En­hance pros­per­ity and im­prove health: Slash reg­u­la­tions, please

Financial Nigeria Magazine - - Contents -

Eco­nomic pros­per­ity is, quite lit­er­ally, a mat­ter of life and death.

Pro­duc­tiv­ity and eco­nomic growth con­tinue to sur­prise on the down­side in most coun­tries. While there is a great deal of hand­wring­ing over the so-called pro­duc­tiv­ity puz­zle, lit­tle at­ten­tion is given to the real elixir: freer mar­kets and more com­pe­ti­tion. In­deed, the pol­icy tide is mov­ing in the op­po­site di­rec­tion in most places.

To get a grip on the pro­duc­tiv­ity puz­zle, let's lift a page from the late Se­na­tor Daniel Pa­trick Moyni­han, who once said, “You're en­ti­tled to your own opin­ions, but you're not en­ti­tled to your own facts.” Yes. There is noth­ing bet­ter than a hard look at em­pir­i­cal ev­i­dence to see if it sup­ports those who es­pouse freer mar­kets or those who em­brace the reg­u­la­tory state as mod­els to en­hance our pros­per­ity and health.

The World Bank has been rig­or­ously mea­sur­ing the ease of do­ing busi­ness (DB) in many coun­tries for over ten years, pro­duc­ing a trea­sure trove of em­pir­i­cal ev­i­dence. The Bank pub­lishes its re­sults iden­ti­fy­ing lev­els of eco­nomic free­dom (read: reg­u­la­tory free­dom) each year in a vol­ume en­ti­tled Do­ing Busi­ness. Ten sets of in­di­ca­tors that cap­ture im­por­tant di­men­sions of an econ­omy's reg­u­la­tory en­vi­ron­ment are quan­ti­fied. The ac­com­pa­ny­ing ta­ble de­fines each of the ten quan­ti­ta­tive in­di­ca­tors. These are each mea­sured by us­ing stan­dard­ized pro­ce­dures that en­sure com­pa­ra­bil­ity and repli­ca­bil­ity across the 189 coun­tries stud­ied. For each in­di­ca­tor, the scores range from a po­ten­tial low of '0' to a high of '100'.

Us­ing the DB scores, we can de­ter­mine whether there is a re­la­tion­ship be­tween a freer reg­u­la­tory en­vi­ron­ment (a high DB score) and pros­per­ity as mea­sured by GDP per capita. The ac­com­pa­ny­ing chart shows a strong, pos­i­tive re­la­tion­ship be­tween DB scores and pros­per­ity. For ex­am­ple, the United States' DB score is 82.15 and its GDP per capita is $55,836, while In­done­sia's DB score is only 58.12 and its GDP per capita is $3,346. All the re­main­ing 187 coun­tries are plot­ted on the chart. There are only four coun­tries that are “out­liers”, with out­sized GDP per capita rel­a­tive to their DB scores: Qatar, Lux­em­bourg, Switzer­land, and Nor­way.

In ad­di­tion to the strong, pos­i­tive re­la­tion­ship be­tween reg­u­la­tory free­dom (ease of do­ing busi­ness) and pros­per­ity (GDP per capita), dereg­u­la­tion yields in­creas­ing re­turns. That is, each in­cre­ment in­crease in the DB score yields larger and larger gains in GDP per capita. With each im­prove­ment in the DB score, there is a more-thanpro­por­tion­ate im­prove­ment in pros­per­ity. This ex­plains why post­com­mu­nist coun­tries that em­braced Big Bang eco­nomic lib­er­al­iza­tions, like Poland, have done so much bet­ter than the grad­u­al­ists. The Big Bangers lit­er­ally got more for their buck.

Eco­nomic pros­per­ity is, quite lit­er­ally, a mat­ter of life and death. The re­la­tion be­tween in­come growth and life ex­pectancy is, of course, com­plex. Eco­nomic pros­per­ity af­fects life ex­pectancy through many chan­nels: higher in­di­vid­ual and na­tional in­comes pro­duce favourable ef­fects on nu­tri­tion, on stan­dards of hous­ing and san­i­ta­tion, and on health and ed­u­ca­tion ex­pen­di­tures. While it is true that re­duc­tions in mor­tal­ity have some­times been the re­sult of “tech­no­log­i­cal” fac­tors, in the larger sense, it is clear that sus­tained eco­nomic growth is a pre­con­di­tion for the kinds of in­vest­ments and in­no­va­tions that, over time, sig­nif­i­cantly re­duce mor­tal­ity. The ev­i­dence on this point is abun­dant and un­equiv­o­cal.

So, know­ing that a freer reg­u­la­tory en­vi­ron­ment is as­so­ci­ated with higher lev­els of GDP per capita, we should ob­serve that a freer reg­u­la­tory en­vi­ron­ment (a higher DB score) is as­so­ci­ated with higher life ex­pectan­cies. Sure enough, it is. The ac­com­pa­ny­ing chart shows a strong and pos­i­tive re­la­tion­ship be­tween DB scores and life ex­pectancy – al­beit one char­ac­ter­ized by di­min­ish­ing re­turns (given ad­di­tional in­cre­ments in DB scores yield smaller and smaller gains in life ex­pectancy).

Many of the 189 coun­tries re­viewed in the Do­ing Busi­ness 2016 re­port are far away from adopt­ing “best prac­tice” poli­cies when it comes to the reg­u­la­tory frame­works they im­pose on busi­nesses. In con­se­quence, pros­per­ity and health are in­fe­rior to what they could be. Just how can that be changed? The eas­i­est way is the sim­plest: just mimic what is done where “best prac­tice” poli­cies pre­vail. This is an old, tried-and-true tech­nique that is used in in­dus­try, par­tic­u­larly when com­pet­i­tive mar­kets pre­vail. Just copy what the “good guys” do. If you do so, you will be­come pro­duc­tive and com­pet­i­tive. These lessons about the dif­fu­sion of “best prac­tice” and how it im­proves pro­duc­tiv­ity are doc­u­mented in great de­tail in a most in­sight­ful book by Wil­liam W. Lewis: The Power of Pro­duc­tiv­ity. Chicago: Uni­ver­sity of Chicago Press, 2004. The same strat­egy can be used by gov­ern­ments to slash reg­u­la­tions.

For ex­am­ple, un­til 2009, those seek­ing to im­port and sell phar­ma­ceu­ti­cals in the Repub­lic of Ge­or­gia faced the same reg­u­la­tory re­view process as one would if the drugs were pro­duced do­mes­ti­cally. Ap­pli­cants would pay a reg­is­tra­tion fee and file a twopart form with the De­part­men­tal Reg­istry of State Reg­u­la­tion of Med­i­cal Ac­tiv­i­ties at the Min­istry of Labour, Health, and So­cial

Pro­tec­tion. The sub­se­quent re­view in­volved both ex­pense and de­lay, with a fair amount of back-and forth be­tween ap­pli­cant and bu­reau­cracy as tech­ni­cal ex­am­i­na­tions led to agency de­mands for cor­rec­tions. This process was not in­tended to ex­ceed about six months, but of­ten took far longer. In ad­di­tion, the gov­ern­ment re­quired all im­porters to ob­tain trade li­cences from for­eign man­u­fac­tur­ers, adding to their costs.

In Oc­to­ber 2009, how­ever, the Ge­or­gian gov­ern­ment did some­thing re­mark­able. Rec­og­niz­ing that its reg­u­la­tory ma­chin­ery was, in fact, un­nec­es­sar­ily du­pli­cat­ing that in many de­vel­oped coun­tries, it adopted a new “ap­proval regime.” It com­piled a list of for­eign au­thor­i­ties with good reg­u­la­tory track records (in­clud­ing, for ex­am­ple, the Euro­pean Medicines Agency and drug ad­min­is­tra­tions in the United States, Ja­pan, Aus­tralia, and New Zealand), and phar­ma­ceu­ti­cals that were ap­proved for sale by those en­ti­ties could hence­forth gain au­to­matic ap­proval for sale in Ge­or­gia. In ad­di­tion, the reg­is­tra­tion fee was slashed 80 per­cent for brand name drugs and pack­ag­ing reg­u­la­tions were greatly sim­pli­fied un­der a new “re­port­ing regime.”

This reg­u­la­tory out­sourc­ing com­pressed the time and greatly re­duced the ex­pense re­quired to com­pete in the Ge­or­gian phar­ma­ceu­ti­cal mar­ket. The hope was that this would put sig­nif­i­cant down­ward pres­sure on prices and im­prove ac­cess to drug ther­a­pies in the do­mes­tic mar­ket. It did so very quickly. (These re­sults are doc­u­mented in Steve H. Hanke, Stephen J.K. Wal­ters, and Alexan­der B. Rose. “How to Make Medicine Safe and Cheap.” Reg­u­la­tion, Fall 2014.)

To grasp the huge po­ten­tial for in­creas­ing pro­duc­tiv­ity, pros­per­ity, and health, let's look at In­done­sia. The ac­com­pa­ny­ing ta­ble shows In­done­sia's DB score for each of the ten in­di­ca­tors. Each is com­pared to the score of the coun­try with the best DB score in that in­di­ca­tor. For ex­am­ple, In­done­sia has a de­plorable score on en­forc­ing con­tracts. In­deed, the gap be­tween In­done­sia and Sin­ga­pore, which scores the best on that in­di­ca­tor out of the 189 coun­tries stud­ied, is huge. So, the po­ten­tial im­prove­ment for In­done­sia by adopt­ing the best prac­tice for en­forc­ing con­tracts is enor­mous.

Just what over­all im­prove­ments in In­done­sia's reg­u­la­tory regime would do for pros­per­ity is dis­played in the last ta­ble re­lat­ing in­cre­men­tal DB score im­prove­ment to GDP per capita. In­done­sia's cur­rent score is 58 and its GDP per capita is $3,346. So, if In­done­sia at­tempts to slash its reg­u­la­tions and move closer to best prac­tice – Let's say it im­proved its DB score by 10 points, yield­ing a score of 68 (the same as Greece and Ser­bia) – In­done­sia's GDP per capita would be ex­pected to jump by $4,999, or 2.5 times.

With an ap­peal to the facts, the pro­duc­tiv­ity puz­zle is easy to solve. Just slash reg­u­la­tions by mim­ick­ing best prac­tices.

*Listed GDPs/Capita ($) are ex­pected val­ues based on the re­gres­sion equa­tion, nor­mal­ized for In­done­sia’s cur­rent GDP/Capita.

Note: Dis­crep­an­cies be­tween ad­di­tive in­creases in GDP/Capita and ab­so­lute GDP/Capita fig­ures are the re­sult of round­ing er­rors.

Sources: Do­ing Busi­ness Re­port 2016 and World Eco­nomic Out­look Data­base.

Cal­cu­la­tions and chart by Prof. Steve H. Hanke, The Johns Hop­kins Uni­ver­sity. Steve H. Hanke is a Pro­fes­sor of Ap­plied Eco­nom­ics at The Johns Hop­kins Uni­ver­sity in Bal­ti­more and a Se­nior Fel­low at the Cato In­sti­tute in Wash­ing­ton, D.C. You can fol­low Prof. Hanke on Twit­ter: @Steve_Hanke. Ar­ti­cle re­pub­lished with au­thor's per­mis­sion. Orig­i­nally pub­lished in Oc­to­ber 2016 edi­tion of Globe Asia.

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