Review: How Do Cross-Country Regulatory Systems Affect Poverty?

April 17, 2019

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The relationship between regulation and economic outcomes is a longstanding question in economic analysis. Considering the underlying foundations of good regulatory systems—such as their effectiveness at enforcing contracts or permitting business creation—is critical for spurring improvements in economic opportunity. In a March 2019 Policy Research Working Paper for the World Bank Group, Simeon Djankov, Dorina Georgieva, and Rita Ramalho (Djankov et al.) examine how “business-friendly” regulations and their enforcement affect poverty at the country level. In the context of the paper, the measures of business-friendly regulations indicate the ease of starting a business, financing its activities, and conducting its operations in relation to regulatory best practices.

The paper conveys two main findings. First, more business-friendly regulatory environments are associated with lower poverty rates. Second, the authors conclude that the findings suggest business creation, spurred by a more favorable regulatory environment, is a key avenue for reducing poverty. Overall, the paper seeks to extend “the evidence on country-level determinants of poverty” by looking into the institutional environment across countries.

While the paper contributes to the literature on how country-level regulatory characteristics affect poverty, it makes strong claims that are not fully supported by the results or methodology. Modifying the analysis could enhance the findings and expand the paper’s contribution to the literature on country-level determinants of poverty. Rather than offering a clear path forward to addressing poverty, the paper is better seen as a starting point for further research. This review analyzes the paper’s main claims, examines its methodology, and recommends ways to make improvements.