Enterprise surveys and binding constraints

There is an important transformation going on in the economics of development policy. Increasingly, economists are moving away from the Washington-Consensus, rules-of-thumb approach to country-specific strategies based on diagnosing locally-binding constraints. The difficulty is that designing such strategies is more of a craft than a science.

The latest contribution to the literature comes from Wendy Carlin and Paul Seabright. After discussing how enterprise surveys can be used in conjunction with cross-country and case-study evidence, they offer the following advice to policy makers:

Suppose that a lobby (the chamber of commerce, say) requests that the government spend money, or pass a law, to bring about an improvement in some aspect of the business climate – the tax administration, customs regulation, the functioning of the courts, the state of the electricity infrastructure, the time it takes the banking system to clear a cheque, delays at customs. Then policymakers can ask the following questions in order to establish the value of responding to such a request:

a) Where does that aspect of the business climate fit in the diagnostic tree diagram and is its importance corroborated by the ‘top down’ analysis?

b) How highly does that aspect of the business climate rank as a complaint in the policymaker’s country in the surveys of managers? If it doesn’t rank very highly, then it will take more argument and more evidence to establish that this should be a priority for public policy.

c) Does cross-country regression analysis suggest modifying the answer to b) because there are grounds for thinking that this aspect of the business climate is generally more important for economic performance than it appears to be in the surveys of managers? Network effects or the impact on new entry (which creates benefits for the economy but costs to existing firms) might explain such discrepancies.

d) Do case studies suggest that this aspect of the business climate is more or less important for this country’s performance than in other countries?

e) Are there alternative policies that would achieve similarly valuable results but at lower cost, or with a greater probability of success for the same cost?

f) Are the interest groups lobbying for this change representing firms that, on average, are performing relatively well or relatively poorly? What are the other distinguishing characteristics of the firms concerned, and is it likely that a policy reform that aids these types of firm will benefit the economy as a whole?

One important conclusion is that one needs to be very careful when interpreting what enterprise surveys reveal about the ranking of constraints in a country, as these responses are always the product of an interaction between the economic environment and firm characteristics.

Comments

[Nachiket Mor]

Is there work on India using the binding constraints framework?

[Blake newman]

The World Bank produces a comprehensive report and country comparison on it's sister site, http://www.enterprisesurveys.org

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raf

Thanks a lot.

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Firms in developing countries face numerous and serious constraints on their growth, ranging from corruption to lack of infrastructure to inability to access finance. Countries lack the resources to remove all the constraints at once and so would be better off removing the most binding one first.

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