Stupidity and Ease of Doing Business

Here is something funny. The World Bank and the International Finance Corporation put out the "Doing Business" reports on 178 different countries. These rankings measure, in some standard sense, the legislative and regulatory ease of doing business across the world.

One glance at the report hints at a major problem: the poorest countries score lowest on the ease of doing business. In other words, this means that in poorer countries, the laws and rules are less conducive to business than in richer countries. This is not just a mild coincidence. If you plot the natural logarithm of GDP per capita with the rankings, you get a nice correlation coefficient (-0.7314859) and, if you run it as a regression, you get the regression results given in the figure.

So both variables are significant at the 0.001 level (in other words, suck it), and the adjusted R-squared is 0.5324--in other words, income variation accounts for over half of the variation in the regression, which is friggin' awesome in terms of economic regressions.

Why--it is not obvious to me at all--should poor countries have terrible business laws--especially when having done nothing at all would have created far better results? Why not just copy the good ones in richer countries and make business easier? Why give yourself such an unnecessary handicap?

My guess has two dimensions to it. First, I argue that people are stupid and stubborn. If they weren't, they'd wake up tomorrow and say "all this red-tape sucks, let's simplify things." But they don't. Why? They're stupid.

This can also be expressed in a more polite manner, in terms of path dependence, I guess. If optimal policies just simply came about in the neoclassical sense, we wouldn't have this problem. The problem is that institutions really do persist. But really it's just another way of saying that people are stupid. And I don't mean to say that somehow I'm exempt from this.

I know I'm overlooking things (like poverty), but I see no reason why poor countries should be littered with red tape preventing business. If anything, the incentive should be to remove all the red tape to encourage it. It's like they're going out of their way to pass tons of laws that don't need to be there just in order to make life difficult. You can't attribute that to anything else but stupidity--especially when the answer is just to leave well enough alone.