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Deals versus Rules: Policy Implementation Uncertainty and Why Firms Hate It

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  • Hallward-Driemeier, Mary

    (World Bank)

  • Khun-Jush, Gita

    (University of Chicago)

  • Pritchett, Lant

    (Harvard University)

Abstract

Firms in Africa report "regulatory and economic policy uncertainty" as a top constraint to their growth. We argue that often firms in Africa do not cope with policy rules, rather they face deals; firm-specific policy actions that can be influenced by firm actions (e.g. bribes) and characteristics (e.g. political connections). Using Enterprise Survey data we demonstrate huge variability in reported policy actions across firms notionally facing the same policy. The within-country dispersion in firm-specific policy actions is larger than the cross-national differences in average policy. We show that variability in this policy implementation uncertainty within location-sector-size cells is correlated with firm growth rates. These measures of implementation variability are more strongly related to lower firm employment growth than are measures of "average" policy action. Finally, we show that the de jure measures such as Doing Business indicators are virtually uncorrelated with ex-post firm-level responses, further evidence that deals rather than rules prevail in Africa. Strikingly, the gap between de jure and de facto conditions grows with the formal regulatory burden. The evidence also shows more burdensome processes open up more space for making deals; firms may not incur the official costs of compliance, but they still pay to avoid them. Finally, measures of institutional capacity and better governance are closely associated with perceived consistency in implementation.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-027.

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Date of creation: Jun 2010
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Handle: RePEc:ecl:harjfk:rwp10-027

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Cited by:
  1. Lixin Colin Xu, 2011. "The Effects of Business Environments on Development: Surveying New Firm-level Evidence," World Bank Research Observer, World Bank Group, vol. 26(2), pages 310-340, August.
  2. Hallward-Driemeier, Mary & Pritchett, Lant, 2011. "How business is done and the'doing business'indicators : the investment climate when firms have climate control," Policy Research Working Paper Series 5563, The World Bank.
  3. Hernan J Moscoso Boedo & Pablo N D’Erasmo, 2009. "Financial Structure, Informality and Development," Virginia Economics Online Papers 374, University of Virginia, Department of Economics.
  4. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.
  5. Raj Nallari & Breda Griffith & Shahid Yusuf, 2012. "Geography of Growth : Spatial Economics and Competitiveness," World Bank Publications, The World Bank, number 6020.
  6. Alan Gelb, Christian Meyer, and Vijaya Ramachandran, 2014. "Development as Diffusion: Manufacturing Productivity and Sub-Saharan Africa’s Missing Middle - Working Paper 357," Working Papers 357, Center for Global Development.
  7. Sebnem Kalemli-Ozcan & Bent E. Sørensen, 2014. "Misallocation, Property Rights, and Access to Finance: Evidence from Within and Across Africa," NBER Chapters, in: African Successes: Modernization and Development National Bureau of Economic Research, Inc.
  8. AfDB AfDB, . "The Africa Competitiveness Report 2013," Africa Competitiveness Report, African Development Bank, number 456, 8.
  9. World Bank, 2012. "World Development Report 2013," World Bank Publications, The World Bank, number 11843.
  10. World Bank & International Finance Corporation, 2013. "Doing Business 2014 : Understanding Regulations for Small and Medium-Size Enterprises," World Bank Publications, The World Bank, number 16204.
  11. Piffaretti, Nadia F., 2010. "From Rent-seeking to Profit-creation: Private Sector Development and Economic Turnaround in Fragile States," MPRA Paper 26558, University Library of Munich, Germany.
  12. Leonardo Iacovone, Vijaya Ramachandran, and Martin Schmidt, 2014. "Stunted Growth: Why Don't African Firms Create More Jobs?," Working Papers 353, Center for Global Development.

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