Canada’s Performance as Measured by the World Bank’s Ease of Doing Business Index

Study by the Canadian Centre for Living Standards, commissioned by the Office of the Chief Economist

Executive Summary

Since 2003, the World Bank publishes the Ease of Doing Business (EDB) Index aimed at measuring the regulatory efficiency and institutional quality of key processes that affect the business environment in a given economy. While highly influential, particularly in the developing world, the EDB has also been faced with criticism and at times controversies. In 2020, the World Bank decided to interrupt temporarily the publication of the EDB report as a result of an audit that revealed politically motivated manipulation of EDB rankings.

Over time, Canada’s relative rankings fell from 4th in 2007 to 23rd in 2020 with no significant changes in its business environments or policies. Canada’s rank fall can only be partially explained as other economies such as Georgia and Mauritius surpassed Canada with higher overall rankings.

To understand the underlying causes of Canada’s rank declining, the Office of the Chief Economist (OCE) commissioned a study to look at Canada’s performance in all 10 areas of the EDB Index. The study also looked at other competitiveness and economic freedom indices (e.g. IMD World Competitiveness Index, World Economic Forum Global Competitiveness report and the Fraser Institute Index of Economic Freedom) and found no such decline in Canada`s performance.

Background

The EDB focuses on 10 areas of the business environment, and the economies’ overall rankings are determined by sorting the overall scores on these 10 areas, which in turn are calculated based on 41 indicators.

With respect to the methodology, each year World Bank officials administer detailed questionnaires to business experts, mostly lawyers working on a pro-bono basis, in the economy’s major city (i.e. Toronto for Canada). Based on the responses, World Bank officials develop estimates for indicators, and the information is subsequently transformed into scores and rankings for 190 economies. Results are published in annual EDB reports and countries, particularly in the developing world, are making changes in an effort to improve their overall rankings. Throughout its history, the EDB Index has been subject to criticism. Criticism received prior to the August 2020 audit led to changes to the EDB methodology resulting in the introduction of new indicators and areas.

The OCE-commissioned study looked at Canada’s performance in all 10 EDB areas, and included an in-depth analysis in areas in which Canada performed poorly – i.e. trading across borders (51st in 2020), dealing with construction permits (64th in 2020), enforcing contracts (100th in 2020), and getting electricity (124th in 2020). Annex A provides details on Canada’s rankings between 2007 and 2020 in all EDB areas.

Importantly, three of the areas in which Canada performed poorly fall under provincial and/or municipal jurisdictions. Furthermore and as noted above, the EDB data is only collected for Toronto in Canada and, as such, the results are not representative of the business environment across Canada but rather of the greater Toronto area.

Results

The results of the study show that the first significant fall in Canada’s ranking happened in 2008-2009 and was particularly influenced by an increase in costs in the “Trading across borders” area. The cost of exporting a container rose from US$700 in 2007 to US$1,660 in 2009, with Canada’s ranking for this indicator falling from 40th to 130th. The cost of importing a container rose from US$850 in 2007 to US$1,785 in 2009 with Canada’s ranking dropping from 50th to 122nd. Other indicators included in “trading across borders” comprise time and cost for documentary and border compliance for both imports and exports. According to the World Bank data, the transportation costs to import (Canada ranked 127th in 2020) and export (142nd in 2020) led to Canada’s poor performance in the “Trading across borders” area. However, based on existing domestic statistics and relative price stability for containers during 2007-2009, it seems extremely unlikely that trade costs could more than double in this period. In addition, there are two different sets of data for this indicator on the World Bank website, which could suggest potential data errors.

A second shift in Canada’s ranking happened in 2012-2013, when the area of “Getting electricity” was introduced to replace the area of “Employing workers”, and resulted in Canada’s relative ranking falling. More specifically, Canada’s poor performance in this area is explained by both the number of procedures necessary by a business to obtain a permanent electricity connection, with Canada ranking 169th in 2012 and 162nd in 2020, as well as the time needed to get a permanent electricity connection, with Canada ranking 156th and 171st in the same years.

Similarly, Canada’s ranking for “Dealing with construction permits” fell from 25th in 2012 to 116th in 2014 as a result of an increase in the number of days needed to obtain a construction permit to build a warehouse from 73 days to 249 days. Both areas of getting electricity and dealing with construction permits fall under shared provincial and municipal jurisdiction, and additional analysis would be required in order to explain properly the significant and sudden deterioration in Canada’s rankings.

Finally, the last significant downward shift in Canada’s performance took place in 2016-2017, when Canada’s ranking in the enforcing contracts area fell from 49th to 112th. The decline was due to an increase in the time required to enforce contracts through courts, from 570 days to 910 days. This area falls under provincial jurisdiction and additional analysis is required in order to explain properly the significant and sudden deterioration in Canada’s rankings.

As a result of all these changes, in 2020, Canada ranked 23rd out of 190 economies; however, among G7 members, Canada ranked 4th after the U.S. (6th), the UK (8th) and Germany (22nd).

While the EDB Index is influential and can present an economy in a positive light in areas in which the given economy performs well, it is also important to note that it has its own limitations. Among others, EDB indicators are: (i) given equal weight despite the fact that not all indicators are equally meaningful, depending on a particular business context; (ii) expressed as means and, given outliers, a median may be more relevant; and (iii) not comprehensive as important aspects of the business environment are overlooked – e.g. infrastructure and corruption. In addition, the EDB Index represents a zero-sum game, that is, if one economy improves its ranking then another one experiences a fall, even if both economies make absolute improvements.

EDB data is usually collected in one major city from a limited number of contributors, and this collection may not be representative of the ease of doing business across the country. Moreover, methodological changes and introduction of new areas in the calculation of the EDB Index have led to inconsistencies in rankings over time.

The World Bank has launched a review of the EDB to understand and address data irregularities as well as to increase the usefulness of the index worldwide. In this respect, the World Bank is considering how to communicate results in the most useful fashion.

The full study on Canada’s performance as measured by the EDB Index is available on the Centre for the Study of Living Standards’ website.