Red Tape in OECD countries: Challenges

and Responses

Cesar Cordova-NovionDeputy Head

Regulatory Reform Programme

Beijing, China

September 2001

What is red tape?

Public Sector(developing, administrating

and enforcing)

Internal External

AdministrativeCompliance

Costs

Capitalcosts

Efficiency or Indirectcosts

Businesses Private Households

Private Sector(complying with regulations)

Economic burdens imposed by Regulations

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)

Main impacts of red tape On businesses

Reduces economic efficiency impose unnecessary costs (time & money)divert resources away from productive investmentshamper entry into marketsCumulative 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

The cost of red tape (1)

0%1%2%3%4%5%6%7%8%

% of Business GDP % of GDP

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

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.

A dramatic “regressive effect”

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1-19 employees 20-49 employees 50-499 employees

US

dol

lars

Annual administrative costs per employee by company size, average all countries

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

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

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

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

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

5. Special SME initiatives

Institutional support Special flexibility measures (supply

model) Exemptions from requirements ‘Vouchers’ to compensate administrative

costs

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