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Corruption and the need for regulatory reform

Zahin Hasan and Asif Ali
WHY are we so corrupt? Why do Bangladeshi businessmen pay bribes? Prof. Mushtaq Khan at SOAS is famous for having made the following arguments.
Too much regulation imposes high compliance costs; non-compliant companies will therefore be lower-cost than comparable compliant companies. In corrupt environments non-compliant companies are not penalised, as officials are more interested in collecting bribes than in enforcing the rules.
In competitive industries, costs cannot be passed on to consumers; high compliance costs will force compliant businesses to close, as they will not be able to compete with lower-cost non-compliant rivals. In the presence of too much (cost-imposing) regulation, corruption "greases the wheels" and allows businesses to operate in a low-cost (non-compliant) manner. Many will dislike the above argument, which appears to excuse corruption. Objectively, though, it is obvious that in Bangladesh, most regulations on businesses are not enforced; they are merely levers which government officers pull to extract bribes (from non-compliant companies).
An example will make this clear. Suppose you own a factory. The law allows you to require your workers to work overtime for 2 hours a day. Suppose your competitors are requiring their workers to work 4 hours overtime every day (while paying factory inspectors to look the other way.) If you are complying with the 2 hour overtime ceiling, you will take longer to manufacture an order than your competitors. If all else is equal, your customers will prefer to buy from your competitors; shorter delivery time is something that customers value.
The ugly truth is that in a competitive environment, most businesses cannot
afford to be more ethical than their competitors. In a corrupt environment, laws are not enforced, and breaking the law may be a successful competitive strategy. In the factory example outlined above, only a factory which is much larger or much more productive than their competitors (able to manufacture the same volume with fewer hours of overtime) can afford to be compliant.
How much regulation is too much regulation? In the factory example outlined above, the answer is obvious: if all small factories are forced to violate a certain labour law (in order to compete with larger factories), that labour law should only be amended so that it only applies to factories of larger than the average size (in each industry). Regulations, which put small businesses at a disadvantage, have a negative impact on competition.
The World Bank's Doing Business report is an interesting study of the Bangladesh regulatory environment. Did you know that to enforce a contract in the Bangladesh civil court system can easily take up to four years? This has extremely serious implications. In the absence of effective civil courts, some businesses employ mastaans to collect money, which is owed to them. Mastaans are not just useful to political parties for collecting chanda; they are also useful to businesses for collecting legitimate debts.
The 2007-08 caretaker government took some laudable steps to identify and try to address over-regulation. In October 2007, a high-powered Regulatory Reform Commission (RRC) was established under the leadership of former Finance Secretary7, Dr. Akbar Ali Khan, with a mandate to streamline and clarify the regulatory regime. This was followed by a high-level public-private dialogue, the Bangladesh Better Business Forum (BBBF), in November 2007. Since their establishment, both institutions have made a number of recommendations for reforms.
The current government should continue to work on regulatory reform. A good start would be to follow up on each of the RRC and BBBF recommendations. The government should openly discuss the RRC and BBBF recommendations and state plainly whether which ones it intends to implement and which ones it intends to shelve.
For more information, see: www.rtongbusiness.org.
Zahin Hasan is a businessman Asif Afi is a researcher.