Thursday, February 20, 2014

Tangled: The rich world needs to cut red tape to encourage business

February 22, 2014

The World Economic Forum, which held its annual gathering of the great and the good in Davos last month, takes advantage of its privileged mailing list to quiz its members on a whole range of issues, including the burden of government regulation. Singapore has come out on top as the least burdensome for the past eight years (see chart 3), whereas many EU countries are bumping along near the bottom. Of the 148 countries surveyed in 2013, Spain was ranked 125th, France 130th, Portugal 132nd, Greece 144th and Italy 146th.

Americans who complain about the Obama administration’s unhelpfulness towards business will also note ruefully that over the past seven years their country has slipped from 23rd to 80th place. In a separate survey conducted by America’s National Federation of Independent Business, the proportion of those who thought regulation was their biggest problem rose from under 10% in 2009 to 20% late last year.

Broadly speaking, in recent years emerging markets seem to have been cutting their red tape whereas the rich world has been strengthening its regulatory regime. This is problematic at a time when developed countries are struggling to generate growth and when prominent economists are talking about “secular stagnation”, a long-term slowdown in the growth rate.

Martin Baily of the Brookings Institution conducted a series of studies to find out why productivity in specific industries was higher in some countries than in others. He found that regulation was an important factor, often holding back competition so that inefficient companies survived for longer than they deserved.

BusinessEurope, a lobby group, calculates that the administrative burden on business in Europe amounts to 3.5% of GDP. Around half of this is due to individual member states implementing EU regulations too zealously, a peculiar habit known as gold-plating.


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