Weak governance is not always a bad thing

In a very cool paper,  Mary Hallward-Driemeier and Lant Pritchett show that the WB’s “doing business” rankings (which are derived from surveying experts about legal requirements) are almost uncorrelated with what actual business people report their experiences to be.

The doing business rankings often show very long time periods for things like getting a construction permit, or a business license, or importing materials in poor countries. Call this the De Jure measure based on the regulations on the books.

However, many of these same countries “suffer” from weak governance and low control of corruption, and it turns out that the median time entrepreneurs report to accomplish these activities is often dramatically shorter. Call this the de facto measure, derived from the “enterprise surveys” of actual businesses.

In other words, when laws/regulations are bad, lack of enforcement can be good.

In other other words, The WB rankings on ease of doing business may well be seriously flawed.

6 thoughts on “Weak governance is not always a bad thing

  1. Do you have a link to the paper? This seems to supports an opinion I’ve had for a while about the FCPA, namely that when companies pay bribes to foreign officials they aren’t trying to get special treatment, they are just following normal practice for the area. As such, the bribes are probably better thought of as de facto taxes;,but people in the US just view bribes as inherently bad, and always see the person paying the bribe as the corrupt one. These people have obviously never had to bribe a border guard just to get them out of their hammock before.

  2. FCPA and bribery is a real catch-22 for companies. It’s true one can argue it’s normal practice in the area. One could also argue that paying protection money to the Mafia in New York City was “normal business practice” at various times. The problem with the FCPA is that the United States can’t go arrest foreign officials for demanding bribes (as they could, at least in theory, with the Mafia).

    A problem (which the paper hopefully addresses, I haven’t looked at it yet) is that weak governance also goes along with weak legal protections, so businesses continue to be at risk from corrupt or powerful people in the country. The book Why Nations Fail talks about people who would build up a farm or business only to have it taken by people with better connections to the (corrupt) government.

    • I hadn’t thought of the comparison to the Mafia before, was it actually illegal to pay protection money?
      The paper is only investigates differences in permit acquisition time, so it couldn’t identify other downsides related to weak governance.

      • I’m not sure if protection money was illegal or not.

        The whole area of bribery and corruption is not black and white. One can argue that bribes are “normal practice” in a particular area, but they are generally also illegal in that area. From that standpoint the FCPA is complementing existing laws.

        On the other hand, “bribes” are often normal within the United States. “Build me a new stadium or I’ll move the football team away” being one example.

  3. Yeah I guess in a certain way, it might not be exactly bad, but again we need to be thinking with these things. I work with OctaFX broker and they help so much with their massive 50% bonus on deposit offer, so I don’t need to worry about too much and what’s more is no restrictions on how I use, so I can even trade with and that’s why it is rated so well and even the risk is very low for me due to such monstrous addition, it always helps in performance.

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