Are Managers’ Perceptions of Constraints to Growth Reliable? Evidence from a Natural Experiment in South Africa

Can surveys of what managers see as the biggest problems that their firm faces provide useful information on the main constraints to private sector and economic development and be used to prioritize reforms in these areas? One of many concerns about doing this is that managers’ responses to questions about specific areas of the investment climate might reflect their assessment of overall investment climate or their overall business confidence rather than their views on that specific area of the investment climate. This paper uses a natural experiment in South Africa to assess whether this is the case. When the World Bank’s 2007-2008 Enterprise Survey was being carried out, a major electricity crisis hit South Africa. The crisis resulted in many more managers saying that power was a serious constraint on enterprise operations—the share rose from about 10 percent of managers before the crisis to close to 50 percent after the crisis. But it also resulted in greater concern about most other areas of the investment climate—including areas such as taxation, regulation, and other areas of infrastructure that were unrelated to the crisis. This suggests that managers do not fully compartmentalize their responses. Moreover, the changes were large enough to suggest that cross-time and cross-country comparisons of perception data will be difficult.