Regulatory Reform: Some Lessons from International

Experience

Regional Conference on Investment Climate &

Competitiveness in East AsiaRussell Muir, FIAS

Kuala Lumpur, November 22, 2005

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Why have regulatory reform?

Benchmark data shows that good regulations help markets function and economies grow; e.g.Doing Business, ICA data

Good regulation includes both:

Sensible deregulation e.g. creating a transparent business-friendly environment and allowing the private sector to operate responsibly; and

Regulation and re-regulation where it is essential, effective and enforceable e.g. raising taxes, protecting health and safety, the environment and the vulnerable

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Business deregulation as part of broader reforms Regulatory reforms at the micro level have worked

best where countries have also pursued:

Macro-economic stability Improvements in institutions Governance reforms

e.g. UK, USA, Australia, Scandanavia, Singapore

BUT

The absence of all three is not an excuse for delaying the micro economic regulatory reform agenda

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What has worked: international experience - a range of models

Three key drivers: reactions to crisis (transition economies; Korea); legislative opportunity (EU Accesion, NAFTA); and recognition of need to catch up (UK; Australia;

Italy) There are a range of ways to go including: Big Bang/Institutionalized Reform (e.g. Mexico) Guillotine (e.g. Hungary; Korea; Kenya) Gradualist/Systemic (e.g. UK; Australia)

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International Experience: different drivers, different models

Country Hungary Mexico

Context • Significant economic decline• EU accession

• Financial crisis• NAFTA

Goal Eliminate unjustified regulations

Move from deregulation to good regulation

Means • Privatization and deregulation

• Regulatory reform RIA

• Trade liberalization• Privatization• Regulatory reform RIA

Champion Regulatory Committee reporting to PM

Dedicated reform team reporting to President then MoT

Challenges Initial reform efforts dissipated due to weak institutional design

Economic benefits of reform not immediately visible

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International Experience: different drivers, different models

Country Australia Korea

Context • Economic decline• Low productivity

• Dismantling govt. interventionism• Financial crisis

Goal Improve competition by better regulation

Market discipline as tool for economic growth

Means National Competition Policy • Massive deregulation• Institutional reform

Champion Competitiveness Council, PM and State Ministers

Presidential Commission, Reg. Reform Commission

Challenges • Reform fatigue• Sustaining incentives for state/federal reform

Lack of incentives to implement regulatory reform tools

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Hungary: “The Guillotine”

Strategy & key initiatives • “First Wave” (1988-1990): Market liberalization and privatization• “Implementation” (1990-1994): Building institutions and ownership; first wave of deregulation (guillotine)review of laws• “Second Wave” (1994-1998): Privatization, attracting FDI, (“guillotine”)

Success factors

- Reforms undertaken by dedicatedDeregulation Commissioners supported at

highest level of government

- Appointment of institution with mandate todrive implementation was key tobetter success of “Second Wave”

over First Wave

Background

From being one of the strongest economies in Soviet block, by 1988 Hungary’s economic situation deteriorated drastically.

Outcome • Highly improved regulatory quality – eliminated or reformed 150 laws and regulations•By 1997, trade was diversified to 70% with EU, 80% with OECD countries• Dramatic FDI increase: attracts 33% of all investment in E. and Central Europe

Source: FIAS Regulatory Reform Notes

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MEXICO: “Institutionalized reform”

Strategy & key initiatives • Goal to eliminate regulatory barriers to economic growth through trade and investment liberalization anchored in NAFTA• Far-reaching privatization programme• Government-wide regulatory reform programme (RIA) from 1995

Background

Economic crisis caused by collapse of oil prices and 1982 debt default triggered recognition of need for macro-economic reforms. Replaced import substitution model and looked to opportunites under NAFTA in 1989

Outcome• Reforms linked to Mexico’s ability to recover after external shocks• Significant increase in Private participation in GDP •Exports’ share in GDP up from $12b in 1983 to $150b in 2000• FDI = 4.3% of GDP (1989-1999)

Source: FIAS Regulatory Reform Notes

Success factors

• Reforms implemented by (Economic Deregulation Unit) assembled

outside of bureaucratic structures reporting to President through Trade Minister. By

2000 UDE became autonomous body.

• Lack of immediate economic resultsdid not hamper commitment

to reform agenda

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AUSTRALIA: “Broad based gradualist approach”

Strategy & key initiatives National Competition Policy (NCP) reform (begun in 1994 and on-going), a broad-based agenda aimed at strengthening competition throughout the domestic economy by changing the regulatory and monopoly roles of the federal and state governments. Used RIA.

Background

Significant economic decline in 1960s and 1970 spurred Government to address micro- and macro level issues contributing to lagging GDP and productivity by implementing reforms in 1980s

Outcome It is estimated that full implementation of the NCP has significantly improved GDP groth. Strong performance over past decade with much of the gain coming from the reforms to be implemented by state governments.

Source: FIAS Regulatory Reform Notes

Success factors

- Clear, comprehensive, well-designed plan- High level of political/bipartisan support

and strong, supportive institutions- Adoption of bold, explicit targets

-Relatively early results created new allies-Monitoring & evaluation built in

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KOREA: The “Big Bang” approach

Strategy & key initiatives • Massive deregulation in which Government ordered to eliminate 50 percent of regulations• Reform, incl. establishment of Presidential Commission, Regulatory Reform Commission, and other mechanisms to promote/monitor reform

Background

First attempt at reform started in 1980s, aiming to dismantle regulatory structure favouring Govt. intervention from 1960s-1970s. Reform agenda given sense of urgency following financial crisis

Outcome • Add 8.6% in GDP growth over 10 years• Reduced consumer prices by 7.2%• Between 1992 and 2001, percentage of industries subject to foreign entry barriers dropped from 45% to 35%• In Global Competitiveness report, Korea ranked 26th of 75 countries in reg. burden (2002), vs. 48th of 53 in 1997

Source: FIAS Regulatory Reform Notes

Success factors

- Govt. & public accepted market disciplineas tool for achieving growth, not threat- Opportunistic approach, building onfinancial crisis to gain reform support

- Reforms embedded in strong institutions- Used good practices (e.g. RIA)

to design/impl. reforms

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Lessons learned from international experience Take advantage of external circumstances to gather stakeholders

Draw on solid benchmark data to build consensus for reform

Consult stakeholders early and transparently—do not rely on narrow political base to drive reform

Build institutions to sustain reform i.e. address the flow as well as stock of regulations

Ensure incentives for staying the course, especially if results take time to materialise

Think about implementation and monitoring earlier rather than later