Doing Business in a Deals World: The Doubly False Premise of Rules Reform

ESID Working Paper No 123. Manchester: Effective States and Inclusive Development Research Centre, The University of Manchester

48 Pages Posted: 19 Aug 2019

See all articles by Sabyasachi Kar

Sabyasachi Kar

University of Delhi - Institute of Economic Growth (IEG)

Lant Pritchett

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

Spandan Roy

Delhi University Enclave - Development Planning Centre, Institute of Economic Growth

Kunal Sen

University of Manchester

Date Written: July 04, 2019

Abstract

The World Bank’s Doing Business reports have evoked an intense policy debate about whether countries should simplify regulatory rules, in order to stimulate investment and growth, or make them more stringent, in order to achieve public policy objectives. Both sides of this debate however, assume that the business environment in developing countries is defined and determined by the exact implementation of these rules by the state and by firms, an assumption demonstrated to be false by a number of studies. These studies seem to indicate that, rather than these rules, doing business in developing countries is based on deals struck between firms and the political or bureaucratic arms of the state. In this paper, we undertake a cross-country analysis of the relationship between the rules related to doing business and these deals, particularly in the context of the state’s capability in implementing them. Using data from the Doing Business reports, the World Bank’s Enterprise Survey and other sources, we show that (i) while there is a relationship between rules and deals, it is a weak one; and (ii) this relationship is itself dependent on the level of a country’s state capability, with the impact of rules on deals getting further weakened if the state capability is low; and (iii) with stringent rules and very low levels of state capability, the relationship becomes perverse, with more stringent rules leading to less compliance, rather than more. Based on these results, we provide a diagnostic approach to rules reform, where the appropriate reform depends on the level of stringency of the rules in a country, and the level of its state capability.

Keywords: doing business, deals, rules, state capability, investment climate

Suggested Citation

Kar, Sabyasachi and Pritchett, Lant and Roy, Spandan and Sen, Kunal, Doing Business in a Deals World: The Doubly False Premise of Rules Reform (July 04, 2019). ESID Working Paper No 123. Manchester: Effective States and Inclusive Development Research Centre, The University of Manchester, Available at SSRN: https://ssrn.com/abstract=3437764 or http://dx.doi.org/10.2139/ssrn.3437764

Sabyasachi Kar (Contact Author)

University of Delhi - Institute of Economic Growth (IEG) ( email )

Delhi, 110007
India

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

Spandan Roy

Delhi University Enclave - Development Planning Centre, Institute of Economic Growth ( email )

North Campus
Delhi
India

Kunal Sen

University of Manchester ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

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