The Optimist

Paperwork Tigers

The developing world can do fine without more regulation, thank you very much. In fact, it can do better.

Fatality rates on roads in many developing countries are hideously high -- an estimated 130,000 people die on the roads in India alone. Buildings in those same countries often collapse without even the provocation of an earthquake -- the result of substandard construction. Many of these deaths could be prevented with regulation -- speed limits, car safety standards, building codes. Surely, then, the answer is for legislatures and executives to put more regulations on the books?

Actually, no. Most of these deaths are associated with regulations already in place that are being ignored. That was the case with building collapse in the Haiti earthquake last year, for example: There were codes; they just weren't enforced. And this isn't a problem limited to poor countries. In the developed world, unenforced regulation is a major cause of bank collapse. Meanwhile, we license florists and hairdressers to no noticeable benefit. That suggests developing countries -- and probably developed ones too -- need considerably fewer regulations so that they can focus on enforcing the ones that really matter.

One big problem with regulatory enforcement in the developing world is that those charged with regulation are understaffed, undertrained, underpaid, and lacking in oversight. But the problem runs deeper than technical capacity. A lot of regulations in the developing world are used -- and often designed -- by politicians and bureaucrats to extract bribes or other favors rather than to actually make things safer. A survey of driving tests in India, which leads the world in traffic fatalities, found that only 29 percent of learner drivers took the mandated test before receiving their license, and 61 percent failed a subsequent surprise driving test. A linked experiment, meanwhile, found that those people who hired touts to help them get a driver's license were effectively exempted from the test altogether. Those unfortunate individuals who actually took the test -- even though they were on average better drivers -- often failed.

Or look at building regulations: Mary Hallward-Driemeier of the World Bank and Lant Pritchett of Harvard University's Kennedy School of Government examined data on construction permits across the developing world, comparing the amount of time builders were supposed to take to legally obtain a permit and the amount of time it actually took. There was pretty much no relationship at all. Perhaps unsurprisingly, World Bank analysis suggests that countries where the official process to get licenses is particularly onerous are also those where firms report more serious problems with corruption.

Moving toward a smaller set of simple regulations actually enforced by a competent set of regulatory agencies would be of huge benefit not only in reducing fatalities and other ill effects, but also in creating an attractive business environment. Take telecommunications: The evidence from the 1980s and 1990s suggests that privatizing the state telephone company had no effect on sector performance unless there was a strong, independent regulator. Again, an analysis by Pritchett, Hallward-Driemeier, and their colleague Gita Khun Jush using enterprise surveys suggests firms do better with more regulation consistently enforced than less regulation enforced by a capricious bureaucrat. The bigger the variability in policy enforcement across firms in the same industries within a country, the lower the employment growth in that industry. But surely best --and most plausible -- of all would be less regulation consistently enforced.

Beyond a bonfire of unnecessary regulation and a strengthening of the capacities and oversight of regulatory bodies, countries might also want to examine other ways than regulation to achieve similar outcomes. For example, if courts are viewed as a comparatively efficient and uncorrupted institution in a country, it might be better to move some of the burden onto them. In the case of building collapse, one approach would be to make construction firm executives criminally liable if a structure they built collapsed due to shoddy work and killed or injured an occupant. Another approach might be to use incentives rather than regulations -- cash payments to people who pass an "advanced" driving test, as it might be called. No approach will be without its problems, but given the widespread evidence that the existing system isn't working across much of the developing world, this is an area ripe for experiment.

Of course, the fact that regulation is a source of power and money for bureaucrats and politicians suggests that changing the situation isn't going to be straightforward. It is likely to be the kind of reform introduced by a new administration trying to start with a clean(er) slate. The Arab Spring might be just such an opportunity in the Middle East, for example; it was ignited, after all, by the self-immolation of a man frustrated by the government harassment he faced operating a fruit stall. Even before the protests, many countries in the region were moving toward simplifying codes that affected businesses -- in recent years Egypt was one of the top 10 most-improved countries in the World Bank's Doing Business index of official red tape. But a 2009 World Bank report noted that there was a big gap between de jure reforms and de facto implementation -- with favoritism still the norm.

Perhaps the spirit of reform will help move countries in the Middle East away from byzantine and capriciously enforced rules toward limited, impartial, universally enforced regulation. It may not sound as grand as sweeping democratization, but it could make a huge difference to the economic prospects of the region.

Flickr user Kozumel

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