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

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

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Chapter in forthcoming NBER book African Successes: Government and Institutions, Volume 1, Sebastian Edwards, Simon Johnson, and David N. Weil, editors
Forthcoming from University of Chicago Press
in African Successes Project

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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This chapter first appeared as NBER working paper w16001, Deals versus Rules: Policy Implementation Uncertainty and Why Firms Hate It, Mary Hallward-Driemeier, Gita Khun-Jush, Lant Pritchett
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Hallward-Driemeier, Khun Jush, and Pritchett w16001 Deals versus Rules: Policy Implementation Uncertainty and Why Firms Hate It
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