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Deals versus Rules

Deals versus Rules

Policy Implementation Uncertainty and Why Firms Hate It

(p.215) 6 Deals versus Rules
African Successes, Volume I
Mary Hallward-DriemeierGita Khun-JushLant Pritchett
University of Chicago Press

African firms report "regulatory and economic policy uncertainty" as a top growth constraint. We argue that often firms in Africa don’t face policy rules but rather 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. 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 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. We show more burdensome processes open up 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:   uncertainty, corruption, enterprise surveys, doing business, policy implementation

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