Regulatory guillotine: panacea or placebo?

24-07-2020

After the Revolution of Dignity, Ukraine is well on its path to move away as far as possible from the remnants of the “Soviet” past to develop a well-functioning economic and social system that is benefiting all of Ukraine’s citizens.

Not the least role in this process is played by changing the rules according to which the state operates, and citizens live. We inherited an outdated business management system, and additionally, during independence, a layer of supplemental rules were laid down to over regulate various spheres of life, especially – business activities. This excessive regulation and over-bureaucratization hamper the development of any state fostering corruption, often serving as a foundation for bribery and schematism. It seems logical that in order to get rid of the bureaucratic burden, you may want to just repeal as many laws as possible, in a belief that once this task is accomplished  everyone will feel free, and corruption will cease to hamper economic and social development of a state.

In a sphere of economic deregulation reforms, this process is called the “regulatory guillotine” – quick, almost mechanical abolition of irrelevant, inefficient, burdensome regulation that creates obstacles or inequality of access to resources for citizens and businesses. After the reset of the National Reform Council, the idea of ​​using such “guillotine” gradually becomes more widely discussed. But will this approach turn to become this much heralded panacea for business problems?

As the practice of various transition economies, such as Kyrgyzstan, has shown, the utilisation of the “guillotine” approach of rapid revision of a body of legislation, followed by the repeal of obsolete rules or the merging of several regulations into one has not yielded expected results of liberating business from the stranglehold of over-regulation. The results are clear: just under 80% of Kyrgyz legislation remains in force while newly consolidated norms did not result in the improvement of the business environment in Kyrgyzstan.

Why such a disappointing result ? Probably because an incorrect instrument was chosen to address the existing regulatory challenge: the Kyrgyz “guillotine” mechanically reduced the  number of regulations, without attempting to address equally important challenges of archaic procedural fields which concurrently were the source of business problems.

Nevertheless, global practice does have several examples, which we illustrate below, where the “regulatory guillotine” was proven to be quite effective. However, it should be noted that such a radical approach to reforming the regulatory field was usually connected with political exigency or to address a very carefully defined set of regulatory challenges in a crisis situation. The pressure of political exigency can be clearly seen while examining the example of pre NAFTA Mexico. As part of its accession requirements to join NAFTA Agreement with the United States and Canada, the country was required to harmonize much of its business-related legislation with the requirements of the Agreement under a very tight time frame. In order to meet this politically sensitive schedule,  the “regulatory guillotine” was deemed as the most effective tool available to meet this accession deadline. Of course, the Mexican government utilised the guillotine method in conjunction with a number of other measures in order to quickly fulfil accession requirements for NAFTA. Hence, the example of Mexico shows that under some specific politically pressing circumstances, the guillotine may be a relevant and effective mechanism to achieve the harmonisation goals. However, one must also keep in mind that the centuries-old close commercial interaction and regulatory cross pollination between Mexico and its northern neighbours made the task of harmonisation of the regulatory sphere more prone to the mechanical utilisation of the “guillotine”.

In yet another example the Vietnamese government, suffering from a legacy of soviet-style command economy made a decision to  use the “regulatory guillotine” in order to remove  a number of archaic business-stifling regulations and move to more modern models of economic development. In order to successfully achieve its reform end Vietnam did not only use the mechanical aspects of the traditional ‘regulatory guillotine’ but rather it designed its own hybrid system that involved parallel utilisation of business consultations, and a  formation of a pool of initiatives that were all supported by strong analytics culminating in a legislative adoption process. Same consultative tools were used very successfully in Ukraine in recent years.   

Another case of a country that embarked on transformative regulatory reform using the “guillotine”, was South Korea after the financial crisis in Southeast Asia in 1997. In less than a year, South Korean authorities have repealed more than half of existing regulations to clean up outdated archaisms that have hampered post-crisis economic recovery.  This swift reform action greatly aided in South Korea’s subsequent successful recovery from the deep recession. Again, the success of Korea is attributable to the fact that the “guillotine” was used over a relatively narrowly defined set of regulatory instruments in response to a set of financial challenges caused by the crisis.

However, if we take current realities of Ukraine’s development, whereby the economy is not in deep crisis, in spite of  the serious economic consequences caused by the pandemic, and Ukraine is not on the verge of an immediate timeline for radical integration processes – the introduction of a classic regulatory “guillotine” will not solve the existing regulatory challenges in Ukraine, rather its traditional mechanical application may do more damage than good in terms of achieving economic growth.

Today, there are about 800 laws in force in Ukraine, among which there are indeed a number of old Soviet norms that must be ruthlessly thrown out of the Ukrainian legislative sphere. However, the very number of regulations themselves may seem to be a problem, for lawyers who strive to eliminate duplication, inconsistencies, and attempt to combine related rules into a single document for ease of application, etc.  Business on the other hand is more likely to concentrate on other, more practical issues such as simplification of procedures, online regulatory database accessibility, actions that will have an immediate positive effect for business, saving money, time and ease the scourge of ever-present corruption. That is why just repealing some laws or “clearing” inconsistencies between them will not necessarily make life easier for entrepreneurs. In my opinion, a slightly different approach would be more effective .

Our practical multi-year experience has shown that instead of analyzing legal abstractions, focus must be placed on analyzing the processes that govern specific areas of business activity, looking for “bottlenecks” that create problems for entrepreneurs, and proposing changes that will remove barriers and simplify procedures with an immediate positive effect on business activity.

This approach is called better, or effective regulation. In this context, measuring the effectiveness of public policy based on solving key problems of stakeholders come to the fore. If in the process of analyzing market regulation we see that the implementation of public policy in a particular market costs the state dear, and also creates negative side effects that affect the business environment, the regulation of such a market obviously needs to be improved. This is the main purpose of the concept known as rolling review – a review of market regulation to improve its quality (efficiency), which aims to holistically analyze a set of problems in a particular area of​​entrepreneurial activity and finds targeted optimal solutions for business. 

Moreover, the concept of effective regulation differs from the “regulatory guillotine” in that, together with the abolition or replacement of burdensome regulation, which helps business’ bottom-line, it involves maintaining or creating growth points for business. For example, the annual destruction of bees due to farming pesticide toxicity, caused by the lack of good neighborliness between farmers who routinely use pesticides and beekeepers whose bees are destroyed by same pesticides cannot be solved by abolishing some legal norm: it is necessary to introduce a procedure or process that will ensure interaction between entrepreneurs to avoid farm losses. Such partnership could take the form of a mandatory but easy and free registration of beekeepers in the village or establishing a requirement that a city council records and informs about the plans by farmers to use pesticides on their fields.

As a result of a systematic review of regulation over the past four years, the government, parliament and president have repealed rules contained in more than 1,200 illegal and obsolete acts, and adopted more than 100 initiatives that create growth points for businesses with an economic impact of about billion dollars a year. To this end, with the support of the EU, BRDO experts analyzed six and a half thousand acts and prepared 54 studies.

In addition to the abolition of regulations and the introduction of effective procedures, an important element of Rolling Review process is the mandatory, based on the best international practice, process of involving the stakeholders in the development of the proposed regulatory solution, as well as, targeted, fact-based forecasting of the direct and indirect impact of these recommended solutions. This analytical process is necessary in order to achieve an optimal  resolution of the regulatory impediment, so that the benefits will always outweigh potential side effects and hence be accepted by all interested parties as benefiting and protecting their interests.

This benefit-driven approach was proposed by our experts in the new Rules of Procedure of the Cabinet of Ministers, that was adopted in February this year. When the Regulation reaches its full regulatory force, government officials shall be required to strictly follow the recommended policy approach to public policy making process, by fully engaging  stakeholders, and requiring to analyze the direct and indirect impact of the recommended decision on a sphere of activity in question.  

Of course, the “regulatory guillotine” cannot be completely rejected: it works very well, in particular, when tackling archaic Soviet legislation that we inherited. However, the priority should not be given to artificially streamline or to unnaturally speed up the process of regulatory reform, in order to just achieve code-structured laws, but instead, the emphasis must be placed on addressing the specific problems of citizens and businesses. Adherents to the “regulatory guillotine” are often at a loss to explain who they are helping by repealing the laws. Proponents of effective regulation, on the other hand, always know who are the specific stakeholders, and who are those who shall  benefit from the solution they propose.

In order to determine whether it is necessary to introduce, change or abolish a particular regulation, we found it prudent to assess its impact on taxpayers’ income level  – conduct sort of  “return on investment” analysis. An effective regulation is one that fully solves the problem of a citizen, it brings expected results, or in other words it provides a positive “return on  investment”. If the rule  brings an insufficient result, meaning the problem is solved only partially or poorly – it should be changed, and if there is no result at all – then the rule must be eliminated.

It has been proven that in general, society is less concerned with how the reform approach is called. The main determination of reform’s eventual approval by society at large is whether the approach delivered a result that will positively impact the socio-economic situation of the concerned. Whichever method, concept or tool is used, society and its interests must be kept at the heart of every approach or decision-making process.

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