Deals vs. rules

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Over on the All About Finance blog, Mary Hallward-Driemeier has an excellent post on the "deals" that firms have to make in countries with excessive regulations. Money quote: 

For countries with lengthy requirements...almost no firm actually faces the formal burdens on the books.

This does not mean that lengthy formal practices are costless. Rather, firms ‘pay’ through other channels. This variation in implementation is associated with greater activities on the part of firms to influence the actions of officials (e.g. paying bribes or spending time with officials). Rather than coping with the application of (more or less favorable) rules, firms face deals. And the larger the gap between the de jure and de facto outcomes, the greater the potential space for deals, and indeed, the more prevalent are bribes.

Nick gogerty
June 23, 2010

If the cost of these short cuts were merely bureaucratic expediency all would be well. Unfortunately, the short cuts can also mean poor work. I remember speaking with a consultant on the Thai subway infrastructure project explaining that due to a $1m bribe a contractor used over $100m in substandard materials. The cost of corruption often shows up when building collapses or infrastructure falls apart.

Fixing the rules a la a "doing" business method would allow for legal rather than extra legal participation and better outcomes all around. Given the potential high pay off for bureaucratic reform it is sad so little focus is placed in the development community.

My own opinion is that bureaucracy is unsexy and that reform by its nature is interventionist. It is easier to show up after the flood, than to change the rules and procedures of dam building.