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

  • Hallward-Driemeier, Mary

    (World Bank)

  • Khun-Jush, Gita

    (University of Chicago)

  • Pritchett, Lant

    (Harvard University)

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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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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  1. Ricardo Hausmann & Dani Rodrik, 2002. "Economic Development as Self-Discovery," NBER Working Papers 8952, National Bureau of Economic Research, Inc.
  2. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
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  10. Ricardo Hausmann & Bailey Klinger, 2008. "Growth Diagnostics: Perú," Research Department Publications 2005, Inter-American Development Bank, Research Department.
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  12. Arbache, Jorge Saba & Page, John, 2007. "More growth or fewer collapses ? a new look at long run growth in Sub-Saharan Africa," Policy Research Working Paper Series 4384, The World Bank.
  13. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  14. Gonzalez, Alvaro & Ernesto Lopez-Cordova, J. & E. Valladares, Elio, 2007. "The incidence of graft on developing-country firms," Policy Research Working Paper Series 4394, The World Bank.
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  17. repec:cup:cbooks:9780521761734 is not listed on IDEAS
  18. Hausmann, Ricardo & Klinger, Bailey, 2008. "Growth Diagnostics in Peru," Working Paper Series rwp08-62, Harvard University, John F. Kennedy School of Government.
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