62 Finance and economics The EconomistJanuary 20th 2018
1H
OW many days does it take to correct a
misleading newspaper interview?
Four, in the case of Paul Romer, the World
Bank’s chief economist. On January 12th a
surprising article in the Wall Street Journal
alleged that one of the bank’s signature re-
ports—on the ease of doing business
around the world—may have been tainted
by the political motivations of bank staff.
The story was based on an interview with
Mr Romer, who pointed out that Chile’s
ranking in the yearly report had dropped
sharply during the presidency of Michelle
Bachelet, a left-leaning politician who took
office for the second time in 2014. Chile
sank so heavily not because doing busi-
ness had become harder, but because the
bank had repeatedly changed its method
of assessment.
That method mostly entails answering
measurable questions, such as how many
days does it take to start a business, register
a property or file taxes. The answers deter-
mine a country’s score (known as its “dis-
tance to the frontier”), and its score, relative
to those of other countries, determines its
global rank and bragging rights.
From 2014 to 2016, the bank made 12 big
methodological changes, broadening
some indicators and adding others. “Doing
Business 2017” (published in late 2016) was,
for example, the first in the series to ask
how easily companies can obtain a refund
or resolve an error after they have filed
their taxes. In that report, Chile was ranked
as the 120th easiest place to pay taxes, some
87 notches below its rank in the previous
year. No other country fell so dramatically.
The data-gathering and analysis were
overseen by a former professor of econom-
ics at the University of Chile in Santiago,
adding to the suspicion ofskulduggery.
Supporters of Ms Bachelet, whose co-
alition lost the recent presidential election,
were apoplectic. Some even suggested that
Chile’s slide in the rankings had hurt confi-
dence, undermining investment and jeop-
ardising their political prospects.
Four days later, Mr Romer clarified his
remarks on his blog, saying that he had not
seen any sign of political manipulation
and had not meant to suggest he had. But
that may not be the end of the matter.
Many people are predisposed to think the
worst of the bank and its Doing Business
reports in particular. Because they rank
countries against each other, they have
been both unusuallyinfluential, spurring
governments to cut red tape, and unusu-The World BankUndoing business
The World Bankcasts doubton one of
its most influential productsThe Big Mac indexThe Mac strikes back
I
T IS usually considered quaint to predict
foreign-exchange movements by refer-
ence to whether currencies are dear or
cheap. Metrics such asThe Economist’s
Big Mac index, a lighthearted guide to
exchange rates, hint at how far currency
values are out of whack. But they are
often driven further out of kilter by capi-
tal flows, by fear and greed, by the in-
terventions of policymakers, and so on.
Since ourlast lookat the index in July,
cheap currencies have narrowed the
valuation gap against the dollar—almost
completely in case of the Canadian dol-
lar (see chart). Fundamentals, such as fair
value, seem (atlast) to have greater sway
in the foreign-exchange market.
The index is based on the idea of
purchasing-power parity, which says
exchange rates should move towards the
level that would make the price of a
basket of goods the same in different
countries. Our basket contains only one
item, but it is found in around 120 coun-
tries: a Big Mac hamburger. If the local
cost of a Big Mac converted into dollars is
above $5.28, the average price in four
American cities, a currency is dear; if it is
below that yardstick, it is cheap. The
average cost of a Big Mac in the euro area
(weighted byGDP) is €3.95, or $4.84 at the
current exchange rate. That implies the
euro is undervalued by 8.4% against the
dollar, ourbenchmark. The lasttime we
looked at burgernomics, it was almost
16% undervalued. The euro surged after
Mario Draghi, boss of the European
Central Bank, hinted at a conference in
Sintra, Portugal, that the bank’s bond
purchases might soon be curtailed. It was
as if the foreign-exchange market sudden-
ly woke up to how cheap it was.
Measured against a basket of cur-
rencies, the dollar still looks dear. Only in
three countries (Switzerland, Norway
and Sweden) do burgers cost more, based
on current exchange rates. But that is not
necessarily a sign that depreciation is
overdue in these countries. The cost of a
burger dependspartly on untradable
inputs, such as rent and wages, which are
higher in the rich countries on the fringes
of the euro zone. So the price of a meal
may not be a good guide to how compet-
itive a country is in markets for tradable
goods. The Swiss and Norwegian cur-
rencies look dear, for instance, but both
countries have big trade surpluses.
Among rich countries, only Britain’s
and Japan’s currencies stand out as bar-
gains. The pound is cheap for a reason—Brexit. But it might be harder for the yen
to stay so cheap. The euro has shown that
the merest hint of an end to easy mone-
tary policy can prompt a sharp rally. The
yen may have a similar “Sintra moment”,
says Kit Juckes of Société Générale, a
bank. For those who feel they have
missed out on the euro at bargain-base-
ment prices, there are other ways to bet
on the burgeoning strength of the euro-
zone economy. Poland and the Czech
Republic have strong links to the euro
area and robustGDPgrowth. The Polish
zloty is undervalued by 44% against the
dollar, and the Czech koruna by 28%.
The caveat that applies to Switzerland,
Norway and Sweden applies in reverse
to emerging markets, where rents and
wages are lower than in the rich world. In
general, currency gauges based on pur-
chasing-power parity work best when
comparing countries with similar in-
come. That said, many emerging-market
currencies do look cheap. The Russian
rouble, for instance, is still 57% underva-
lued even after a big rally in the oil price.
South Africa’s rand is almost as cheap.
Eat hamburgers with Johannesburgers.The dollar’s decline is a small victory for burgernomicsThe Big Mac indexSources: McDonald’s; The Economist*At market exchange rates (Jan17th 2018)
†Average of four cities‡Weighted average of
member countries §Average of five citiesLocal currency under(-)/over(+) valuation
against the dollar, %
July 2017 January 2018 Big Mac price*, $
60 40 20 - 0 + 20 40
Switzerland
Norway
Sweden
United States†
Canada
Brazil
Denmark
Euro area‡
Australia
New Zealand
Britain
Czech Republic
Japan
China§
Poland
Turkey
South Africa
Russia6.76
6.24
6.12
5.28
5.26
5.11
4.93
4.84
4.71
4.51
4.41
3.81
3.43
3.17
2.97
2.83
2.45
2.29