Changes to the Methodology, 2005 - 2012

Doing Business 2012

The methodology for 3 of the Doing Business topics was updated this year—getting credit, dealing with construction permits and paying taxes.

First, for getting credit, the scoring of one of the 10 components of the strength of legal rights index was amended to recognize additional protections of secured creditors and borrowers. Previously the highest score of 1 was assigned if secured creditors were not subject to an automatic stay or moratorium on enforcement procedures when a debtor entered a court-supervised reorganization procedure. Now the highest score of 1 is also assigned if the law provides secured creditors with grounds for relief from an automatic stay or moratorium (for example, if the movable property is in danger) or sets a time limit for the automatic stay.

Second, because the ease of Doing Business index now includes the getting electricity indicators, procedures, time and cost related to obtaining an electricity connection were removed from the dealing with construction permits indicators.

Third, a threshold has been introduced for the total tax rate for the purpose of calculating the ranking on the ease of paying taxes. All economies with a total tax rate below the threshold (which will be calculated and adjusted on a yearly basis) will now receive the same ranking on the total tax rate indicator. The threshold is not based on any underlying theory. Instead, it is meant to emphasize the purpose of the indicator: to highlight economies where the tax burden on business is high relative to the tax burden in other economies. Giving the same ranking to all economies whose total tax rate is below the threshold avoids awarding economies in the scoring for having an unusually low total tax rate, often for reasons unrelated to government policies toward enterprises. For example, economies that are very small or that are rich in natural resources do not need to levy broad-based taxes. The correction rate between Doing Business 2011 and Doing Business 2012 was 7%

Doing Business 2011

The methodology for the employing workers indicators was updated this year, with guidance from a consultative group of relevant experts and stakeholders. The employing workers indicators are not included in this year’s aggregate ranking on the ease of Doing Business.

Changes agreed as of the date of publication are the following: the calculation of the minimum wage ratio was changed to ensure that no economy can receive the highest score if it has no minimum wage at all, if the law provides a regulatory mechanism for the minimum wage that is not enforced in practice, if there is only a customary minimum wage or if the minimum wage applies only to the public sector. A minimum threshold was set for paid annual leave and a ceiling for working days allowed per week to ensure that no economy benefits in the scoring from excessive flexibility in these areas. Finally, the calculation of the redundancy cost and of the annual leave period for the rigidity of hours index was changed to refer to the average value for a worker with 1 year of tenure, a worker with 5 years and a worker with 10 years rather than the value for a worker with 20 years of tenure. The correction rate between Doing Business 2010 and Doing Business 2011 is 5.7%.

Doing Business 2010

The methodology for one of the Doing Business topics—employing workers—was updated in Doing Business 2010. The assumptions for the standardized case study were changed to refer to a small- to mediumsize company with 60 employees rather than 201. The scope of the question on night and weekly holiday work has been limited to manufacturing activities in which continuous operation is economically necessary. Legally mandated wage premiums for night and weekly holiday work up to a threshold are no longer considered a restriction. In addition, the calculation of the minimum wage ratio was modified to ensure that an economy would not benefit in the scoring from lowering the minimum wage to below $1.25 a day, adjusted for purchasing power parity. This level is consistent with recent adjustments to the absolute poverty line. Finally, the calculation of the redundancy cost was adjusted so that having severance payments or unemployment protections below a certain threshold does not mean a better score for an economy. The correction rate between Doing Business 2009 and Doing Business 2010 was 5.5%.

Doing Business 2009

The methodology for one of the Doing Business topics—getting credit—improved in Doing Business 2009. Three main changes were made, affecting only the strength of legal rights index. First, a standardized case scenario with specific assumptions was introduced to bring this indicator into line with other Doing Business indicators. Second, the indicator now focuses not on tangible movable collateral, such as equipment, but on revolving movable collateral, such as accounts receivable and inventory. Third, the indicator no longer considers whether management remains in place during a reorganization procedure, better accommodating economies that adopt reorganization procedures similar to Chapter 11 reorganization or redressement procedures in civil law systems. The correction rate between Doing Business 2008 and Doing Business 2009 was 6%.

Doing Business 2008

The methodology for three of the Doing Business topics—dealing with licenses, employing workers and enforcing contracts—was improved in Doing Business 2008. For dealing with licenses, three changes were made. First, the case study now applies to builders that are fully licensed and insured at the start of the project. As a result, procedures that involve insuring or licensing the construction business are no longer counted. Second, inspections are now assumed to take 1 day to complete even where there is a delay between the request for an inspection and its occurrence. This change was made to eliminate discretion in interpreting the time that respondents report for inspections. Third, preconstruction inspections were added to the list of procedures; these affect mainly countries in the former Soviet Union. The first two changes reduce the number of procedures and delays associated with the case study; the third increases them.

For employing workers, improvements were made to align the Doing Business methodology with International Labour Organization (ILO) conventions. It is now possible for an economy to receive the highest score on the ease of employing workers—indicating the most flexible labor regulations—and comply with all 187 ILO conventions. Two main changes were made. First, the calculation of firing costs was modified so that 8 or fewer weeks of salary now receives a score of 0 for purposes of calculating the rankings on the ease of employing workers. Second, restrictions on night work such as higher overtime premiums or limitations on scheduling work hours are no longer coded as rigidities. Both changes result in more flexibility in employment regulations as coded in Doing Business.

For enforcing contracts, the list of procedures was revised to accommodate procedural differences between civil and common law. For example, in civil law countries the judge appoints an independent expert, while in common law countries parties send the court a list of their expert witnesses. Two assumptions were added, on attaching the defendant’s goods prior to judgment and on providing expert opinions. To indicate the overall efficiency of court procedures, 1 procedure is now subtracted for countries that have specialized commercial courts and 1 procedure for countries that allow electronic filing of court cases. Finally, the cost indicator now includes all fees for enforcing judgments.

Doing Business 2007

The methodology for four of the Doing Business topics changed for Doing Business 2007. For paying taxes, the total tax rate measure now includes all labor contributions paid by the employer (such as social security contributions) and excludes consumption taxes (such as sales tax or value added tax). And the measure is now expressed as a percentage of commercial profits rather than gross profits. This change reflects the total tax burden borne by businesses. For enforcing contracts, the case study was revised to reflect a typical contractual dispute over the quality of goods rather than a simple debt default. For trading across borders, Doing Business now reports the cost associated with exporting and importing cargo in addition to the time and number of documents required. And for employing workers, hiring costs are no longer included in the calculation of the ease of employing workers.

Doing Business 2006

In 2005, in addition to developing new indicators on dealing with licenses, trading across borders and paying taxes, the indicators on two other topics were expanded.

Firstly, changes were made to the protecting investors indicators. The disclosure index in Doing Business 2005 captured seven ways of enhancing disclosure: whether laws and regulations require reporting (i) family; (ii) indirect and (iii) beneficial ownership; (iv) disclosing information on voting agreements between shareholders; (v) audit committees to the board of directors; (vi) use of external auditors; and (vii) ownership and financial information is publicly available to all current and potential investors. The strength of investor protection index in Doing Business in 2006—comprising the extent of disclosure index, the extent of directors liability index, and the ease of shareholder suit index—targeted the indicator set on the specific issue of self-dealing within corporations. The new approach provides a more focused, in-depth understanding of each country’s legal protections against corporate looting.

Secondly, the indicators on employing workers were expanded to include the non-salary cost of hiring a worker, which consists of all social security and payroll taxes paid by an employer on behalf of a worker.

Doing Business 2005

Changes were made to every set of indicators in 2004. For example, previously the statutory requirement for minimum capital was taken as part of the initial cost of starting a business. But in a number of countries, only a part of the mandated minimum capital needs to be paid up-front, with the rest paid over time. For example, only 25% is paid upfront in Germany, 30% in Italy and 50% in Armenia. The revised indicator reflects the up-front cost only.

Indicators of credit markets were also improved. In 2003 we reported a measure of the legal rights of creditors in insolvency. In 2004, the measure is expanded to cover collateral laws as well—which define legal rights that help both borrowers and lenders. And indicators on credit information were simplified to an index of six variables, covering information sharing from both public and privately owned registries.

As another example, 2003’s methodology for enforcing a contract did not allow for a creditor to seek recovery outside the courts. This assumption was made in the belief that such actions may always be reversed by a later court judgment and are not preferred by creditors. But several countries—for example, Belgium, France and Greece—have administrative debt collection procedures that are binding for both debtors and creditors. In 2004, administrative procedures are used for countries where the respondents indicate they are the most common method.

A different problem arises when the respondents describe how entrepreneurs would register a business, go to court or enter bankruptcy—but in reality have dealt little with such transactions. To gauge their experience, this year’s surveys collected information on how many such transactions the respondent completed. The new evidence shows that the average incorporation lawyer dealt with more than 100 cases of business entry in 2003. And because Doing Business has about 500 respondents on starting a business, the data reported here reflect experience with more than 50,000 transactions for the whole sample—for only one of the topics in Doing Business. Beyond the arithmetic, a professional dealing with these issues every day can differentiate between usual costs and delays and those under extraordinary circumstances.

To inspire reform, indicators need to be simple. Changes to the methodology have been made where users of the indicators said they had trouble understanding them. For example, 2003's indices on the rigidity of employment regulation were based on a reading of the laws and varied from 0 (less rigid regulation) to 100 (more rigid regulation). Many business people asked whether the indices could be presented in terms of costs. So in 2004, a new indicator on the cost of firing a redundant worker has been constructed, measured in terms of weeks of wages.

For another example, 2003's indicators on the difficulty of closing a business looked at the cost, time, priority of claims and extent of court involvement. Policymakers have said that they are most concerned about how much value is being lost in inefficient bankruptcy procedures. The result is a new indicator, which calculates how many cents on the dollar can be recovered in bankruptcy.

Once the simple indicator triggers interest in reform, by comparing it with those for other countries and by showing the economic and social benefits of improvement, more detailed information collected by the Doing Business team can be used to assist the reformers. One example is the indicators on registering property. Once the government of Malawi acknowledges the need to make registration more efficient, the depth of the analysis allows further investigation of where the reform should focus. In particular, the third procedure—the requirement to obtain consent from the minister of lands for the property transfer—is the largest bottleneck to registering property. Cutting this procedure would reduce the time by 75%.

Data have also been collected on the actual use of courts in filing for bankruptcy. This is a first attempt to measure use of public institutions and hence the relevance of bankruptcy laws for the average business. The result: in 40 countries bankruptcy is hardly ever used. The analysis of such data helps in setting priorities for reform and in designing improvements to indicators. The 2004 data set presents new indicators on collateral laws to address how creditors enforce their rights outside of bankruptcy.