Sweeping away outdated trade regulations improves competitiveness in developing countries

The quality of regulations and how well they are implemented play an important role in determining economic efficiency and trade and investment outcomes.  Yet few countries systematically review how regulations affect trade. This can often mean that outdated or redundant regulations unnecessarily restrict trade and undermine competitiveness.

Here’s an example: One relatively advanced developing country discovered a long-ago instituted ban on imports of broomsticks (presumably when that country had a problem with witches!) but which currently had no purpose at all. In other instances, ministries and agencies continue to use import permits to obtain information on the quantity and value of imported items, even though that information is now readily available from modernized electronic customs systems.

So, it’s important to ensure that regulations affecting trade are designed to achieve a clear policy objective and that government agencies and the private sector can effectively implement them. One country’s effort to protect its citizens from imports of toxic chemicals -- a genuine public policy objective -- is a case in point. While the country could easily ban imports of these chemicals in bulk form, it had no capacity to inspect and test imports of paints and other final products containing the toxic ingredients. The result:  While domestic firms saw their production costs rise because they could no longer use the toxic chemicals, products containing the chemicals were still being sold on the domestic market.

On the other hand, better regulation of trade does not necessarily mean less regulation.  Indeed, regulations play a critical role in facilitating trade. For example, technical regulations tell exporters the requirements their product must satisfy, and they also give domestic consumers confidence that their health and safety are not being compromised and that the product will do what it says it will do.

In some countries, the lack of standards and the capacity to enforce them impedes imports of renewable energy products such as solar panels. In this way, a lack of regulations can undermine competitiveness by preventing access to the productivity enhancing inputs and technologies that are available to competitors in better-regulated countries.  Similarly, a lack of laws and regulations, such as those for the protection of consumer data, can be a constraint to newer means of trade, such as e-commerce. 

The following are key steps that developing countries can take to enhance the regulation of trade and international competitiveness: 

• Review existing trade permits and licenses and remove those that are redundant or outdated.
   
• Set up a permanent committee to review all new regulations and to ensure inter-ministry coordination to avoid duplication of requirements. The committee would introduce regulatory impact analysis and a risk-based approach to regulation across government.
   
• Introduce an appeal mechanism, such as an ombudsperson’s office, to give stakeholders a chance to contest the decisions of civil servants that they feel are mistaken, unfair, or arbitrary.
   
• Identify capacity gaps that undermine effectiveness and efficiency of implementation.
   

The benefits of such reforms can be considerable. For business, they can bring higher productivity and improved competitiveness in international and domestic markets; for the economy, more investment, job, and innovation, and higher growth; for consumers, lower prices, improved quality, and wider choice.

South Korea is often cited as an example of fundamental regulatory reform that had a profound effect on the economy and on competitiveness and growth. In 1997, South Korea defined general principles of regulatory reform and required ministries to register all regulations, conduct an impact analysis on all new regulations, and conduct a comprehensive regulatory improvement plan every year. Each ministry had to prove the need for its regulations. By the end of 1999, the number of regulations had been reduced almost by half -- from 11,125 to 6,308, of which 2,411 had been modified.

Sometimes, a clean sweep is required. One country in eastern Europe reviewed the existing Law on Trade and concluded that more than half of its provisions needed change. As a result, decided not to change the existing law but to propose a completely new one.