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

68 Pages Posted: 14 Jun 2010

See all articles by Mary Hallward-Driemeier

Mary Hallward-Driemeier

World Bank - Research Department; World Bank - Development Research Group (DECRG)

Gita Khun Jush

University of Chicago; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Lant Pritchett

Harvard University - Harvard Kennedy School (HKS); Center for Global Development

Multiple version iconThere are 3 versions of this paper

Date Written: June 9, 2010

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.

Keywords: regulation, economic policy, international development

JEL Classification: D81, H32, J23, K2, O17

Suggested Citation

Hallward-Driemeier, Mary and Khun Jush, Gita and Pritchett, Lant, Deals Versus Rules: Policy Implementation Uncertainty and Why Firms Hate it (June 9, 2010). HKS Working Paper No. RWP10-027, Available at SSRN: https://ssrn.com/abstract=1624873 or http://dx.doi.org/10.2139/ssrn.1624873

Mary Hallward-Driemeier (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/mhallwarddriemeier

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Gita Khun Jush

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

Lant Pritchett

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-496-4562 (Phone)
617-496-2554 (Fax)

HOME PAGE: http://ksghome.harvard.edu/~lpritch/

Center for Global Development

2055 L St. NW
5th floor
Washington, DC 20036
United States

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