Will ‘Doing Business’ Keep Damaging Business?

Arruñada, Benito (2008), “Will Doing Business Keep Damaging Business?,” Journal of Comparative Economics, in press. Accepted manuscript version available online in ScienceDirect since April 27, 2008 (doi:10.1016/j.jce.2008.04.001).

The success of the Doing Business project (for herein, denoted DB) has made administrative simplification policies popular. Unfortunately, by its systematic flaws, DB methodology exerts a perverse influence on the design of such policies. Simeon Djankov’s response (2008) to my analysis of DB (Arruñada, 2007) shows again what I criticized DB for: its narrow focus on some costs and rent seeking damages reform efforts. Moreover, the macroeconomic benefits of reducing the cost of initial formalization, which is just a tiny component of total entry costs, should not be exaggerated. Entrepreneurs remain informal mainly because formalizing their businesses increases their tax burden without—in many developing countries—reducing their transaction costs. Empirical tests using DB indexes are of little help in this discussion as they have severe limitations.

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