Synopsis
The Schumpeterian process of 'creative destruction' is an essential ingredient of a dynamic economy. In many countries around the world, however, this process is weakened by pervasive regulation of product and factor markets. This book documents the regulatory obstacles faced by firms, particularly in developing countries, and assesses their implications for firm renewal and macroeconomic performance. Combining a variety of methodological approaches--analytical and empirical, micro and macroeconomic, single- and cross-country-- the book provides evidence that streamlining the regulatory framework would have a significant social pay-off, particularly in developing countries that are also burdened by weak governance. The book's chapters trace out analytically and empirically the links between microeconomic policies and distortions, on the one hand, and aggregate performance in terms of productivity, growth and volatility, on the other. The volume adds to a novel but increasingly influential literature that seeks to understand macroeconomic phenomena from a microeconomic perspective, and derive the relevant lessons for development policy. Such literature is still fairly scarce in the case of industrial countries, and virtually in its infancy for developing countries.
Review
To the benefit of interest groups, most of the large costs associated with excessive business regulation remain hidden in the complexities of the ongoing process of restructuring. This book does a great service to all of us by unearthing some of these costs with a convincing array of cross-sectional evidence. A must-read for policy makers, especially in heavily regulated regions such as Latin America. ---Ricardo Caballero, Chairman and Ford International Professor, Department of Economics, Massachusetts Institute of Technology
Despite greater macroeconomic stability and increased openness to trade and investment, many developing countries have failed to thrive. This original study links microeconomic regulation to aggregate measures of growth, productivity, and volatility to explain the poor performance of emerging economies around the world, and especially in Latin America. The authors convincingly show that excessive regulation of business and labor has led to adverse macro performance. Stringent regulations perform a double punch. First, they prevent resources from moving to their most productive uses and economies from adjusting to external shocks. Second, they provide insidious incentives for rent seeking to the relevant authorities, especially when governance is weak. This book is essential reading for policy makers seeking to improve growth and stability in developing countries. ---Simeon Djankov, Deputy Prime Minister and Minister of Finance of Bulgaria, and former director of Doing Business, The World Bank
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