What is the ‘Ease of Doing Business Index?’
The ease of doing business index was created jointly by two leading economists, namely Simeon Djankov and Gerhard Pohl from the Central and Eastern sector of the World Bank Group. It is an aggregate number that includes different parameters that define the ease of doing business in a country. The ease of doing business (EODB) measures the country’s position in offering the best regulatory practices. Though the World Bank started publishing the reports in 2003, the ranking only started only in 2006.
The EODB study captures the experience of small and medium-sized companies in a country with their regulators and the relationship with their customers, by measuring time, costs, and red tape they deal with. The goal of the World Bank is to provide an objective basis for understanding and to improve the regulatory environment for businesses worldwide.
The survey consists of a questionnaire made by a team of experts with the assistance of academic advisors. The questionnaire consists of feedback on business cases that cover topics such as business location, size, and nature of its operations. This survey’s motive is to collect information that is affecting their business and not to measure conditions such as the nation’s proximity to large markets, quality of infrastructure, interest rates, and inflation.
The next step of the data-gathering process involves over 12,500 expert contributors such as lawyers and accountants from 190 countries in the survey to interact with the Doing Business team in conference calls, written reviews, and visits by the global team. Respondents fill out the surveys and provide information relevant to laws, regulations, and different fees charged.
A nation’s ranking is decided after assessing the following factors:
- Starting a business – idea, time, procedure, and capital required to open a new business
- Construction permits – permissions, land, and cost to build a warehouse
- Electricity access – procedure, time and cost needed to obtain an electricity connection from the electricity board
- Property registration- procedure, time, and cost required to register the warehouse with the local government body
- Getting credit and loan – the process involved in getting credit from banks, and depth of credit information index
- Investor protection – the extent of disclosure, liability, and ease of shareholder suits
- Payment of taxes – tax filing process, preparation of tax filing and number of taxes paid
- Cross border trading – number of documents required, and cost for import and export
- Enforcing contracts – procedure, time, and cost to impose debt contract
- Insolvency process – time, cost and recovery rate under a bankruptcy proceeding
Based on the score obtained in the above sub-indices, a country is assigned a rank in the ease of doing business index. The ease of doing business report is a complete assessment of competitiveness or the business environment. Still, rather it should be considered as a proxy of the regulatory framework faced by the private sector before starting a new business.
The Economic Reports
The ease of doing business reports is an annual report published by a team led by Djankov in 2003. The report is then elaborated by the World Bank Group that basically measures the costs firm is incurring for business operations. The World Bank report is, in fact, an important knowledgeable product in the field of private sector development. It has also motivated the design of various regulatory reforms in developing countries. The study presents a detailed study of costs, time, and procedures that a private firm is subject to before opening the company. This then creates rankings for a country.
Impact on Currency
The Doing Business report is used by policymakers, politicians and development experts, journalists, and, most importantly, the fund managers to understand the easiness of starting a business in the country. More companies mean more jobs, and more jobs mean faster development. Growth in the economy is directly related to the companies’ performance and the opening of new businesses. Therefore, when regulations are eased for starting a business, it contributes to the GDP of the country longer and increases the value of the currency in the international market.
Sources of information on Ease of Doing Business
The ease of doing business report is one of the most sought reports in the finance industry, so many financial institutions and economic websites give mention ranking of a country after collecting the data from official sources. However, the data published by the World Bank is the most reliable and factual.
GBP (Sterling) – https://tradingeconomics.com/united-kingdom/ease-of-doing-business
Ease of Doing Business report is one of the most discussed issues around the world. The report that is issued by the World Bank gets a lot of attention from the government around the world. For country authorities, it sheds light on regulatory aspects of their business climate. For business representatives, it helps initiate debates and dialogue about reform.
The private sector creates pressure on the respective government to ensure required reforms to indirectly improve the country’s rank in the EODB index. Investors take the decision of investment in a country based on the ranking of that country in the ease of doing business report. From the World Bank’s point of view, it demonstrates an unconditional ability to provide knowledge and resource information. This exercise by the World Bank generates information that is useful and relevant.
Impact due to news release
In the previous section of the article, we understood the definition of ‘Ease of Doing Business’ and the methodology used for ranking a country. Now we will extend our discussion in identifying the impact of the news announcement on the value of a currency. Many case studies tell correlation exists between ease of doing business and FDI flows.
One study finds that judicial independence and labor market flexibility are significantly associated with FDI flows. The number of procedures required to start a business and strength of the arbitration regime both have a significant and robust effect on FDI. Due to these reasons, foreign investors always invest in an economy where business activities can be carried out without any obstructions.
In today’s lesson, we will analyze the impact of ‘Ease of Doing Business’ on different currencies and analyze the change in volatility due to its news release. The below image is a graphical representation of Switzerland’s rank in 2018 and 2019. We see that the country had shown improvement in it’s ranking by two places. Let us find out the reaction of the market to this announcement.
USD/CHF | Before the announcement
Let us start with the USD/CHF currency pair to analyze the impact of the ‘Ease of Doing Business’ announcement. The above image is the daily time frame chart of the currency pair, where we can see that the pair is moving within a ‘range.’ Presently, the price is at a resistance area, which means sellers can push the price lower anytime soon. Therefore, we should be cautious before taking a ‘buy’ trade in this pair.
USD/CHF | After the announcement
After the news announcement, a slight amount of volatility is witnessed, which takes the price higher that results in the formation of a bullish ‘news candle.’ Since the Swiss Franc is on the left-hand side of the pair, a bullish candle indicates bearishness for the currency, and that is becoming weak. We can say that the news announcement a slight negative on the currency.
CAD/CHF | Before the announcement
CAD/CHF | After the announcement
The above images represent the CAD/CHF currency pair, where it appears that the market is moving in a channel before the news announcement. We should be looking to sell the currency pair as the price is at the top of the channel. However, the news announcement shall give us a clear direction of the market. We will not be taking any position before the news release as the news release has a moderate to high impact on the currency pair.
After the news announcement, the price moves a little higher and closes with some amount of bullishness. As the ‘ease of doing business’ was not so encouraging for the economy, traders went ‘short’ in Swiss Franc right after the news release. However, the effect does not last long, and the market collapses a couple of days later.
CHF/JPY | Before the announcement
CHF/JPY | After the announcement
The above images are that of the CHF/JPY currency pair, where we see a strong move to the upside before the news announcement, and currently, the price is at the resistance turned support area. There is a high chance of buyers becoming active at this point; hence, sell trades should be avoided.
After the news announcement, we witness some volatility in the market that takes the price lower but not by a lot. The impact was not great on this currency pair as the country slipped below by two places in the ‘ease of doing business’ ranking. When the impact of news settles down, one should start analyzing the pair technically and take the position accordingly.
That’s about the ‘Ease of Doing Business’ as an economic indicator and its relative impact on the Foreign Exchange market. Cheers!