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Credibility of rules and economic growth : evidence from a worldwide survey of the private sector

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  • Brunnetti, Aymo
  • Kisunko, Gregory
  • Weder, Beatrice

Abstract

Economic theory and case study evidence have long suggested that institutional factors, such as well-defined property and contract rights, may be crucial in explaining differences in economic performance across countries. Much of the recent discussion about"governance"has, for example, focused on the role of corruption and its consequences for investment and growth. By comparison, the empirical literature relating institutional factors with growth has been relatively scarce and has mainly concentrated on crude proxies such as'political instability and macroeconomic volatility. The problem of most of these variables in that they inadequately capture the uncertainties that are relevant for entrepreneurs. The authors propose new measure of institutional uncertainty based on the subjunctive evaluations of entrepreneurs. They surveyed the private sector in a broad cross-section of countries. The survey was designed to capture institutional factors such as the predictability of rules, entrepreneurs'fears of policy surprises and reversal, their perception of safety and security of property, the reliability of the judiciary, and their problems with bureaucratic corruption. The authors construct and test a summary indicator of the"credibility of rules,"as well as its components in standard cross-country growth and investment regressions. The main findings: a) the overallindicator of credibility is significantly related with higher rates of investment and growth; b) the credibility indicator calculated for the subsample of small local companies is even more closely related to the growth performance; c) the subindicators"security of persons and property"and"predictability of rule-making"are most closely associated with growth; d) the indicators of"corruption,""perceived political instability,"and"predictability of judiciary enforcement"are most closely associated with investment; and e) preliminary results for an extended sample - including transition economies - indicate that institutional factors may also help to explaining difference in economic performance in these countries.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1760.

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Date of creation: 30 Apr 1997
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Handle: RePEc:wbk:wbrwps:1760

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Keywords: Health Monitoring&Evaluation; Economic Theory&Research; Public Health Promotion; Fiscal&Monetary Policy; Environmental Economics&Policies; Governance Indicators; Economic Theory&Research; Achieving Shared Growth; Inequality; Health Monitoring&Evaluation;

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  1. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(3), pages 459-483, December.
  2. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 90(358), pages 314-29, June.
  3. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  4. Joshua Aizenman & Nancy Marion, 1991. "Policy Uncertainty, Persistence and Growth," NBER Working Papers 3848, National Bureau of Economic Research, Inc.
  5. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 717-37, August.
  6. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications 5919, Inter-American Development Bank.
  7. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series, The World Bank 609, The World Bank.
  8. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
  9. Barro, Robert J. & Lee, Jong-Wha, 1994. "Sources of economic growth," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 40(1), pages 1-46, June.
  10. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  11. Kormendi, Roger C. & Meguire, Philip G., 1985. "Macroeconomic determinants of growth: Cross-country evidence," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(2), pages 141-163, September.
  12. Easterly, William & Rebelo, Sérgio, 1994. "Fiscal Policy and Economic Growth: An Empirical Investigation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 885, C.E.P.R. Discussion Papers.
  13. Alesina, Alberto, et al, 1996. " Political Instability and Economic Growth," Journal of Economic Growth, Springer, Springer, vol. 1(2), pages 189-211, June.
  14. Brunetti, Aymo, 1997. " Political Variables in Cross-Country Growth Analysis," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 11(2), pages 163-90, June.
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