Revisiting the “Trading Across Borders” category of the World Bank’s Doing Business index
20th March 2018By John Edwin Mein, Executive Coordinator Of The Procomex Alliance Institute, And Current Chair Of The WCO Private Sector Consultative Group
Procomex is an alliance of Brazilian companies and private sector organizations which aims to support the Customs modernization process. In this article, Procomex explains why it decided to replicate the survey used by the World Bank to evaluate the performance of the country when it comes to ease of trading across borders, and what the exercise revealed.
What makes an economy internationally competitive? There are a number of responses out there. The World Economic Forum, for example, defines competitiveness as the institutions, policies and factors that determine a country’s level of productivity – productivity which is supposed to impact on the well-being of its people.
Competitiveness can be evaluated by comparing how different countries handle identical processes, or put in place measures that are seen as critical factors for companies to start operating or to grow, the objective being to know what countries do best and how efficient they are in comparison with one another. In the trading environment, the Doing Business index, promoted by the World Bank, is considered a reference on such matters by policymakers and investors from around the world.
The Doing Business project, which has wide international credibility and serves as a marker for governments to attract foreign investment and business opportunities, gauges 190 countries on 10 topics, each consisting of several indicators. Under the “Trading Across Borders” category, the indicator registers, among others, the time and costs associated with the logistics processes for exporting and importing goods. The data on trading across borders is gathered by way of a questionnaire administered by trade service providers.
In the 2017 edition of the index, Brazil ranked 149th in the “Trading Across Borders” category among the 190 countries surveyed. Despite efforts to modernize its foreign trade, the country has not managed to improve its ranking over the last few years. Was the world moving faster than Brazil or was the information used on Brazil “noisy”? To answer that question, Procomex took up the challenge, in 2016, to replicate the World Bank survey when it comes to Brazil’s foreign trade, and then investigate whether the Bank was measuring indicators correctly and if those responding to the questionnaire were the best positioned to do so, i.e., whether they had the practical knowledge to provide the correct answers.
Doing Business methodology
To evaluate the capacity of a country to process international trade operations efficiently, Doing Business records the time and cost associated with the logistics process of exporting and importing goods. Since 2016, it has evaluated “the accumulated time and cost (excluding tariffs) associated with the three procedures – document compliance, border compliance and domestic transport – within the total process of exporting or importing a shipment of goods” (Doing Business 2017).
The import and export case studies use different products as a reference. For the evaluation of export procedures, Doing Business considers the product of greatest comparative advantage in each country, and in the case of evaluating import procedures, a single very common manufactured product, automotive parts, is used as a reference for all countries. The most frequent modes of transport, as well as the port, airport, or land border used to trade those goods, and the most important trading partner for the products being studied are identified for each country.
The assumption is that a shipment travels from a warehouse in the largest “export business” city to a warehouse in the largest importing economy. In the Brazilian case, as in 10 other economies, data is also collected on the second largest city of business. Thus, the samples from São Paulo (61%) and Rio de Janeiro (39%) are both evaluated and weighted.
In the evaluation of Brazil’s import processes, the World Bank identified Argentina as the economy from which the country imports the highest value (defined by the price multiplied by the quantity) of automotive parts. To assess exports, the Bank identified soya beans, classified within Chapter 12 of the Harmonized System (HS) international goods nomenclature, as the product with the largest comparative advantage (defined by the highest export income), and China as the largest purchasing economy of the product.
Procomex first replicated the survey in 2016. Actual traders that import or export the products targeted in the World Bank survey were asked to fill in the questionnaire used by the Bank. Based on the responses, Procomex set 18 DOSSIER out to analyse foreign trade processes in detail, and identified a significant number of issues regarding the methodology, the questionnaire, and the selection of sectors (products) and trading partners made by the Bank.
It is worth mentioning that obtaining the information was a challenge. Since 2004, Procomex has been working with companies and private sector organizations on the modernization of Customs processes, making proposals for changes in procedures to the government that resulted in substantially improving the “lead time” of Brazilian companies.
Over the years, Procomex has built up a network of companies with whom it works closely and with whom it has built a significant level of trust. However, many of the companies that were approached during the survey refused to respond to the questionnaire, considering the information commercially sensitive, even though the confidentiality of the data was assured. It took many calls to convince them to participate in the survey, and lots of time clarifying the questions asked in order to obtain a significant level of response.
In 2017, Procomex repeated the exercise with two of its top professionals working part-time over three months. Instead of focusing only on the products, sectors and regions selected by the World Bank, Procomex decided to introduce new ones which were considered more meaningful in evaluating Brazil’s ease of doing business in the trade facilitation area. The survey methodology proposed by the Bank was strictly followed, but with a new set of data.
For exports, the Procomex survey results suggest that the choice of reference sectors (products) has a significant impact on countries’ final scores. In the case of Argentina, for instance, the World Bank chose to use the country’s second-largest export product, namely automobiles (HS 87) – an industrial product, instead of the country’s largest export product, namely residues and waste from food industries (HS 23) – an agricultural product. This choice alone improves Argentina’s position in the ranking.
With respect to imports, although Argentina is used in the World Bank study as Brazil’s main country of origin for goods of HS 87.08, over the last few years, Germany has been the main exporter of automotive parts to Brazil, representing about 11% of the parts imported into Brazil and surpassing by a considerable margin Argentina, which is the fifth largest economy of origin for goods of HS 87.08 (8% of Brazilian imports). Another issue is that relating to the means of transport used as a reference in the survey; the study focused on the Port of Santos, although only 1% of imports of automotive parts from Argentina were made through this port. To obtain an accurate picture of the import process of automotive parts, the study should have focused on road transportation through the São Borja border with Argentina.
Countries of origin and means of transport used are two important factors that should be taken into account when trying to accurately calculate the time and costs associated with imports of automotive parts into Brazil. The choice © Brandi Redd WCO news N° 85 February 2018 19 of reference countries used in the analysis of imports is also important as they define the modalities, boundaries, and differentiated practices of Customs clearance, including required documentation. Moreover, depending on the means of transport and the place of entry, different border agencies are involved and different controls are applied to a shipment. In all the tests performed, the results obtained in this study suggest that Brazil’s international position is underestimated in the World Bank’s calculations.
Other lessons learned
The answers obtained by Procomex demonstrated that companies face different realities, which are dependent on their location, the most used border post, their commercial partner, and the transacted product. Participants in the Procomex survey gave very different answers and the level of inconsistencies suggests that attention needs to be given to the clarity of the questions presented by the World Bank in its questionnaire.
Applying the same questionnaire on a global scale raises a number of challenges, among them is the issue of language, and how to guarantee the comparability of responses. Generic questions, not specifically adapted to the Brazilian reality, generated ambiguous interpretations. Many survey participants corrected their answers as soon as the questions were clarified. Deciding when an activity began and ended is, for example, not very clear, and some respondents had doubts about how to calculate the time spent on each activity. What about calculating the time spent on performing activities that occur simultaneously? The preparation of documentation and border procedures are accounted for separately, although they may occur simultaneously, thus increasing the total time used for the operation as a whole.
Moreover, directly asking importing and exporting companies to answer the survey, instead of surveying only trade service providers, enabled Procomex to get better information about the operations, problems, times and costs relating to Brazilian imports and exports. In fact, direct communication with companies leads to information of a better quality.
Based on the experience gained during both exercises, the Procomex Alliance Institute would strongly recommend that Customs authorities identify an independent organization in their country, such as a university or a research institute, and undertake a similar study. Should they decide to do so, they can count on the assistance of the Institute.