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

40 Pages Posted: 20 Apr 2016

See all articles by Gregory Kisunko

Gregory Kisunko

World Bank

Aymo Brunetti

The World Bank

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID; Graduate Institute Geneva, IHEID

Date Written: April 1997

Abstract

An indicator of the credibility of rules is constructed from broad cross-country survey data and it is shown that low credibility is associated with lower rates of growth and investment. 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.

Brunetti, Kisunko, and Weder propose new measures of institutional uncertainty based on the subjective 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 reversals, 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:

The overall indicator of credibility is significantly related with higher rates of investment and growth.

The credibility indicator calculated for the subsample of small local companies is even more closely related to the growth performance.

The subindicators security of persons and property and predictability of rule-making are most closely associated with growth.

The indicators of corruption, perceived political instability, and predictability of judiciary enforcement are most closely associated with investment.

Preliminary results for an extended sample - including transition economies - indicate that institutional factors may also help to explain differences in economic performance in these countries.

This paper - a product of the Office of the Chief Economist and Senior Vice President, Development Economics- was produced as a background paper for World Development Report 1997 on the role of the state in a changing world. The study was funded in part by the Research Support Budget under the research projects Cross-Country Indicators of Institutional Uncertainty (RPO 680-51), and Indicators of Government Quality as Perceived by the Private Sector (RPO 681-52).

Suggested Citation

Kisunko, Gregory and Brunetti, Aymo and Weder di Mauro, Beatrice and Weder di Mauro, Beatrice, Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector (April 1997). Available at SSRN: https://ssrn.com/abstract=614955

Gregory Kisunko (Contact Author)

World Bank ( email )

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

Aymo Brunetti

The World Bank ( email )

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

Beatrice Weder di Mauro

Graduate Institute Geneva, IHEID ( email )

Chemin Eugene Rigot 2
Geneva, 1211
Switzerland

Graduate Institute Geneva, IHEID ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland
1211 (Fax)

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