Regulatory climate sets the stage

Written by Verghis Chandy | Verghis Chandy | Updated: Oct 12 2012, 10:11am hrs
The regulatory environment in India is seen as more stifling than stimulating for entrepreneurs. This is mirrored in India's poor standing in the World Bank Doing Business 2012 ranking, where it's placed at 132, out of 183 countries. On the Starting a Business parameter, the ranking is way behind at 166.

The situation can change only when the regulatory climate turns decidedly conducive to business. Entrepreneurship is fostered in an environment that enables the entrepreneur to create, run, manage and close a business without hassles, while the regulatory system guarantees him easy compliance, rule of law and protection of propertyphysical and intellectual.

The UN Conference on Trade and Development (Unctad), which recently brought out its Entrepreneurship Policy Framework and Implementation Guidance, says the regulatory environment should encourage people to set up own business, try new business ideas and take on calculated risks, while keeping administrative burdens to the bare minimum to support public policy and sustainable development objectives.

Imposing a heavy regulatory burden on the private sector harms entrepreneurship development. The Doing Business rankings show that some of the most entrepreneurial and competitive economies (such as Singapore, New Zealand and Canada) impose the least administrative requirements on start-ups. Countries that impose more onerous administrative requirements on firms and where the cost of registration is higher typically show much lower rates of entrepreneurial activity, Unctad points out.

Excessive administrative barriers or lack of transparency about the requirements entrepreneurs have to fulfil can have significant adverse effects on the society. When starting a business is discouraged, the business models of incumbent firms are not regularly challenged, enabling inefficient producers to maintain their market position. The economy's overall productivity increases more slowly than it would in an economy that fosters easier firm entry and competition.

The basic step in establishing a business friendly regulatory environment is to understand how far existing rules and procedures hold back entrepreneurial activity. This implies distinguishing between regulations that are essential for the functioning of businesses; those that are essential but can be simplified or otherwise managed more efficiently; and those that produce more costs than benefits and so should be abolished.

Making this distinction can best be achieved in three steps, says the guideline. The first step is benchmarking the national business climate against other countries. But local realities have to be factored in here. Similarly, national entrepreneurship strategies aimed at development in specific target areas, or for specific target groups, need suitable regulation for their implementation.

The second step is to look at specific sectors and regions and assess whether specific licensing or administrative requirements are justified or not. Again, benchmarking such requirements against international experiences, or between regions or sectors, may be done.

The benchmarking has to be complemented with a third step: organisation of a public-private dialogue on the costs and benefits of regulations. Such a dialogue would convey the business communities' concerns about excessive regulations and let the regulators know the costs of regulation. This will help weed out useless regulations and refine the remaining ones.

Kenya has won kudos for such an exercise. It set up a Business Regulatory Reform Unit in 2006 to regularly keep track of all regulatory regimes and licensing, and to ensure that new regulations, licences, fees and charges do not create avoidable burdens on business and do meet international best. This unit also tracks the quality of new licensing regulations through a Regulatory Impact Assessment.

Even in India's neighbourhood, the Bangladesh Better Business Forum was set up in 2007 in response to low business confidence, regulatory uncertainty, bureaucratic bottlenecks and barriers to businesses. With 41 members (20 public and 21 private) and chaired by the prime minister, the forum has five working groups, including one on business entry and operations. The forum has so far proposed 249 recommendations, of which 113 were approved.

Unctad says in many developing countries a significant part of the economy remains in the informal sector, and the size of which is determined by the quality of the legal framework, more precisely company entry costs and regulatory burden, including corruption and financial constraints. Breaking down these hurdles promotes formal entrepreneurship.

Often, procedures for start-ups can be abolished without any negative side effects. Three measures have shown to be particularly successful in this regard: (i) systematic procedures to review and cut business start-up requirements in terms of number of licences, procedures, and administrative fees; (ii) the introduction of fast-track mechanisms and one-stop-shops to bundle procedures; and (iii) the introduction of ICT-based procedures for businesses registration and reporting.