The United States slipped one spot to eighth in the most recent iteration of the World Bank’s Ease of Doing Business rankings. The Index ranks countries based on how supportive their economies and regulatory frameworks are to starting and operating a local firm. For the United States, the report uses a population-weighted score for Los Angeles and New York City. A decade ago the United States ranked third, behind only perennial top-two finishers Singapore and New Zealand, but in this year’s Index it also ranked behind Denmark, Hong Kong, South Korea, Norway, and the United Kingdom.
In a competitive global economy it is important for a country to avoid creating an environment that deters or inhibits economic activity. In terms of the overall Ease of Doing Business ranking, the United States has been running in place, while other countries have surged ahead in recent years. U.S. policymakers at all levels should consider ways that they can reduce the cost and burden of doing business. If the most recent Index is any indication, the United States must catch up.
One caveat is that the data are current through June 2016. Beginning in 2017, the Trump Administration has practically halted the flow of new regulations to the Federal Register and moved to roll others back. The next iteration of the index should be released in the coming weeks, and the new U.S. ranking could improve due to these changes.
The World Bank’s Index incorporates ten distinct categories that contribute to the overall ranking. The United States is in the top tier in only two of them, regarding Getting Credit (2nd) and Resolving Insolvency (5th). Among the rest of the categories, the United States is mediocre or falling behind other high-income countries.
Source: World Bank Group, “Doing Business 2017: Economy Profile 2017, United States,” p. 9.
For the Starting a Business indicator, the United States fell to 51st in this year’s Index from 45th in the 2016 version. The raw score stayed virtually the same, so the slippage in rankings reflects other countries making more progress in recognizing and addressing the obstacles that make it harder to start a business. For this category, the closest country that is also in the top ten overall is Denmark which ranks 24th in terms of Starting a Business. The World Bank also gives the scores of these categories in relation to the best performing country to give a sense of how far behind other countries are lagging relative to the best performance recorded since 2005 or the third year the indicator was recorded. The United States scores worse than the average for OECD high-income countries, at 91.23 compared to 91.51. The United States’ performance in most of the ten categories is far from impressive, but it fares the worst and has fallen the farthest in the Starting a Business category.
The recent slippage in the rankings should sadly not be that much of a surprise, as the United States is mired in a years-long trend of lackluster economic dynamism. The share of companies that are less than a year old has fallen from almost 15 percent in the late 1970s to 8.1 percent in 2015, the most recent year of data available. Relatedly, the share of people employed in these new firms has fallen. New companies are vital for creation of new jobs and the development of new products and innovations.
The decline over a longer time-period is even more drastic as the United States ranked 4th in the 2008 Index. Reducing barriers to starting a new business, by making it easier for owners to navigate construction processes, or reducing the number of agencies and procedures they have to coordinate, could improve the U.S. environment and make it easier for prospective entrepreneurs to start businesses. Although it was not enough to reverse the longer trend of a falling ranking, the Index did note that starting a business did become easier in New York City due to “faster online procedures.”
Recovering the lofty rankings of past indices will require a multi-faceted approach by the Trump Administration and Congress. Productive channels for reform range from streamlining the administrative procedures related to starting a business to broader tax reform that brings rates in line with other high-income countries and reduces the burden of compliance in terms of hours.
The United States has long been a beacon for entrepreneurship and productive economic activity. That will not change overnight, but the lackluster ranking in this Index, and the longer decline, highlight the need for comprehensive review of the existing tax and regulatory framework.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
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