Credibility of Rules and Economic Growth: Evidence from a Worldwide Survey of the Private Sector

TLDR: In this article, the authors proposed a new measurement approach based on firm-level surveys and an indicator of the "credibility of rules" and found that low credibility of rules is associated with lower rates of investment and growth.

Abstract: A business environment characterized by 'incredible' rules such as unclear property rights, constant policy surprises and reversals, uncertain contract enforcement, and high corruption most likely translates into lower investment and growth. The literature on growth and policies has suggested different ways to measure the relevant uncertainties. This article proposes a new measurement approach based on firm-level surveys and an indicator of the 'credibility of rules'. Using data from a private sector survey conducted in 73 countries and covering more than 3,800 enterprises, standard cross-country growth and investment analysis indicates that low credibility of rules is associated with lower rates of investment and growth. The survey was designed to capture local entrepreneurs' views of the predictability of changes in laws and policies, of the reliability of law enforcement, of the impact of discretionary and corrupt bureaucracies, and of the danger of policy reversals due to changes in governments. Confidence in the reliability of the survey results opens many avenues for further research that could exploit the micro dimensions of this data set.