Bring Me Sunshine : Which parts of the business climate should public policy try to fix ?

This paper offers guidance to perplexed policymakers on how to draw practical lessons from the large and often confusing literature on the business climate and its role in economic development. We use the analogy of a doctor treating a patient, who must draw together information from the patient's subjective reports, from clinical studies of average patient responses to treatment, and from the patient's detailed case history. We argue that policymakers can use three complementary sets of findings: from subjective reports of managers of firms, from cross-country regression analysis, and from case histories of countries or regions. These findings are less often contradictory than they sometimes appear, provided they are interpreted carefully. Although there is still much to learn, we give many examples of useful practical conclusions that can be drawn from this literature. 1 This paper, especially Section 3.2, draws heavily on joint work with Mark Schaffer. We are also grateful for useful discussions of these questions with David Ulph. Oleg Shchetinin provided excellent research assistance.