June 19, 2017

The Importance of Ease of Doing Business

Vivek Dehejia, Resident Senior Fellow at IDFC Institute writes in this Mint article about the business regulatory environment in India and its impact on economic outcomes.


He writes "there is not, strictly, a one-to-one relationship between EoDB and good economic outcomes such as a higher level of gross domestic product (GDP) per capita or a higher growth rate. In an already largely liberal economy, ill-conceived deregulation may lead, for instance, to cronyism and political capture, which would be detrimental to the general good. However, in India and other formerly socialist economies featuring a very large overhang of a meddling and burdensome state, it is safe to take it as a working assumption that up to a certain point, which we are still far away from, what is good for business is good for everyone....


A 2016 Wall Street Journal column by economist John Cochrane showed that there is a tight correlation between GDP per capita, as measured by its natural logarithm, and the World Bank’s “distance to frontier” (DTF) index, which is derived from the better-known ranking of countries, when comparing across a large set of advanced and emerging economies at a point in time. In particular, higher GDP per capita correlates well with a higher DTF score, and vice versa. One can also show, using Indian data, a robust correlation over time: Years in which India has higher GDP per capita also correspond, for the most part, with a better DTF score.

Cochrane’s finding led to something of an academic row with economist Bradford DeLong, who contested the causal interpretation that a better business regulatory environment leads to higher GDP per capita. ....


The valid argument that correlation does not, of itself, imply causation has something of the force of theology among economists. Yet, this perfectly valid piece of wisdom from statistics should not obscure the fact that a correlation itself may be of interest, even if we are not with any certainty able to prove the existence, to say nothing of the direction, of causation. Thus, it might be that better EoDB leads to higher GDP per capita; that higher GDP per capita leads to better EoDB; that both are true; and that something entirely different—call it the quality of institutions—is driving the result. One could be perfectly agnostic on this and yet make a common-sense case for a better business regulatory environment in the context of over-regulated, formerly socialist economies such as India".

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