Putting “light touch” regulation back on the agenda

Perhaps the least fashionable policy idea at the moment, apart from mandatory bankers’ bonuses, is “light touch” regulation. To quote from an international source (BWCS): “Light touch regulation is dead. It was a bad idea from the start and deserves to be buried.” Closer to home, a post on Public Inquiry highlights “a light touch regulatory regime – as little red tape as possible” as on a par with Charlie Haughey as items of ridicule in a PD policy paper from 2006.

Developing countries, however, don’t seem to be getting the message. Since the start of the recession, Rwanda, for example, which seems hell-bent on developing its business environment and its attractiveness as an investment location, slashed the number of procedures required for starting a business from 8 to 2 and reduced associated costs by over 90%. It also took numerous other “light touch” steps, such as reducing the number of days to register property by 75%. As a result, its World Bank Doing Business rank improved by 76 places globally in one year, to 67th in the 2010 rankings. It’s now in the top five locations for doing business in sub-Saharan Africa, a table headed by the relatively prosperous  countries of Mauritius and South Africa.

What this shows is how a concept – efficient regulation, i.e. doing the job required for the minimum fuss necessary – gets abused and twisted to mean something completely different, i.e. doing the job badly. It was twisted by one set of vested interests in the run-up to the recession: “You don’t need to regulate us. Sure, isn’t everyone going light touch now? We know what we’re doing.” It is now being twisted by those of a certain ideological persuasion and those who fear the changes that may result from greater transparency and efficiency: “Efficient regulation? Sure that was the problem all along. We need strong government and strong regulation.”

The danger is that, with “strong regulation” so much en vogue, and with the public baying for blood, governments will confuse efficient regulation with bad regulation and decide that “strong regulation” is the way forward. Governments need to set the objectives of regulation first and then work backwards from there to find out the least costly way of achieving the goals of regulation. Much of the problem of the financial crisis was that the regulation was not “light touch”, it was simply bad regulation. A good regulatory system means that everyone can act as much in their own interest as they’d like, and the economy and society benefit. That is certainly not the economic system that prevailed in the 2000s.

From a competitiveness point of view, but also from the point of preventing needless waste of time and money, governments must remember that regulation can be both strong (i.e. regulate what needs to be regulated) and efficient (i.e. as little red tape as possible) at the same time. Fortunately, the European Commission is keeping “light touch” regulation on the agenda, despite the political whims of the recession, as a report published last month by the CSO on their compliance with “Better Regulation” shows. In the words of the Commission:

Administrative costs are important since businesses across the EU are required to spend considerable amounts of time filling in forms and reporting on a wide range of issues. By reducing unnecessary reporting requirements company employees can spend more time on core business activities which may reduce production costs and allow additional investment and innovation activities to materialise, which in turn should improve productivity and overall competitiveness.

In plain English, this comes down to freeing up people from filling out forms so they can do things of real value.

Four years ago, based on a Dutch and British methodology which looks at how real businesses spend their time, the European Commission produced estimates of the “administrative costs” that exist in each member state, as a percentage of the total economy. It also produced ballpark figures for the kind of economic stimulus that would occur if governments, including the Commission, reduced their “administrative burden” by 25%, through “cutting red tape”. The graph below shows these costs – and this economic stimulus – for different EU countries.

It varies from country to country. As one might expect, economies that have had to work with more businesses over the years have less inefficient regulation than other economies (compare the UK and Sweden to Greece or Portugal). But the economic benefits of a 25% reduction in red tape – changing not what regulation aims to do but how it’s done – are substantial for all economies.

The annual economic stimulus for the whole EU from this step towards “light touch” regulation is estimated to be about €150bn… that’s the equivalent of adding another economy about the size of Ireland! Unfashionable as it may be, perhaps we should be  looking to “light touch” regulation to kickstart the economy. Put antoher way, “light touch” regulation was not part of the problem and it’s actually part of the solution.