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Red Tape in OECD countries: Challenges and Responses

This article discusses the concept of red tape and its impacts on businesses and governments. It explores the costs of red tape and highlights best practices in administrative simplification, such as one-stop shops, time limits on decision-making, licensing reduction programs, technological solutions, and special SME initiatives. Reducing red tape is crucial for regulatory reform and can have significant benefits for SMEs.

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Red Tape in OECD countries: Challenges and Responses

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  1. Red Tape in OECD countries: Challenges and Responses Cesar Cordova-Novion Deputy Head Regulatory Reform Programme Beijing, China September 2001

  2. What is red tape?

  3. Formalities are an integral part of modern economies • Formalities are the main link between authorities and businesses and citizens • Governments require standard information to implement regulations and provide public services and products • As policies become more targeted to specific issues and populations, the need for information increases • But many regulations abuse of ex ante “paper” controls (‘command and controls’) rather than controlling actual compliance and change of behaviors (performance-oriented)

  4. Main impacts of red tape • On businesses • Reduces economic efficiency • impose unnecessary costs (time & money) • divert resources away from productive investments • hamper entry into markets • Cumulative effects • Impedes innovation and business responsiveness • Discourages entrepreneurship • On government • Hinders achieving policy goals • Encourages informality and growth of the grey sector • Fosters corruption and discretionary abuses

  5. The cost of red tape (1) Represents around 4% of the Business Sector GDP OECD (2001) Businesses' Views on Red Tape Administrative and Regulatory Burdens on Small and Medium-sized Enterprises, Paris

  6. The cost of red tape (2) • On average, each SME spent US$27 500 per year complying with tax, employment, and environmental formalities. • Total costs split into tax (46%),employment (35%) and environmental (19%) formalities • Though the latter is growing rapidly. • An average cost of US$4 100 per employee, or around 4% of the annual turnover of companies. • The majority of companies (around 60%) reported that administrative compliance costs increased over the period 1998-1999.

  7. A dramatic “regressive effect” Annual administrative costs per employee by company size, average all countries

  8. Administrative simplification Best practices 1. One-Stop Shops 2. Time-limits on administrative decision making 3. Licences reduction programmes 4. Technological means of reducing transaction costs 5. Special SME activities

  9. 1. One Stop Shops • Reduce search costs • Improve awareness of requirements • Variety of delivery mechanisms • One-stop shops as licensing clearing-house • From single level access to inter-governmental co-operation • Though this raises delegation and overlap issues

  10. 2. Time limits on administrative decision-making • Statutory time limits enforces accountability • Consequences of failing time limits vary • ‘Silence is Consent’ • Change the burden of prove • But, can lead to disproportional harm from non-conforming activities without an enforcement and compliance upgrade

  11. 3. Licensing procedures • Rationalisation/reduction • Simplification • Information requirements • Attachments • From ex ante licensing to ex post control • Single identification number • Amalgamation of formalities • Central registry of all formalities with positive security • Quality certification of formalities

  12. 4. Technological means to reduce transaction costs (e-formalities) • Forms on-line (“dematerialisation”) • On-line on-way transactions (electronic signatures) • On-line two-way interchange (EDI) • Security dimensions

  13. 5. Special SME initiatives • Institutional support • Special flexibility measures (supply model) • Exemptions from requirements • ‘Vouchers’ to compensate administrative costs

  14. Red tape reduction is a powerful leverage for regulatory reform • Main beneficiaries are SMEs • Visible gains • Early gains • Easier than complex reforms of economic and social regulations • Linked to improvements of public administration and bureaucracy

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