Towards a more holistic view of business climate

The CPIA Africa report 2024 focused on policies and institutions aimed at supporting private sector development. As average economic growth in the region remains below the 2000-2015 average, public spending to jumpstart growth is constrained by a tight fiscal space across the continent. Consequently, successful private sector expansion is even more pressing than before, while policies to support this expansion need to be focused on effective regulation and facilitation rather than financial support. Within the CPIA, the cluster of indicators around structural policies, including trade, financial sector, and business regulatory environment are the most pertinent to private sector development, though all CPIA criteria have a role to play in supporting the private sector ecosystem.

These insights are now complemented by the newly launched Business Ready (B-READY) indicators, which provide a quantitative assessment of the business environment, both in terms of policy and results. Most relevant to the CPIA, the first pillar in the B-READY indicators measure the quality of the regulatory framework supporting business formation and growth, and the second pillar measures the quality of public services, central to the capacity of institutions captured in the CPIA analysis. While there may be some overlap between the policies covered by B-READY and the CPIA structural policies cluster, the methods and coverage diverge to allow for complementarity between the indicators. The B-Ready indicators are a more explicit compilation of whether certain individual policies exist to support business activities, with the policies themselves identified in the data. However, the data is not combined into an overall score, as the intent is to provide detail regarding the type of bottlenecks to the business environment rather than an overall league table.

In contrast, the CPIA is a reflection of the expert opinions on business environment across the World Bank, as reflected by an internal review and discussion process. The CPIA process allows for greater consideration of country context and development needs when considering the effectiveness of policies and institutions, while the B-READY indicators benefit from greater clarity and granularity. Together, they can potentially provide a combination of these two considerations to provide insight on the policies needed to improve business climate while allowing for country-specific consideration.

While private sector development in Sub-Saharan Africa remains a persistent problem, CPIA scores suggest regional comparisons of B-READY figures may overstate the regulatory constraints due to the countries selected for the first round of data. Globally, the CPIA indicators most closely related to business performance, Cluster B, are roughly on par with the global average for IDA-eligible countries, but within the countries selected for the first round of B-READY, countries in Sub-Saharan Africa have an average CPIA Cluster B score of 3.3, below the overall average of 3.4.

However, this discrepancy arises mostly through the financial services indicator within Cluster B, which is also reflected in the gap in the average of B-READY indicators between SSA countries and all IDA-eligible countries for financial services of 5.5 points. In contrast, the average for the 9 remaining B-READY indicators only differs by 0.6 points between Sub-Saharan Africa and the average for all IDA-eligible countries. Thus, while the B-READY data may overemphasize the shortfall in business environment indicators for the region, this discrepancy is mostly due to the financial sector. We expect this to improve over time as more countries are covered in the next phases of B-READY.

Although regional averages may be misleading, the B-READY reflects well many of the business-related findings of the CPIA. For the 19 countries currently covered by both data sets, the correlation between the B-READY indicator averages and the CPIA Cluster B is strong, with a coefficient of 0.71. Interestingly, while the CPIA deals with policies and institutions, the correlation is highest for pillar 2 of B-READY, which deals with quality and transparency in the provision of public services. One would have expected the correlation to be higher for Pillar 1, which focuses on the quality of regulations. This may reflect the requirement in the CPIA that scores reflect de facto policies and institutions, which require evidence that reforms are effectively in place.

As a result, the B-READY indicators are an extremely useful insight into the detail of policy choices underpinning the business environment measures of the CPIA. The rich, publicly available data behind the B-READY indicators provide explicit areas of focus and reform for each category. For example, within the indicator measuring the quality of regulations promoting competition, there are 12 measurements on specific measures adopted in individual countries, such as the "issuance of guidance on merger control" and "legal framework prohibiting anticompetitive agreements." This type of specificity should be a good indication of the types of policies considered in the CPIA review process, even if the review is not a mechanical combination of these policy considerations. Taken together, the CPIA and B-READY can provide a clear reflection of the institutions and policies supporting private sector growth, including the ability to provide country context and technical judgement while providing detailed policy measurements to guide reform agendas.

To note: This feature story combines the scores into an average partly to illustrate the point that the combinations of B-READY scores differ from the technical assessment of private sector structural policies produced by the World Bank through the CPIA.