How Business is Done in the Developing World: Deals versus Rules

• Published in: The Journal of economic perspectives Vol. 29; no. 3; pp. 121 - 140
• Main Authors: Hallward-Driemeier, Mary, Pritchett, Lant
• Format: Journal Article
• Language: English
• Published: Nashville American Economic Association 01.07.2015
• Subjects: Building permits; Business indicators; Business structures; Business surveys; Commercial regulation; Compliance; Construction; Corporations; Developing countries; Economic regulation; Economic surveys; Economic theory; Enforcement; LDCs; Limited liability companies; Regulation; Regulation of financial institutions; Statistical median; Studies; Symposium: Doing Business; United States; Working papers; World Bank; United States > US
• ISSN: 0895-3309; 1944-7965
• DOI: 10.1257/jep.29.3.121

What happens in the developing world when stringent regulations characterizing the investment climate meet weak government willingness or capability to enforce those regulations? How is business actually done? The Doing Business project surveys experts concerning the legally required time and costs of regulatory compliance for various aspects of private enterprise--starting a firm, dealing with construction permits, trading across borders, paying taxes, getting credit, enforcing contracts, and so on--around the world. The World Bank's firm-level Enterprise Surveys around the world ask managers at a wide array of firms about their business, including questions about how long it took to go through various processes like obtaining an operating license or a construction permit, or bringing in imports. This paper compares the results of three broadly comparable indicators from the Doing Business and Enterprise Surveys. Overall, we find that the estimate of legally required time for firms to complete a certain legal and regulatory process provided by the Doing Business survey does not summarize even modestly well the experience of firms as reported by the Enterprise Surveys. When strict de jure regulation and high rates of taxation meet weak governmental capabilities for implementation and enforcement, we argue that researchers and policymakers should stop thinking about regulations as creating "rules" to be followed, but rather as creating a space in which "deals" of various kinds are possible.