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Regulatory reforms to boost growth

IFTY Islam and Ahsan Mansur
Last week we along with eight other members of a Bangladesh delegation attended a World Bank •FIAS/DFID Conference on "Smart
Regulation in South and Southeast Asia” in Hanoi, Vietnam. Having written in the past about what Bangladesh can learn from Asia's FDI champ (from S2b in 2000 to mote than $30b in 2008), it was inspiring to visit the region's latest economic miracle. I he city itself rightly earns its reputation as the "Paris of the East” with its colonial legacy of grand boulevards and beautiful French architecture. But the topic itself, regulatory reform, was of particular interest given the apparent loss of momentum in Bangladesh Regulatory Reforms Commission's (RRC) activities (two of whose members were part of the delegation) after some success early in its tenure.
So why is regulatory reform so important? As the OECD Report on Regulatory Reforms has highlighted, regulations which impede innovation or create unnecessary barriers to trade, investment, and economic efficiency; create duplication between regulatory authorities and different layers of government, and even among governments of different countries; allows for vested interests seeking protection from competition; and are outdated or poorly designed to achieve their intended policy goals arc all part of the problem.
The OECD goes on to note a fundamental objective of regulatory reform to improve the efficiency of national economies and their ability to adapt to change and remain competitive. Reform that sharpens competitive pressures provides powerful incentives for firms to become more efficient, innovative and competitive. These improvements can boost the productivity of entire industries and often bring sharp and swift cost/price reductions and improvements in the quality and range of products and services, to the benefit of consumers and user
industries. Reform that reduces business burdens and increases the transparency of regulatory regimes supports entrepreneurship, market entry, and economic growth that, in turn, should produce high paying, high quality jobs. Reform that reduces "red tape" and paper work burdens for ordinary citizens, particularly in their role as taxpayers, frees up valuable time and individual initiative.
Another way of seeing this is that poor quality regulation leads to increased compliance costs for business and other groups. These costs are passed through to consumers in the form of higher prices for goods and services, such as food and energy. Poor quality regulation also substantially reduces levels of economic activity and impedes employment and wealth creation.
Getting back to the conference itself, there were delegations from 12 countries including Asian dynamos such as Korea, Vietnam and India as well as the US and UK with extensive and developed regulatory reform processes. All the presentations, from both World Bank experts, and country reformers offered plenty of food for
thought. But the standout for us, was the presentation from Mr Gil, the director general of Regulation from the Korean Prime Minister's office which underlined the central importance and pivotal role regulatory reform has played in the Korean miracle. As the cliche goes, “Talk is cheap” but there can be no question that Korea tripling per capita income in the 10 years since the Asian crisis deserves respect and admiration from developing economies looking to trigger similar dynamic growth in their economies.
As Prof Jong Seok Kim noted in a paper on Visions and Strategies for Better Governance — the need for foreign direct investments, promotion of exports, and relieving domestic business of regulatory burdens — all required radical reform of existing Korean regulations Korean president DJ Kim set a quantitative target of abolishing at least 50 percent of existing regulations by the end of 1998. Considering the efficient nature of the Korean government's operation, this presidential order carried with its significant weight and authority. As a result, 5,430 regulations or 49 percent of the existing regulations were simply elimi-
nated, and 2,411 of the remaining regulations were modernised
A key element in the reform process is Regulatory Impact Assessment (RIA). An RIA process involves systematically identifying policy options and assessing the expected effects of regulatory proposals, using a consistent analytical method, linked to policy decision making.
The World Bank FIAS experts noted a number of key elements for RIA : 1) A formally announced policy, which is endorsed by the head of government or senior minister, is essential -- but not sufficient -- to ensure that regulators actually comply with the RIA requirement; 2) Strong support from senior government ministers, in particular at the early stages of RIA implementation, to establish the authority of the policy and encourage officials to incorporate it effectively into existing policy development processes; 3) Consultation with affected parties and other stakeholders.
Consultation with stakeholders and mobilisation of public support help the decision-making process and RIA in several important ways.
However the regulatory reform experts at the conference have recognised that the skills required to complete high quality RIA an specialised and may not be widespread within many developing countries' administrations Consequently, a major goal of a best-practised RIA system must be to develop the relevant capacities of regulators progressively over time. One suggestion they have for a country like Bangladesh is ‘RIA Light" or a less extensive process
So what are our conclusions? Firstly, poor regulations have high costs. In the area of land administration, it has led to millions of court cases for settling ownership disputes and enhanced uncertainty in investment decisions. Better import or trade regimes can encourage competition and speedy delivery of inputs and finished products leading to improved distribution or supply chains and lower prices. Better banking regulations may be the key to lower interest rates for investors. More effective FDI regulations can attract much-needed foreign capital.
Hence, we appeal to the prime minister for taking measures to reinvigorate the dormant RRC with a fresh mandate. The FBCCI and other key private sector stakeholders as the primary beneficiaries of better regulations should have more frequent dialogues and a feedback mechanism. The development partners should also continue providing significant capacity building support towards regulatory reform. The Awami League-led government was elected on a platform of reform and renewal. A strengthened RRC would certainly reinforce the government's reform efforts and help Bangladesh emerge stronger from the global economic crisis and achieve 10 percent growth rate by 2017.
Ifty Islam is the managing partner of AT Capital. Email: ifty.islam@at-capital.com Ahsan Mansur is the executive director of Policy Research Institute