Regulation and Growth

Abstract

Why some countries grow faster than others is one of the most important questions in economics. Solving this puzzle has the obvious appeal of improving the living standards for a significant proportion of the world population. We go further towards answering this question by studying a major determinant of growth: regulations governing business activity. Our results also have significant implications for policy. They suggest that countries should put priority on reforming their business regulations when designing growth policies. Measures of institutions currently used in the growth literature indicate the extent of problems but not how to resolve them. By contrast the indicators in the Doing Business database are directly linked to specific reforms. For example the procedures to register a business or property can be cut by combining them at a one-stop shop for businesses. Establishing a credit bureau or reducing mandated severance pay for workers will also improve performance on the business regulations index. Our findings imply that identifying and implementing such reforms can accelerate economic growth.