HKS Faculty Research Working Paper Series
HKS Working Paper No. RWP10-027
June 2010
Abstract
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.
Citation
Hallward-Driemeier, Mary, Gita Khun-Jush, and Lant Pritchett. "Deals Versus Rules: Policy Implementation Uncertainty and Why Firms Hate It." HKS Faculty Research Working Paper Series RWP10-027, June 2010.