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

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  • Hallward-Driemeier, Mary
  • Khun-Jush, Gita
  • Pritchett, Lant

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 Kennedy School of Government in its series Scholarly Articles with number 4448884.

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Date of creation: 2010
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Publication status: Published in HKS Faculty Research Working Paper Series
Handle: RePEc:hrv:hksfac:4448884

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Cited by:
  1. 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.
  2. 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.
  3. Raj Nallari & Breda Griffith & Shahid Yusuf, 2012. "Geography of Growth : Spatial Economics and Competitiveness," World Bank Publications, The World Bank, number 6020, October.
  4. 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.
  5. 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, October.
  6. Hernan Moscoso Boedo & Pablo D'Erasmo, 2010. "Financial Structure, Informality and Development," 2010 Meeting Papers 319, Society for Economic Dynamics.
  7. World Bank, 2012. "World Development Report 2013 : Jobs," World Bank Publications, The World Bank, number 11843, October.
  8. AfDB AfDB, . "The Africa Competitiveness Report 2013," Africa Competitiveness Report, African Development Bank, number 456, 6.
  9. Sebnem Kalemli-Ozcan & Bent E. Sorensen, 2012. "Misallocation, Property Rights, and Access to Finance: Evidence from Within and Across Africa," NBER Working Papers 18030, National Bureau of Economic Research, Inc.
  10. 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.
  11. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2010. "The worldwide governance indicators : methodology and analytical issues," Policy Research Working Paper Series 5430, The World Bank.

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