Prioritizing business environment reforms

Over the last decade or so, the World Bank has made considerable investments in carrying out firm-level surveys that can be compared across countries and over time. What have we learned from all of this? Most obviously, we confirmed our suspicions that reforming the business environment, e.g. by reducing the barriers to entry, can boost productivity.

But perhaps more importantly, we now have a better sense of which aspects of the business environment matter most for different countries. Things like protection of property rights seem to be a basic prerequisite for all countries, but certain aspects of the business environment matter much more to countries at different levels of development. A new World Bank working paper by Lixin Colin Xu usefully summarizes what the research says:

...the body of correlations gathered from the studies does point to a plausible story: the effects of the business environment vary across industry, complementary institutions, and initial conditions. Some elements of the business environment turn out to loom large in most economies, such as a basic protection of property rights against government expropriation, labor flexibility, and low entry and exit barriers, which are found invariably to be important in explaining economic performance in various economic contexts. Other elements, such as infrastructure and contracting institutions, hinge critically on initial conditions. Infrastructure, for instance, is found to matter much more in countries with a low initial stock of infrastructure, while the quality of courts and access to finance are more important in richer countries. Country-specific development bottlenecks may also be important for understanding why some countries are under-developed.

Unfortunately, as Xu points out, many of the studies he summarizes still have not fully excluded various endogeneity issues. But as countries continue to reform their business environments, this will provide the kind of panel data that can give us a bit more confidence about the "plausible story" that Xu tells above.