The World Bank's serious error

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Monday, January 15, 2018

The news that the World Bank made repeated methodology modifications over the past four years to its Doing Business rankings - changes that penalized Chile more than any other nation - is worrisome because it places into question the credibility of the information provided by the Bretton Woods institution.

At BNamericas, we rely on these competitiveness rankings to bolster our news; they provide a framework of understanding to our reporting on the real economy within Latin America, and influence our macro analysis of countries.

Chile is currently 55 out of 190 countries on the list, down from 34 in 2014, when President Michelle Bachelet began her second term.

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"Based on the things we were measuring before, business conditions did not get worse in Chile under the Bachelet administration," the World Banks' chief economist, Paul Romer, told The Wall Street Journal. In a January 12 interview with the Journal, Romer questioned "the integrity" of the process that led to the changes in methodology and offered "a personal apology" to Chile and other countries affected.

The uproar in Chile was understandable. How much investment did Chile lose as a result of this faulty ranking? Could it have played a role in the loss of the government's candidate - Alejandro Guillier - in the recent election that brought back to power the market-friendly Sebastian Piñera?

To the first question: it's probably very difficult to argue that the lower rankings explain Chile's falling investment during the Bachelet years. As Capital Economics notes: "In real terms, fixed investment is now 10%  below its  2013 peak... we think that other factors better explain the drop in business investment. For one thing, the corporate tax rate was hiked from 20% in 2013 to 25% in 2017, the largest rise in the OECD. But most importantly, copper prices fell from a peak of 8,000 US$/mt in 2013 to a trough of around 4,500 US$/mt at the start of 2016, causing mining investment to collapse."

As we have said previously here in this column, President Bachelet had bad luck with commodity prices in the last four years, and Piñera had exceptionally good luck in his first term (2010-2014). Moreover, the boom in the energy sector seen under Bachelet shows that international investors were hardly scared by the rankings of a World Bank report.

In a blog post over the weekend, Romer calculates that Chile's 2017 ranking would have been 51 without any modifications, compared to 55 as was published - not a great difference. But he does show that without the modifications made, Chile's rank would have gone down by only 5 places overall; in the published ranking, it goes down by 21 places from calendar year 2013 to 2017.

About the second question - did this influence politics? I think the answer is that we live in a world where elections are no longer local - but would a better international competitiveness ranking have improved Guillier's poorly planned campaign in the eyes of Chileans? Doubtful.

Still, the error is serious, and the World Bank has much answering to do.

"You probably won't be surprised to learn that the fundamental failure can be traced back to a lack of clarity in our communication," Romer said in his post.

Once again we learn that, though we live in a world of seemingly endless possibilities of communication, we seem to be growing more distant and removed from the truth in information.