6 Political Variables in Growth Regressions

In a study for the World Bank, Stone, Levy and Paredes (1992) tried to discover the main obstacles to private business development in Brazil and Chile. The research was based on interviews with forty-two clothing firms of different sizes in each country. The entrepreneurs were confronted with a list of twenty possible problems about doing business, and they were asked to assign the relative importance to each of these areas. The list included most major problems, ranging from inflation and high taxes to political uncertainty and lack of access to credit. As different as the results for the two countries were, there was one area of clear agreement: in both countries the entrepreneurs considered political and policy uncertainty a very serious problem for doing business. In Brazil, it was cited as the most important and in Chile as the second most important of the twenty obstacles to private-sector development. A similar case is Nicaragua after 1991. In spite of the serious stabilization and deregulation effort of the Chamorro government in 1991, private investment did not improve and remained low for years after the programme. In Borner, Brunetti and Weder (1995a) we reported on a survey of private firms in Nicaragua that aimed at unearthing the reasons for this reluctance to invest. The result was clear. The main obstacle, in the eyes of the potential investor, was the fear of unpredictable changes in important aspects of the institutional framework. Of the fifty firms surveyed, 72 per cent reported that they lived in constant fear of wide-ranging policy changes. Under such uncertainty firms preferred not to commit their resources to partially irreversible investment projects.