Political Risk Latin America Blog @PolRiskLatam

Regime Type: Do private firms have a preference?

Posted in News and Articles, Political Risk by politicalrisklatam on November 23, 2010

by Stephen Smith for Private Sector Development Blog, November 10th, 2010.

One can reasonably expect that frequent and unpredictable changes in economic policy might adversely affect investment by the private sector and the overall growth of the economy. For all practical purposes, uncertainty about future economic policies is a step towards economic anarchy. But precisely what causes firms in some countries to have higher uncertainty about future economic policies than others? Does the underlying political structure matter? What elements of the political structure, if any, matter for the level of policy uncertainty as perceived by private agents?

These questions have received very little attention from economists and political scientists, largely because of a lack of reliable data. However, this is beginning to change with greater efforts devoted towards data collection. For example, a recent study by Kenyon and Naoi (2010) published in the Comparative Political Studiesjournal uses Enterprise Surveys data on firms in 27 countries in Eastern Europe and Central Asia (the BEEPS dataset) to look at how political regimes affect the level of economic policy uncertainty. The study finds an inverted U-shaped relationship between firms’ perceptions of policy uncertainty and political regime type. Firms in hybrid regimes report higher levels of concern over policy uncertainty than those at either of the far ends of the curve (see figure below). The study also suggests that the explanation of this phenomenon lies with a combination of polarized political competition and limited access to credible information regarding possible policy changes. (continue reading… )

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