Business Expectations and Uncertainty in Developing and Emerging Economies

We study the properties of business expectations and uncertainty in 39 developing and emerging economies. Our evidence comes from 31,000 businesses responding to the World Bank Group Business Pulse and Enterprise Surveys. The surveys elicit three-point subjective probability distributions about future own-firm sales. We measure expectations and uncertainty using the first and second moments of those distributions and verify they predict future sales outcomes and absolute forecast errors, respectively. Our analysis reveals two new facts about business uncertainty across countries. (1) Uncertainty is higher in our sample than in advanced economies, and it declines with GDP per capita even after accounting for firm size, sector, and other firm- and country-level predictors of uncertainty. (2) Absolute forecast errors are larger than our survey-based measures of business uncertainty imply; namely, business managers are overprecise, understating sales volatility similarly across levels of economic development