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Why the ease of doing business matters?

  Jul 26, 2017

Why the ease of doing business matters?

In the World Bank’s (WB) 2017 Doing Business ranking, India stands at the 130th place in a list of 190 nations—just a spot higher than in the 2016 rankings. A curious case is being made that higher rankings do not really imply good economic outcomes such as higher foreign direct investment (FDI) inflows or higher gross domestic product (GDP) growth.
Ease of Doing Business Concept
Index GDP relation
Once we know that a high ease of doing business index is almost equivalent to being a rich country, it is foolhardy to expect that a high index will also imply higher GDP growth. The convergence hypothesis proposed by the neo-classical growth theory, says that poorer countries tend to grow faster in per capita terms. Estimates from the recent work at Harvard suggest that for every per-unit increase in the log of per capita income, the long-run growth rate drops by almost 1.22% per annum.
Evidence
Similar analysis shows that a better ease of doing business score is associated with a lower level of structural unemployment.
Foreign Direct Investment
In summary, a country can’t progress without undertaking the reforms that lead to better business conditions. These reforms are critical to achieve better living standards, moderate inflation, low-inflation uncertainty and high-growth rate. In short, India’s efforts to improve its ease of doing business ranking is not an unnecessary obsession.