John Ure Webpage

I have long been a sceptic of indices that purport to measure a country’s standing in a league table and for all the obvious reasons. They rely on what is often dodgy data of uncertain provenance, they are inherently subjective in terms of the weightings given to any one set of data, and the countries concerned use them wrongly by comparing themselves with competing economies even when the structure and dynamics of those economies are very different. At best, countries will ask what they can do to improve their standing, at worse they look for quick fixes which lack substance, such as unenforceable (or unenforced) laws and regulations and end up as smoke (simple appearances) and mirrors (nevertheless, reflected in the index).

Nevertheless, indices per se are not the problem. Properly constructed and used they provide a basis for evidence-based policy-making. While data is information of sorts the trick of course is how good is the analysis and how does it fit in with other sources of information and analysis. There are always more ways than one to tell a story, and none of them need be wrong. They are just different. But what happens when the data is deliberately manipulated to improve the results? Well, that according to an inquiry by the World Bank may have happened in the construction of the annual Ease of Doing Business report in 2018 when the current head of the IMF, Kristalina Georgieva was then the MD of the WB. Georgieva, a respected economist –  she wouldn’t have got the job otherwise – denies that China put pressure upon her or the WB to upgrade their league position in return for adding to its contribution to WB funding. Nobel-winning WB Chief Economist Paul Roemer in 2018 resigned his position in the World Bank apparently in protest at changes in the methodology of the Index, but as it affected Chile. Georgieva denies changes that improved China’s standing were the result of pressure from China, and in her defence, Jeffrey Sachs of Columbia University points out that Shanta Devarajan, an ex-Harvard economics professor who was in charge of the Indexing, denies any pressure from Georgieva. Sachs claims that the accusations are part of an anti-China hysteria. Whatever the truth, the scandal has led the WB to withdraw the Index and hints that in future it will take a different approach.

But one of the revelations, although not unknown of course, is that so many professional investment funds rely upon this index among others to place funds. Think about the implications and what this implies for due diligence. At best it outsources due diligence to indexes, such as the use of tracker funds to pick stocks. An easy life for fund managers handling other peoples’ money. At worse it means the blind leading the blind down a sinkhole, but again if it’s other peoples’ money… I recently enquired of an online insurance company about insuring my car for another year. As soon as they learned my age, “no we don’t insure people of your age”. I replied, “you mean you don’t do due diligence with respect the driving record of your customers?” The reply to that was “as an online company we don’t have the staff to do due diligence.” So algorithmic driven digital companies cut costs by doing away with due diligence – they can always add a few dollars to everyone’s premium to cover the risk while saving money on staffing costs. Companies relying upon indexes are basically cutting costs by doing away with due diligence. What about relying upon reports from the Big Four accountancy companies for due diligence? I don’t have enough fingers on my two hands to count the number of accounting failures (due diligence) to do so.

So, what to do? Well, if indices are needed the obvious step is to put an end to league tables and simply issue ratings per country in, for example, a coloured code, with a narrative attached highlighting where the strengths and weaknesses are which would offer countries ideas of what they should be looking for, namely ways to get better. This would add to the work involved because it would require a qualitative as well as a pseudo-quantitative assessment of each country. But it would add to credibility.