Removing Administrative Barriers

1. Removing Administrative Barriers to Investment:Korean Regulatory Reform ExperienceJong Seok KimProfessor at Hong Ik UniversityMember of Regulatory Reform CommitteeRepublic of KoreaPresented at the World Bank GroupPSD Regional Training EventBangkok, ThailandApril 5-7, 2005

2. Removing Administrative Barriers • Cutting “Red Tapes” • Deregulation • Regulatory Reform

3. OECD Definition of Regulatory Reform • Regulatory reform refers to changes that improve regulatory quality, that is, enhance the performance, cost-effectiveness, or legal quality of regulations and related government formalities.Reform can mean revision of a single regulation, the scrapping and rebuilding of an entire regulatory regime and its institutions, or improvement of processes for making regulations and managing reform.Deregulation is a subset of regulatory reform and refers to complete or partial elimination of regulation in a sector to improve economic performance.

4. How Red Tapes Affect Investment: Cost • Regulation is a hidden tax. • Businesses must incur compliance cost. • Deregulation will have the same effects as tax cuts. • Regulation affects rate of return(ROR) on investment by raising costs. • High compliance cost is the real barrier to investment, not the volume of paper work.

5. Reduce Cost, not Paper Work. Recommendation 1: • Focus on reducing compliance costs. • Prioritize reform agenda by the compliance costs.

6. How Red Tapes Affect Investment: Risk • Regulatory uncertainties raise business risks. • Higher risks discourage investment. • Regulatory uncertainties come from • poor enforcement of rules, and • low quality regulations. Example: A survey by the Korean Chamber of Commerce in November 2004 shows that Korean businesses felt more pain from poor enforcement of the environmental regulations rather than strict environmental standards.

7. Low Quality Regulations are... • regulations with vague rules and unpredictable results. • regulations with low compliance. • regulations that cause excessive social costs. • regulations that are unfair to honest people. • regulations that are redundant and overlapping.

8. Elements of Regulatory Quality • Vague rules and procedures with wide discretionary power of regulators – source of abuse and corruption as well as uncertainty • Low compliance is the result of: • loose enforcement; • unrealistic standards or procedures. Regulations with low compliance are worse than no regulation.

9. Elements of Regulatory Quality • Unfair to honest people • some regulations are based on “presumption of guilt” that regulatees are unreliable and potential violators • prohibition in principle, permission in exception • Redundant and overlapping regulations • Different offices in the government demand similar reports or similar inspections. • Multiple jurisdiction over the same activity.

10. Improve Regulatory Quality Recommendation 2: • Make rules and procedures more transparent and predictable; • Make requirements and standards more realistic and easier to meet; then • Improve compliance. • Make overlapping regulations unified into a single combined regulation.  this will reduce business risk, compliance costs, and corruption.

11. Why Low Quality Regulations Take Place • It is not a matter of some incompetent bureaucrats. There is a more fundamental structural reason. • Government agencies are always constrained by shortage of personnel and budget. • To overcome this constraint, ministries tend to resort to regulatory methods to achieve their policy goals.

12. Why Low Quality Regulations Take Place • Private sector’s compliance costs are not borne by regulators. There is a structural bias in favor of costly and excessive regulations. • Moreover, regulators are given a carte blanche in regulatory design and enforcement, unlike personnel and budget allocation. • There is a need for third-party check on introducing and enforcing regulations.

13. Make a Permanent System of Quality Control Recommendation 3: • Control regulatory quality by an independent body in government. It should be independent from line ministries. • Make regulatory quality control a part of government administrative function.

14. Korean Regulatory Reform: Background • In 1997, South Korean economy was hit by the Asian financial crisis. • Four major sectoral reforms were launched to overcome the crisis. • Financial sector reform • Labor market reform • Corporate sector reform • Public sector reform • The four sectoral reforms were regulatory reform in broad sense.

15. Korean Regulatory Reform of 1998 • There were 11,125 regulations as of January 1998. • President ordered to eliminate 50% of existing regulations within a year: “Guillotine Approach” • Each ministry had to prove the need for its regulations before Regulatory Reform Committee (RRC) during the process. • By the end of 1999, the total number of regulations in Korea decreased to 6,308; 2,411 regulations were modified. • Virtually all areas of Korean economy and life were affected.

16. The Economic Impacts of the Reform All numbers are projected numbers.

17. The Economic Impacts of the Reform All numbers are projected numbers. Source: Byung Ki Ha(1999), The Economic Effects of Korea’s Regulatory Reform (in Korean), KIET

18. The Basic Act on Administrative Regulation • The Basic Act on Administrative Regulation (BAAR) was enacted by the Legislature(1997). • BAAR requires: • Establishment of Presidential Regulatory Reform Committee • Registration of all regulations • Mandatory Regulatory Impact Analysis(RIA) on all new and important regulations • General principles of regulatory reform • Comprehensive Regulatory Improvement Plan by each Ministry each year

19. The Presidential Regulatory Reform Committee • Presidential Regulatory Reform Committee (RRC) was established in 1998. • RRC is under the President and chaired by the Prime Minister and a civilian co-chairman. • RRC consists of 20 members, 7 of them cabinet ministers. • Civilian members are appointed by the President for two year term.

20. RRC’s Major Functions • Establish the basic policy guidelines on regulatory reform and quality control across the government. • Review proposals for new or strengthened regulations • Examine existing regulations • Register and publish regulations • Examine current status of regulation in Ministries and Agencies

21. RRC’s Review Process • All introduction and strengthening of regulations must go through a review process by RRC. • All proposals must attach a RIA document. • Proposing ministry should prepare RIA. • All law, by-laws, administrative orders, decrees are reviewed. • RRC maintained consistent set of principles to control the quality. • About 1,000 regulations go through RRC review each year.

22. RRC’s Review Principles Economic regulations are to be deregulated, while social regulations are to be made more efficient. The method of regulations will change from a negative system (where actions are prohibited unless exemptions are made) to a positive system (where actions are permitted with simple registration or notices, and prohibited actions are clearly spelled out). Transparency of regulations will be increased. Excessive discretion by field-level bureaucrats will be reduced. Regulations with low compliance rates, or regulations whose costs outweigh the benefits will be eliminated. Overlapping regulations will be unified into a single combined and unified regulation. Regulations which are contrary to international agreements and global standards will be eliminated.

23. Lessons from Korean Experience:Success Factors • Economic crisis was needed for regulatory reform to gain support and momentum. Political support for the reform was also built on the popular campaign to save the economy and to wipe out corruption. • Making regulatory reform a part of government function was important, both in institutions and in the administrative procedure law. • Regulatory quality was controlled by an independent agency at the center of government who could check the “pro-regulation” tendency of ministries.

24. Lessons from Korean Experience:Challenges • Regulatory reforms in Korea focused mostly on legal changes, not actual implementation of those changes on the ground. • The Korean reform focused on reducing the number of regulations with little attention to compliance costs. • Lack of reform at the local government level undermined visible benefits for citizens. • The Korean reforms tackled individual rules rather than interlinked groups of rules.

25. Consider “Guillotine Approach” Recommendation 4: • Let the regulators prove the need for their regulations, or they lose their regulations.

26. Concluding Remarks “Regulation is like growing old: we would rather not do it, but consider the alternative” • - William G. Shepherd - • We cannot eliminate “red tape” entirely. Improve the quality, and make it easier to comply. Learn to live with it. • Private sector’s ability to maintain market principle and order is not a prerequisite for deregulation. It is a consequence of deregulation.

27. There are two ways to cut “red tapes”. Across the tape (right way), or Along the tape (wrong way) Thank you!