In the report of the government’s Task Force on Economic Re-strategizing, of which I was a member, we wrote about the need to redefine the relationship between the government and the business sector.
As we think about the Bangladesh of the future, a future that would be crafted in the midst of significant turbulence in the global economy, we need to think about this important relationship.
In this article, I shall summarize some of the important aspects of that redefinition.
The first relates to one of the most important functions of government, ie, to regulate the economy. Regulations are needed to ensure that businesses, driven by a profit motive, not only create jobs and contribute to economic growth but do it in a way that promotes social goals, such as protecting the environment, ensuring workplace safety, good treatment of workers and provision of safe and good quality products.
But regulations need to be defined properly and enforced effectively. Otherwise they will lead to the worst of both worlds -- stifle entrepreneurial initiatives without delivering on the social goals listed above.
We need to move towards a more modern and effective regulatory regime if we want our businesses to grab the opportunities being thrown up by the turbulent global economy and also tackle the risks being generated. Such a regime will have streamlined regulatory interfaces, a disciplined way of writing new regulations and a forward-looking approach to identifying regulatory gaps.
Note that we are not talking about doing away with regulations or advocating minimal regulations. We are talking about smart regulations -- well-written and properly enforced regulations that clarify the rules of the game for businesses.
Businesses, domestic and foreign, constantly complain about regulatory hassles and uncertainty. Reform of the current regulatory regime is thus important. I would go further and say that it is urgent.
How do you carry out such reforms?
Regulatory reforms do happen in Bangladesh but at a slow and uneven pace. It is high time that we moved from an ad-hoc approach to a more strategic way of carrying out such reforms. We can’t leave this important agenda entirely to the whims of line ministries and agencies.
That is why in the Task Force report we recommended the setting up of a central body, such as a regulatory reform commission to drive the process. This needs to be a permanent, full-time commission -- not a large body, but a small, agile and technically sound office. It should carry out at least four important tasks.
First, it should review the existing stock of regulations, and identify rules and regulations that are redundant or problematic (and should thus be removed) and those that may stay but need to be refined.
Second, it should review the existing administrative procedures for complying with various regulations and recommend actions to streamline these, such as reducing the number of documentary requirements and steps involved.
These two sets of activities deal with current regulations. The next two are concerned with new regulations.
The third task of such a body is to suggest ways to improve the way new regulations are drafted. This is an important task. To draw an analogy, it is of little use removing the accumulated dirty water in a swimming pool if the pipes that bring in new water are dirty -- in no time, the pool will once again become full of dirty water!
The proposed body may advocate the use of regulatory impact assessments whereby line ministries proposing a new regulation must carry out an assessment of the proposed regulation, its likely benefit and cost (both the cost of enforcement by government and compliance by businesses) and the risk of any unintended consequences.
The assessment should clarify at the outset what is the problem that the proposed regulation will address and whether a regulation is the best way to address it (sometimes increased competition rather than regulation may be the answer). Such assessments need not be carried out for all regulations but the important ones to start with.
Although the line ministries must carry out these assessments, the commission may develop the methodology for doing these, provide training to the line ministries and assess the quality of the assessments.
Finally, the commission may identify areas where new regulations are needed. While we worry about the hassles created by existing regulations, we must also note that in some areas the problem is not too much, but too little, regulation.
This is particularly the case where businesses may want to introduce new technology and/or new business models and discover that the existing rule book does not have regulations that address such innovations. The lack of clarity about the rules of the game may discourage businesses from introducing such innovations. This is a loss for not just the businesses but even more for society.
The second important dimension of the government-business relationship that needs redefining is the provision of incentives to businesses.
The government provides a wide range of incentives to the private sector, from subsidies to protection against imports, from subsidized loans to tax exemptions. There is nothing wrong with this in principle. Many countries, especially in East Asia, have used incentives as an effective tool to steer private sector behavior in directions that helped advance important development goals.
But they ensured one thing. They attached performance discipline to the provision of incentives.
In our case, performance disciplines are absent or weak, or haven’t evolved over time. And that is why one of the recommendations of our Task Force on economic re-strategizing was to attach performance discipline to any support given to the private sector.
A concrete example will clarify what I am trying to say.
Let’s say the government wants the garment industry to increase its productivity or go into more value-added products, or it wants the pharmaceutical industry to invest more in R&D, or the electronics industry to upgrade its technology.
It may identify certain performance indicators that can assess progress on these fronts. It can then say that it will provide some support to these industries on the condition that they show progress towards these goals.
In other words, certain target values would be set for these indicators and support would be contingent on meeting these targets.
Such an approach is relevant for FDI too. South Korea is a great example of a country that strategically leveraged FDI to achieve important development goals by linking performance discipline to incentives. They did this with domestic investors too.
In summary, the government should use support to bring about change, not maintain the status quo as is the case now.
The final government-business relationship highlighted in the Task Force report is the role of government in enhancing competition in the marketplace. An economy becomes dynamic and productive when there is competition.
Bangladesh does have a Competition Commission tasked with this mandate. But, its capacity and effectiveness is low. Moreover, it has become a largely prosecuting body rather than an advocacy body.
An effective competition agency identifies bottlenecks to competition, identifies actions to address these and advocates within government the implementation of such actions. Our Competition Commission will have to become more effective as an advocate for enhanced competition.
To enhance completion, the government must enhance its knowledge of how markets function. Currently, government agencies often act in a knee-jerk manner when they see a problem in the marketplace, such as rapidly rising prices. The usual approach is to try to control prices, often by sending magistrates to impose fines on traders.
Time and again, we have seen that such pseudo-macho behaviour fails to produce results. To be more effective in steering market behaviour in a desirable direction, the government must understand the dynamics of demand and supply and the role of expectations in shaping market behaviour.
The Competition Commission may be a depository of such knowledge but other agencies must have at least some basic knowledge of market dynamics.
To conclude, the time has now come to re-think the way the government interfaces and interacts with the private sector. It can’t be business as usual.
Syed Akhtar Mahmood is an economist, previously with an international development agency.