Semi-Imaginary Red Tape

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Businesspeople complain that government regulations keep them from doing the necessary work of business. In some cases, this is a legitimate complaint. In other cases, it is an illegitimate complaint.

    

There are countries with corrupt officials who create the maximum possible amount of arbitrary red tape. Their goal is to intentionally slow down the process of the normal business in the hope that they will be paid to get out of the way.

    

There are countries with perfectly honest officials who can’t be bribed. They may however, be inefficient. Perfectly reasonable technocratic reviews may require weeks or years to be completed. Business opportunities wither on the vine because the entrepreneur is waiting for approvals.

    

There are also countries with perfectly honest officials who get their work done quickly and in short order. Owners and managers complain anyway because they don’t like paying fees or obeying rules.

    

All of these settings will produce businesspeople who complain about “big government” and “an excessive regulatory environment”. In the first setting, they are complaining about very real issues. In the second setting, their issues may be legitimate as well. In the third setting, there is a lot of empty whining.

    

The open question remains, when businesspeople complain about regulatory burdens, how much of this is real and how much of this is bellyaching?

   

There is a new and elegant study by Marcus Kurtz and Andrew Schrank that speaks to this issue. In their article “The Social Construction of the Regulatory Burden: Methodological and Substantive Considerations” in the March 2021 issue of Social Forces, Kurtz and Schrank examine the ratings of regulatory burdens that are given to countries based on the World Economic Forum’s Executive Opinion Survey. This survey asks 100 business leaders in each of 151 countries to rank the extent to which the regulatory regime of their country is burdensome or not burdensome for business. The survey is repeated every year; Kurtz and Schrank were able to obtain the data for each of the years between 2005 and 2015. That provides a lot of data on executive opinions which can be analyzed.

    

Kurtz and Schrank had the methodological goal of assessing whether standard indicators of regulatory burdens are valid. This has implications for the work of a number of other social scientists who use data on “regulatory burdens” to run equations predicting economic growth or political outcomes. If the data on regulatory burdens is questionable, it casts doubt on the various studies that have been published using this measure.

    

The average reader won’t care about whether the articles in political science journals were properly done or not. However, it is worth knowing if when business people complain about regulatory burdens, whether those complaints are bona fide or not.

    

The basic finding is that many of the perceptions of businesspeople are accurate. However, owners and managers have biases. These biases lead them to exaggerate regulatory burdens under a number of circumstances.

    

What do businesspeople get right?

1. The greater the cost of registering a business, the more businesspeople complain about regulatory burdens. Seems reasonable.

2. The greater the number of days it takes to register a business, the more businesspeople complain about regulatory burdens. Also reasonable.

3. The greater the number of procedures that are needed to start a business, the more businesspeople complain about regulatory burdens. Fair enough.

4. The longer each starting-a-business procedure takes, the more businesspeople complain about regulatory burdens. Time is money. Regulations that take time cost money.

    

So far, so good.

However, businesspeople also complain about regulatory burdens on the basis of considerations that have nothing to do with regulations or inefficiency at all.

1. The poorer the country, the more businesspeople complain about regulatory burden. Regulatory burdens did not make Peru poorer than Switzerland. Peru is poorer than Switzerland for other reasons. However, when businesspeople are unhappy about the state of the economy, they do more general all-purpose bellyaching about government regulations. So, businessmen in poor countries complain a lot about their governments, even when their objective costs of doing business or the number of procedures required is  not large.

2. Similarly, when the economy is going down, businesspeople are more likely to complain about regulatory burden. Government regulations do not produce either business booms or recessions. However, during booms, businesspeople like their regulatory regimes. During busts, businesspeople hate their regulatory regimes.

3. When inflation is high, businesspeople complain about regulatory burden. Government does help to produce inflation. Excessive government spending will cause inflation. Inappropriate monetary policy will cause inflation. However, routine government regulation does NOT cause inflation. Economies go from inflationary to non-inflationary periods. The basic structure of government regulations tends to remain the same. Relatively constant and consistent labor laws or safety laws do not move an economy from non-inflationary to inflationary. Bad central bank policy or mismanagement of foreign reserves can move economies from non-inflationary to inflationary. “Government regulations” are often a scapegoat for other actions governments take that are more realistic causes of inflation problems.

4. Businesspeople in democracies complain more about regulatory burdens than do businesspeople in more dictatorial states. The exact causal mechanism behind this relationship needs further exploration. It could be that businessmen in autocracies just complain less because complaining in autocracies gets you into trouble. It could be that military strongmen are perceived as being friendly to business. It could be that there really is more corruption in democracies than in dictatorships. (Scholars disagree about the latter point.) Regardless of the causal mechanism involved, businesspeople do complain more about government regulations in countries with free elections. They do so even if their regulatory burdens are not high.

5. Businesspeople under Leftist governments complain more about regulatory burdens than to businesspeople in more right-wing countries. This is clearly not about regulatory burdens and more about the direction of government policy overall. Leftwing governments are more likely to tax business. Leftwing governments are more like to raise minimum wages. Leftwing governments are more likely to support labor unions. Leftwing governments are more likely to impose environmentally friendly policies. None of this involves how much paperwork there is, or whether government officials are efficient or inefficient. If anything, business would prefer that Ministries of the Environment or Ministries of Labor be inefficient rather than efficient, because they would prefer not to have environmental laws or labor laws enforced. “Corruption” and “inefficiency” become conflated with the progressive or not progressive content of social policies. If you are leftist, you are corrupt.

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So what does all this mean?

If businesspeople are complaining about regulatory burdens, their complaints have to be taken with a grain of salt. They may be reacting to legitimate bona fide corruption or government inefficiency. They may be just complaining about the state of the economy as a whole. Or they may be complaining because leftists are in power.

 

You have to have to look behind the surface to understand what is going on.