Slash govern­ment reg­u­la­tions, cut red tape, and pros­per

Financial Nigeria Magazine - - Contents - By Steve H. Hanke

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. Un­for­tu­nately, in most places, the pol­icy tide is mov­ing in the op­po­site di­rec­tion.

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 to look at hard, em­pir­i­cal ev­i­dence.

The World Bank has been rig­or­ously mea­sur­ing the ease of do­ing busi­ness in many coun­tries for over ten years, pro­duc­ing an abun­dance of em­pir­i­cal ev­i­dence that re­veals dif­fer­ent as­pects of an econ­omy's reg­u­la­tory en­vi­ron­ment. The Bank pub­lishes its re­sults iden­ti­fy­ing lev­els of eco­nomic free­dom (read: reg­u­la­tory free­dom) each year in a re­port en­ti­tled Do­ing Busi­ness. Ten sets of in­di­ca­tors that cap­ture im­por­tant di­men­sions of an econ­omy's reg­u­la­tory en­vi­ron­ment are mea­sured. The ta­ble be­low de­fines each of the ten quan­ti­ta­tive in­di­ca­tors. Th­ese are each mea­sured by us­ing stan­dard­ized pro­ce­dures that en­sure com­pa­ra­bil­ity and repli­ca­bil­ity across the 190 coun­tries stud­ied. For each in­di­ca­tor, the scores range from a low of '0,' des­ig­nat­ing fail­ure, to a high of '100' for those coun­tries that are ex­celling in the in­di­ca­tor. The over­all ease of do­ing busi­ness (DB) score for a coun­try is sim­ply the av­er­age of its scores for all ten in­di­ca­tors. 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 chart be­low shows that there is a strong, pos­i­tive re­la­tion­ship between DB scores and pros­per­ity. For ex­am­ple, the United States' DB score is 82.45 and its GDP per capita is $57,220 while Zim­babwe's DB score is only 47.10 and its GDP per capita is $1,081. All the re­main­ing 188 coun­tries are plot­ted on the chart. There are only five coun­tries that are “out­liers,” with out­sized GDP per capita rel­a­tive to their DB scores: Qatar, Lux­em­bourg, Switzer­land, Nor­way and San Marino. In ad­di­tion to the strong, pos­i­tive re­la­tion­ship between reg­u­la­tory free­dom (ease of do­ing busi­ness score) and pros­per­ity (GDP per capita), dereg­u­la­tion yields in­creas­ing re­turns. That is, each in­cre­men­tal in­crease in the DB score yields larger and larger gains in GDP per capita. In short, with each im­prove­ment in the DB score, there is a more-than-pro­por­tion­ate im­prove­ment in pros­per­ity. This ex­plains why post-com­mu­nist 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 or 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 chart be­low shows a strong and pos­i­tive re­la­tion­ship between DB scores and life ex­pectancy – al­beit one char­ac­ter­ized by di­min­ish­ing re­turns (each ad­di­tional in­crease in DB score yields smaller and smaller gains in life ex­pectancy.)

Many of the 190 coun­tries re­viewed in the Do­ing Busi­ness 2017 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. The same strat­egy can be used by gov­ern­ments to slash reg­u­la­tions and cut red tape.

For ex­am­ple, prior to 2009, one 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 La­bor, Health, and So­cial Pro­tec­tion. The sub­se­quent re­view in­volved both ex­pense and de­lay, with a fair amount of back-and forth between the ap­pli­cant and the bu­reau­cracy. 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 li­censes from for­eign man­u­fac­tur­ers, adding to their costs.

This sys­tem of govern­ment phar­ma­ceu­ti­cals ap­proval was costly to ad­min­is­ter, and cre­ated an un­com­pet­i­tive mar­ket which was dom­i­nated by three sup­pli­ers. Th­ese firms – PSP, Aversi, and GPC – sold about 75% of all medicines con­sumed in Ge­or­gia. Prices tended to be high rel­a­tive to Ge­or­gian in­comes, and the num­ber of ther­a­pies on the mar­ket was lower than in many other coun­tries.

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% 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. It was an­tic­i­pated that this would put sig­nif­i­cant down­ward pres­sure on prices and im­prove ac­cess to drug ther­a­pies in the do­mes­tic mar­ket. As the chart be­low shows, it did so very quickly. Ge­or­gia's move to out­source reg­u­la­tion in 2009 was not the only re­form it im­ple­mented dur­ing the past two decades. Led by the late Kakha Ben­dukidze, a well-known free-mar­ket ad­vo­cate, Ge­or­gia, since 2003, has made sweep­ing free mar­ket re­forms as part of its post-com­mu­nist trans­for­ma­tion, touch­ing ev­ery as­pect of busi­ness life. In­deed, Ge­or­gia's ease of do­ing busi­ness score in­creased in­cred­i­bly dur­ing this pe­riod. Cur­rently, Ge­or­gia ranks 16th in Do­ing Busi­ness, rank­ing just above Ger­many. Ge­or­gia's free mar­ket re­forms have cer­tainly paid off. Since 2003, GDP per capita has in­creased at an av­er­age an­nual rate of 6.44%. This is no co­in­ci­dence. By break­ing down and quan­ti­fy­ing the var­i­ous as­pects of busi­ness reg­u­la­tion in its econ­omy, Ge­or­gia was able to iden­tify the in­di­vid­ual fac­tors in­hibit­ing busi­ness growth – like it did in 2009 with phar­ma­ceu­ti­cals.

Ge­or­gia's path shows that a coun­try can un­lock a huge po­ten­tial for in­creas­ing pro­duc­tiv­ity, pros­per­ity, and health just by ad­just­ing its rules and reg­u­la­tions to al­low its pri­vate sec­tor to thrive. With an ap­peal to the facts, the pro­duc­tiv­ity puz­zle is easy to solve: Just mimic ob­served best prac­tices by slash­ing reg­u­la­tions and cut­ting red tape.

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