19 January, 2013

Regulatory guillotine helps business climate

Entrepreneurs often run into regulations that are more obstacles to their operations rather than help. Many problematic regulations have passed their best-by-date, implemented long ago under circumstances that no longer exist. Many others were simply designed by a well-meaning bureaucrats who simply had limited understanding of practical entrepreneurial issues.

Swedish policy makers are certainly not alone when they promise to reduce regulatory burdens for business, especially smaller companies. In country after country, similar promises are dearly issued, and the European Union has several programs to reduce regulatory burdens. But, actually doing so seems easier said than done. Too many regulations that obviously no long serve any purpose remain on the books.

But now several countries with reforming ambitions have started using a new tool for this purpose: the Regulatory Guillotine. With this interesting tool, bureaucrats identify a grouping of regulations, often those that impact business climate in some way – and ask three questions about each regulation in this order:

  • Is it necessary?
  • Is it legal?
  • Is it business friendly?

When all three questions can be answered ‘Yes’, the regulation passes to the ‘Keep’ file. If, however, the regulation fails either of the first two questions, it is passed to the ‘Repeal’ category. Then, if the regulation makes it past the first two questions but not the third, it is sent back into processing under the ‘Revise’ category.

This procedure certainly must be adapted to conditions in different countries, especially considering their specific decision-making process. In many cases, though both sides in labour market issues can have a highly constructive advisory role.

Hungary, Mexico, and South Korea have started using this regulatory guillotine. Macedonia, a modern reform tiger climbing like a rocket in several freedom indexes, has started applying this method. Even Serbia and Croatia have embraced the idea. In practice, we see that between 20 and 50% of all rules defined as needing review in this way are repealed.

And the positive effects are clear. South Korea has seen foreign direct investment increase substantially, and over one million new jobs have been created. So the issue of repealing old or burdensome regulations becomes less a question of whether this is needed, and more a question of how to do so. Now, there is an answer: the Regulatory Guillotine.

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Johnny Munkhammar