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Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector

  • Brunetti, Aymo
  • Kisunko, Gregory
  • Weder, Beatrice

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 f

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Article provided by World Bank Group in its journal World Bank Economic Review.

Volume (Year): 12 (1998)
Issue (Month): 3 (September)
Pages: 353-84

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Handle: RePEc:oup:wbecrv:v:12:y:1998:i:3:p:353-84
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  1. Ricardo Hausmann & Michael Gavin, 1996. "Securing Stability and Growth in a Shock Prone Region: The Policy Challenge for Latin America," IDB Publications (Working Papers) 5919, Inter-American Development Bank.
  2. Roubini, Nouriel & Swagel, Phillip & Ozler, Sule & Alesina, Alberto, 1996. "Political Instability and Economic Growth," Scholarly Articles 4553024, Harvard University Department of Economics.
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  4. repec:fth:wobaco:1083 is not listed on IDEAS
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  8. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
  9. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
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  11. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December.
  12. Alesina, Alberto, et al, 1996. " Political Instability and Economic Growth," Journal of Economic Growth, Springer, vol. 1(2), pages 189-211, June.
  13. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-63, June.
  14. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, volume 1, number 5474.
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  16. Brunetti, Aymo, 1997. " Political Variables in Cross-Country Growth Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 11(2), pages 163-90, June.
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