World Bank have different purposes, Size and Structure (World Bank is about three times the size of IMF), Sources of Funding and recipients of funding (IMF only lends to countries in distress). This is a very simplistic way to look at the two institutions but it helps.

Ease Of Doing Business Rankings: A Critique

Reports that assess the business environment by speaking to experts or government officials capture the de jure processes of compliances and regulations. But there can be differences between de jure processes and de facto reality due to issues of implementation and understanding of systems by user enterprises. Hallward-Driermeier and Pritchett find that for comparable questions such as time taken to start a business or time taken to get construction permits, the results of the Doing Business reports of the World Bank and the Enterprise Survey globally are poorly correlated.

The above excerpt is not from the Wire, Scroll, Quint or NDTV. It is from NITI Aayog’s report on Ease of Doing Business published in 2016 which the Government of India later disowned. India jumped 23 places to occupy 77th position in the World Bank’s ‘Ease of Doing Business Rankings’. I hate to be a party pooper, but we should first understand what the World Bank’s Doing Business rankings really mean before we pop the cork.

World Bank’s Doing Business rankings are based on responses from experts, chartered accountants & lawyers. They are not based on how the entrepreneurs & businessmen look at the regulatory environment. Why should this matter at all?

Take the example of the Single Window System that the government brought to facilitate ease of doing business. This allows the companies to submit all their regulatory documents to a single entity or at a single place. This is a great move because it brings down the time businesses spend on paperwork. It also cuts down the corruption associated with multiple entities. So, if you ask experts, they will tell you that India has improved a lot in ease of doing business with this single move. But the NITI Aayog Report I discussed above suggests that businesses are not even aware of the Single Window System.

Only 20% of enterprises that started operations during or after 2014 said that they had used a single window system to set-up their business.

So, this rank shows you what reforms the government has taken but it doesn’t tell you if businesses are actually benefiting from them. There is a vast gap between what the enterprises know and what the government officials say they have done to improve procedures relating to various permits and clearances.

Another big flaw in World Bank’s EODB ranking is that its data source is limited to just two cities— Mumbai and Delhi.

One can argue that examples set by these two cities will be replicated in other cities. While a large proportion of India’s business takes place in these two cities, this cannot be representative of the entire country.

The Rankings take into account 10 parameters and rate countries based on it. India’s ranking improved mainly due to two factors:

  1. Improvement in dealing with construction permits (from a rank of 181 to 52) due to the new online building permit approval system in Mumbai that helped streamline and centralize the construction-permitting process.
  2. Improvement in “trading across borders” (from a rank of 146 to 80) as the government let the exporters seal their containers electronically at their own facilities, limiting physical inspections to 5% of shipments helped in trade facilitation.

This looks like a very thin thread to base the whole of India’s ease of doing business rank. India’s “paying taxes” ranking declined due to glitches in GST filing system and the associated time loss. The Insolvency & Bankruptcy code has been taken into account for resolving insolvency but It had no effect on the ranking.

So, what are the ground realities?

  1. Labour laws are still one of the biggest impediments to ease of doing business in India. Companies in labour-intensive sectors find the labour laws in India quite onerous. If India wants to avoid jobless growth, the government needs to reform the labour laws.
  2. Most States have made it easier to obtain land for business but ensuring clear property rights can make the land market more transparent & efficient. In many states like Rajasthan, obtaining land for commercial purposes is quite difficult. Registering property is a time-consuming process with registration fees that can go as high as 1% of property value.
  3. India got a score of 8.75 out of 35 in a global intellectual property index. This is published by the US Chamber of Commerce. The reason cited for the poor score is a “fundamental weakness” in India’s Intellectual Property laws. India ranks 44 out of 50 nations.
  4. There is a vast difference in the ease of doing business across various states. In poorer states, the compliance burden is large while in richer states, it is easy to do business.
  5. Similarly, companies with a low number of workers (upto 10 employees) face less difficulty in doing business while companies with a larger number of employees are burdened with regulatory burden. This prevents India from coming up with larger companies.
  6. Enterprises are not aware of the improvements in ease of doing business. Hence, they cannot leverage the steps taken by the government to smoothen the regulatory processes.
  7. In low-growth states, power shortage is still a problem. Addressing this will enhance the productivity & efficiency of the businesses.
  8. The GST filing system hasn’t stabilized yet. There are glitches in the filing process that can lead to huge time losses.

And finally, do the Ease of Doing Business ranking actually translate into foreign direct investment & GDP growth?

A research has shown a negative correlation between EODB rankings and GDP growth rates. It argues that a country with a bad economic ranking can perform better economically than a country that has a better EODB ranking. I am skeptical about this research and I do believe that EODB ranking matter when a company decides to invest in a country. But just the ranking cannot tell you if the business environment in the country has really improved. There are miles to go before we sleep.

And if we are flaunting this report, we should equally embrace all International reports about India, even the ones that show us in a bad light. When the same World Bank published its human capital index, the government cited “major methodological weakness” & rejected it. Similar “methodological weaknesses” are applicable to EODB rankings as well.

Kadyalwar Sunil Abhinav