Let’s say you’re looking for a place to live, a college, a car… or a country to invest in.
You could do your own research: Check out YouTube, read Reddit, Google it, and call yourself an expert. But the reality is that you’ll get nothing more than spotty insight, poorly supported conclusions, and a budding private-message friendship with a guy from the chatroom named Jed who seemed to know what he was talking about and, you know, had some really good points.
The Rankings-Industrial Complex
Or you could use a tool specifically crafted for people with more curiosity than time or patience… a ranking about whatever it is you’re interested in, released by an apparently reputable organization that applies a (pseudo) scientific process to collect and digest data, and then spits out a pre-baked conclusion. Presto, research done… conclusion reached… and decision made.
For example, there is Money magazine’s rankings of places to live in America, Consumer Reports‘ rankings of everything from rice cookers to SUVs to blood-glucose meters, and the Forbes list of rich people (you’re not buying them, but same idea). And then, of course, there’s the granddaddy of the rankings-industrial complex, U.S. News & World Report (which covers colleges, nursing homes, credit cards, diets, gastroenterology hospitals, mutual funds… and maybe even the dress shoes in your closet).
We often take them at face value, but these kinds of rankings are imperfect at best. Is a little town in Minnesota really the best place in the U.S. to live, as Money contends? The U.S. News & World Report rankings are “ridiculous,” said the Washington Post in 2018. Gold standard Consumer Reports has faced challenges to its testing and rankings over the years.
Under the veneer of seemingly objective hard data, there’s enormous scope for subjectivity… and the methodology allows for plenty of wiggle room.
Data in pure form loses its virginity when subject to analysis.
And when advertisers jostle for screen or page space with rankings – after all, they’re a business, not a public service – lines are easily blurred.
So it’s not surprising that when smart people who are less driven by capitalist concerns put together vitally important rankings… that doesn’t mean they’re any better. In fact, far from it.
The Ranking of the World
The Ease of Doing Business (“EoDB”) annual ranking of the business climate and suitability for investment of the economies of 190 countries was supposed to be different…
It was a collection of data assembled by exceptionally smart people at the World Bank, the platinum-plated do-good multilateral financial institution that aims to boost economic growth and reduce poverty in developing countries.
Until its recent demise (more on that soon), the EoDB survey was the Car and Driver 10 Best Cars and Trucks of wonky policy sets, the Condé Nast Traveler Gold List of the best hotels and resorts of the global investor. A foundational source of data and insight for policy makers, it also became shorthand for the ability of an economy to attract investment.
Many countries molded their policy and reform priorities in order to improve their position on the various benchmarks of the survey – from “dealing with construction permits” to “protecting minority investors” to “getting credit.”
“The World Bank has successfully marshaled the Ease of Doing Business [ranking] to amass considerable influence over business regulations worldwide,” explained an article in the journal International Organization in July 2019.
It was a finely tuned, carefully orchestrated snapshot of the factors that shaped the lives and well-being of billions of people… while driving – or being the cause of a rerouting of – untold sums of investment funds. (The Economist reported that an internal World Bank assessment found that the EoDB contributed to the decision-making process for investments by the World Bank in 676 projects worth nearly $16 billion over the past 10 years.)
As the Financial Times explained, “Credibility in the unassailability of [the World Bank’s] data is paramount, with billions of dollars of investment every year dependent on its information.”
And for politicians, improving the investment environment to move up in the rankings also had a competitive element to it. After all, investment is a zero-sum game: If Country X gets more foreign investment, Country Y will get less. And the EoDB ranking mattered in that calculus.
It was also a source of national price. “I want Saudi Arabia to be among the top 10 countries in Doing Business in 2010. No Middle Eastern country should have a better investment climate by 2007,” said King Abdullah of Saudi Arabia in 2006 (2020 ranking: 62nd). In 2011, Russian President Vladimir Putin set the goal of Russia breaking into the top 20 by 2018, after placing 123rd. (In 2020, it reached a very respectable 28th.)
Implementing reforms with the express purpose of keeping up with, or overtaking, the Joneses (in this case, other countries) – even if those measures were good policy anyway – is like studying for a test. The teacher is incentivized to ensure that his students score well on a standardized exam, so his instruction is geared toward that end… rather than the broader aims of (say) training the student to think and inculcating them with a love of learning. But it didn’t matter – if the survey was the whip to bring about change, the World Bank was happy.
A new system shows which stocks could soon rise 100% thanks to a Connecticut couple’s catastrophic 401(k) loss.
China’s EoDB Obsession
The Ease of Doing Business index was a mix of research project, national policy prescription, and competitive motivation. And in the global pecking order of the EoDB, China didn’t like where it stood.
In 2016, China was ranked just 84th out of around 190 countries in its overall score. For a country with a long-term plan to re-assume what it viewed as its natural position at the top of the global economic and geopolitical pecking order, that simply would not do.
As the Economist explained,
[In] 2017 Li Keqiang, China’s prime minister, grumbled that his country was lagging behind its peers [in the EoDB rankings]. At his urging, officials began freeing entrepreneurs from red tape—and crimson ink. They cut fees, streamlined approvals, and began to use electronic seals instead of the traditional ink stamp on many documents.
Within a few years, the time required to launch a company was cut from nearly 23 days to just nine. Incentivized bureaucrats made it easier to plug into the electricity network by expanding network capacity, making it cheaper to connect, and introducing a mobile application.
Whatever its motivation – a sense of competition, keeping up with other developing markets, pride – China did it. By 2020, China rallied to reach a ranking of 31, beating out the likes of France (32), Switzerland (36), and India (63).
Or did it?
China’s Ranking Levitation
A few weeks ago, a commissioned report produced by law firm WilmerHale accused then-World Bank CEO Kristalina Georgieva of manipulating the rankings to boost China’s position in the 2018 EoDB report.
In September and October of 2017, the report explains, Chinese officials – presumably feeling the hot breath of the prime minister on their neck – were in frequent touch with the World Bank about China’s placement in the upcoming annual ranking.
According to the WilmerHale report, there was some internal discussion – prompted by Georgieva and then-World Bank president Jim Yong Kim – about how to bring about an upward adjustment in China’s position. One (rejected) suggestion was that Hong Kong be integrated into China’s overall score. (The Special Administrative Region is ranked separately in the EoDB, and regularly places in the top three.)
That would be like U.S. News & World Report allowing New Jersey public institution Rutgers University to co-opt Princeton (a perennial top 5 finisher and No. 1 this year, versus Rutgers’ ranking of 63) for the purposes of the survey. It would do the trick but would be far too heavy-handed.
Instead, according to the WilmerHale report – a compelling read, if bureaucratic intrigue is your thing – the EoDB team discovered three areas where the data could be reinterpreted to boost China’s score.
For example, an indicator of legal rights was adjusted to give China more credit for a law relating to secured transactions. This change “could be justified in light of differing expert opinions on the effect of the Chinese law,” the report explained.
And hey, presto. After the tweaking, China’s ranking – like a levitating body under David Copperfield’s hand – miraculously ascended seven spots to No. 78, from the No. 85 that it was originally going to be ranked that year.
As it happens (it’s always eventually about the money, isn’t it?), it wasn’t only about China not wanting to lose face with no improvement in its ranking year over year.
At the time the 2018 EoDB report was being finalized, Georgieva was also eyeball-deep in efforts to coax additional cash out of China as part of a broader effort to boost the World Bank’s capital base. The conversation with China – the third-largest shareholder in the institution and a key contributor to the capital campaign – would have been a lot more difficult, presumably, if China had EoDB egg on its face.
Why It Matters
A year and a few months later – in early 2019 – Jim Yong Kim unexpectedly and abruptly resigned from his position as the World Bank’s president, three years before his term in office was slated to end.
He joined a fund that invests in infrastructure projects in the developing world. It was an opportunity that he explained at the time was “unexpected,” but one through which he said he thought he could “make the largest impact on major global issues.”
It was a strange career move – leaving the pinnacle of the crossroads of development, emerging markets, and investment, for a position with a no-name institution that presumably paid better but enjoyed a crumb of prestige next to the five-course meal of the World Bank. And it was an option that very likely would have existed three years later. Kim either was in serious debt and needed some cash (no evidence of that at all) – or had a Spidey sense that he best get out while the going was good.
(Someone else with good timing: In January 2018, then-World Bank chief economist – and now Nobel Prize winner – Paul Romer left his position in a huff after just 15 months, claiming at the time that the EoDB data was manipulated… an assertion he later recanted.)
The WilmerHale investigation fingers Kim and Georgieva as the instigators of the data-fiddling that resulted in China’s improved position. However, Kim – as a private citizen long since divorced from the intricate politics of EoDB – seems to be out of harm’s way.
But Georgieva isn’t… She left the World Bank in October 2019 to become the head of Washington, D.C.-based multinational lender International Monetary Fund (“IMF”), which – like the World Bank – was founded in 1944 at the Bretton Woods conference that has since helped define the global financial system.
With money from 190 member countries, the IMF aims to keep the international monetary system on an even keel – through cultivating monetary cooperation, facilitating global trade, promoting sustainable growth, and reducing poverty. The people who work at the IMF, like those at the World Bank, fancy themselves to be among the sharper knives in the drawer, with degrees from the world’s top universities.
Georgieva, a Bulgarian economist, spent most of her career at the World Bank and the European Commission. If, after her run as World Bank CEO, she’d gone on to take up skydiving or an economics-endowed scholarship in Sofia or wiping the noses of her grandkids, the story of the fiddling of the figures of the 2018 EoDB might have lost its legs.
But that she’s at the IMF now makes all the difference… Following the release of the investigation on data irregularities, Georgieva denied that at the World Bank she had “put pressure on staff to manipulate data.”
“Let me be clear: The conclusions are wrong. I did not pressure anyone to alter any reports,” she said.
Right now, Georgieva is struggling to save her job. Shortly after the publication of the investigation, both Democrats and Republicans sitting on the House of Representatives’ financial services committee questioned whether she was the right person to continue to lead the IMF. The Senate Foreign Relations committee demanded “full accountability.” Treasury Secretary Janet Yellen declined to take a call from Georgieva, which is a government way of hanging someone out to dry. The Economist urged her to resign.
Why is everyone so upset over a few altered figures? It’s not as if we haven’t all at some point developed a hypothesis – really, a conclusion – and then scurried about to find the data to support it. (And there isn’t a stock analyst on earth who hasn’t tweaked a few figures, thanks to the wonders of Excel, to support a pre-ordained conclusion, especially when called on by the boss to do so.)
Three Big Problems
The first issue is that the IMF, as the Economist explains, is “the custodian of data standards for the world’s macroeconomic statistics.” That data, compiled on every angle and corner and cranny of the economies of member countries, is used to inform decisions about finance, economics, and policy by the IMF, investors, and other lenders. And Georgieva’s (alleged) prioritization of political expediency over data integrity at the World Bank taints the entire research operation of the IMF.
More broadly, the IMF – like many multinational organizations (such as the World Bank, the United Nations, and the World Health Organization) that serve multiple masters with conflicting agendas – suffers from a tension between its research aspirations and its diplomatic imperatives. At the World Bank, Georgieva allowed the need to appease China to trump the objectivity of the EoDB product.
How will the IMF (under Georgieva) react the next time it faces a similar decision point – where, say, it might have to offend China or some other noisy rich country? The objectivity of the decision making of Georgieva – and, by extension, the IMF – has been compromised.
And, of course, let’s not forget that the culprit at the World Bank was China. U.S. policymakers – whose support Georgieva needs if she is to remain the head of the IMF – are toxically allergic to any whiff of China-pandering. Anti-China sentiment is one of the very few policies that unites both sides of the aisle in American politics. Of all the countries to cave in to, Georgieva chose the very worst.
Why It Matters to (Emerging) Markets
One of the first victims of the scandal has been the Ease of Doing Business survey itself. In June 2020, the World Bank “paused” the annual report following internal reports of irregularities. In mid-September – the day after the publication of the WilmerHale report – the EoDB survey was axed altogether.
It made sense to excise what threatened to become a cancer to the organization. It’s still an incalculable loss for countries looking to benchmark their policies to higher standards, to investors looking for insight on a market’s business climate, and as a motivating factor to egg on countries to reform.
As emerging and frontier market brokerage Tellimer explains…
The loss of a supposedly independent, rigorous, objective, comparable data set with global coverage and a time series stretching back to 2006 matters for long-term investors in [emerging markets]. Ease of Doing Business was a unique data set.
What’s more, though, the episode is a Hummer-hits-Corolla ding to the credibility of the entire multilateral organization community… from the Paris Climate Accords, to the World Trade Organization, to the World Economic Forum, and every other alphabet-soup group of international do-gooders… particularly those where the U.S. sits at the head of the table.
If the World Bank couldn’t keep itself free from political influence (from China no less!), who can?
It’s also a signal to China to accelerate its efforts to develop parallel rival groups – like its Asian Infrastructure Investment Bank, which aims to fund billions of dollars in projects throughout Asia every year… the $4 trillion (or so) Belt Road Initiative to build out infrastructure from East Asia to Europe… and the Shanghai Cooperation Organization (a Eurasia-focused economic, political, and security alliance spearheaded by China). China is reading the room, and it’s seeing that it’s not welcome.
Georgieva Is On Borrowed Time
The U.S. is the most important shareholder of the IMF, and it’s clear that Georgieva doesn’t have the support of the U.S. government. She’s likely to follow the same ignominious path out the door as some of her predecessors.
One former IMF head, Rodrigo Rato, was sentenced to four years in prison for embezzlement (at least not committed during his time at the IMF). Another, Frenchman Dominique Strauss-Kahn, quit in May 2011 amidst allegations that he sexually assaulted a hotel maid.
A third, Christine Lagarde, was in December 2016 convicted of financial negligence from her time in the French government – but was not removed from her position. She went on to green-light the single worst lending decision in the decidedly mixed history of the IMF. And then – talk about failing upwards – in November 2019 she was made head of the European Central Bank, a position that rivals that of Jerome Powell, the head of the U.S. Federal Reserve, in global macroeconomic importance.
Georgieva didn’t commit a crime… But she may have done something at least as bad: undercut the credibility of the multilateralism of the World Bank and, by association, other organizations operating in the same realm. And we’ll all suffer.