To assess the investment climate that private sector firms face in over 100 countries, the World Bank’s Doing Business Indicators and Enterprise Surveys provide useful material for research. The former provides measures of the time and costs associated with complying with a country’s regulations like starting a business, trading across borders, dealing with construction permits and so on. In the Enterprise Surveys, firms are asked about their actual experience in doing business. A recent paper* by Mary Hallward-Driemeier of the World Bank and Lant Pritchett of Harvard Kennedy School is an interesting effort to use these surveys to shed light on the policy impact on firms and economic performance.
Using three comparable indicators – these include the time to get an operating permit, time to get a construction permit and time to import goods – the authors observe that Doing Business provides an estimate of the days of compliance for each of these indicators for a country, but firms in that specific country report widely different times to complete the same transaction. So, if it takes 65 days to start a business in Ecuador, the distribution of firms that reported getting an operating licence was between a 10th percentile reporting one day with the 90th percentile reporting 60 days. The variation across firms in a country is of a magnitude similar to the cross-national variation under the Doing Business indicators.
In an earlier paper**, these authors (along with Gita Khun-Jush) examined the African evidence on the differences between the Doing Business estimates of compliance times and the actual distribution of experienced times from the Enterprise Survey. Even here, large firm-specific variability was observed and they reported actual times that are much less than the Doing Business days. Whether it took a firm a long or short time to get a construction permit or operating licence or have imports clear customs has next to nothing to do with the Doing Business report about that particular country. Its explanatory power for the realised specific policy action for a specific firm was near zero.
The upshot is that the countrywide investment climate indicated by the Doing Business indicators has little association with the experience of firms in a particular country. Although these deviations in compliance times are far from direct evidence of corruption, the authors find them consistent with “environments of policy implementation that are permeable” through deals. In the African example, the authors find that all the firms have accommodated themselves to the existing environment and have made deals to do business. They do find evidence that deals are costlier where the de jure rules are more burdensome and firms cannot fully escape the costs of greater regulatory burdens.
Their work deserves greater attention since it is the first attempt to examine the differences between the Doing Business estimates of compliance times and the experienced times in the Enterprise Surveys. Their findings build on earlier works about the heterogeneity of regulatory compliance in specific countries and sectors. One such example is the research of M S Bertrand, R Djankov, R Hanna and S Mullainathan, who investigated the granting of driver’s licences in New Delhi and found that individuals who hired a tout were effectively exempted from one element of regulatory compliance (the driving exam) while those who did not hire a tout did have to take the exam (and often failed).
The authors also relate their work to the large literature on corruption and its relationship to a firm’s profitability, regulatory compliance and regulations and thus economic performance. The Indian context deserves greater research attention in this regard since fears are being expressed by no less than Prime Minister Dr Manmohan Singh regarding crony capitalism. Economists like Raghuram Rajan have called it oligarchic capitalism in which few businessmen have a close nexus with the policy establishment and have made fabulous fortunes in land, real estate and natural resources like iron ore and coal in which proximity to the government obviously helps.
Their paper also provides an insight into the “puzzle” of the differential response of economic growth to reforms of the 1980s and 1990s – while some countries experienced a boom after modest reforms, some others stagnated despite massive reforms. Their hypothesis for this differential response to policy reform is that when de jure and de facto policies diverge, the impact of de jure reforms might have wildly different effects, depending on how it affects a firm’s distribution of expectations. Moreover, initiatives that have had a minimal impact on the de jure policy but which signal a decisive shift in policy implementation might have substantial and immediate effects on investor expectations and initiate growth acceleration — the examples they have in mind are China after 1978 and India’s shift to pro-business attitudes in the 1980s or in the 1990s with decisively announced but gradualist implementation of reform.
*How Business is Done and the ‘Doing Business’ Indicators: The Investment Climate when Firms have Climate Control, November 2010
** “Rules versus Deals: Policy Implementation Uncertainty and Why Firms Hate It”, NBER Working Paper 16001, June 2010
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