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Deals versus rules : policy implementation uncertainty and why firms hate it

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

Firms in Africa report"regulatory and economic policy uncertainty"as a top constraint to their growth. This paper argues 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 (such as bribes) and characteristics (such as political connections). Using Enterprise Surveydata, the paper demonstrates 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. The analysis shows 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. The paper shows 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 The World Bank in its series Policy Research Working Paper Series with number 5321.

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Date of creation: 01 May 2010
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Handle: RePEc:wbk:wbrwps:5321
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  1. 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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  15. repec:cup:cbooks:9780521761734 is not listed on IDEAS
  16. Dollar, David & Hallward-Driemeier, Mary & Mengistae, Taye, 2005. "Investment Climate and Firm Performance in Developing Economies," Economic Development and Cultural Change, University of Chicago Press, vol. 54(1), pages 1-31, October.
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