Too many rules for business

About 25 states and jurisdictions in the United States have enacted some type of interior design legislation. These include ‘title acts' which regulate who can call themselves an interior designer, but do not prohibit anybody from practising as an interior designer, and ‘practice acts' which expressly prohibit anyone without a licence from practising the profession of interior design. There are similarly laws that regulate various other professions, including hair dressing, and even more narrowly, ‘hair braiding' and ‘wig specialists'.

These laws specify what classes you need and how many, the hours of practice you need to put in before applying, annual fees, etc. One can understand how some occupations that deal with health and safety (doctors, for instance, or a food vendor) need to be covered by a licence. They afford consumer protection, since you need to be sure that the person you are going to consult is qualified to do so, or that the place has some minimum hygiene and safety standards.

HIGH ENTRY BARRIERS

But hair braiding and interior design? In America's litigious society, past disputes may be driving some of this licencing-gone-mad behaviour. And the elaborate rules and procedures also raise the fees for the service, raise entry barriers, and reduce competition. There are forms to be filled, records to be maintained, licences to be renewed, enforcement taken care of, and so on.

When a system is designed, it is done so with some objectives in mind and as time passes, further regulations are added to it.

Regulations become ossified and sometimes irrelevant. Often, people cannot think of why a rule was instituted, groups emerge with a stake in maintaining the regulation, and no one wants to take the responsibility for changing it, so it continues.

The full length of the US tax code (both the law and the regulations that go with it) are estimated at about 16,500 pages! A safe platform for most politicians is to scream how they are going to simplify the tax code but nobody does anything. Perhaps they don't want to throw the tax preparers out of work!

MAKING THINGS EASIER

The US President announced in January this year a new push to ease regulations that are a burden on business. His motive is not only to save money for businesses, but allow more businesses to be formed. Since then, about 30 different departments and agencies have announced various proposals for consideration, and some have already made changes.

The Environmental Protection Agency has altered its rules so that dairy farmers will not have to follow the same rules as oil companies when they have a milk spill. The Occupational Safety and Health Administration has announced that it will reduce various reporting requirements that can save businesses several man hours of record keeping.

Rules and procedures can be a significant damper on entrepreneurship. That is why the World Bank has been tracking and publishing annual rankings since 2002 called Doing Business and these league tables provide a way of comparing countries and also tracking a country's performance over time.

INDIA'S POOR RANKING

The ease of doing business index this year has ranked countries from 1 to 183. For each country, the index is the average of its percentile rankings on each of the nine items that comprise the index.

These include: ease of starting a business, dealing with construction permits, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. In 2011, the US was ranked at number 5 and India placed 134. You just have to think about the number of times you go to the bank, or ration office, or the tehsildar for every thing to understand why India ranks so low.

To take stock of progress made over the years, this year's report introduces a new change score that provides a five-year measure of how business regulations have changed in 174 economies. These may include a reduction in the time to start a business, increase in investor protection, and so on. It is encouraging that there have been improvements in the ease of doing business in about 85 per cent of the economies.

POOR SYSTEMS

I recall a news item that appeared early this year. A private school in Bangalore had announced that it would issue only 300 application forms (for 150 seats) for admission to its Pre-preparatory Course beginning 8.30 am on a Saturday. Each form cost Rs 300.

A long queue of anxious parents and guardians began to gather outside the school soon after noon on Friday. An accompanying photograph showed people keeping their place in line while huddling under blankets through the night. The reporter described the long line of people as ‘patient and pensive'. I wondered why they were not irritated and restive.

Even keeping in mind that the school wanted to raise some revenue in the process of selling application forms, and perhaps wanted to be equitable in the distribution of forms, there are at least a dozen ways to deal with filling 150 seats without inconveniencing the public in this manner. Clearly, they had not thought through their admission process to design an efficient system. Stupid and irrational regulations are not the preserve of the government. We see them everyday in our lives and wonder.

As the IT specialists will tell you, designing a system to be both effective (meets its objectives) and efficient (maximises output with a minimum input) is a specialty. Any district collector or manager (or even headmaster) with a sheet of paper before her cannot design a system.

Many former colonies carry the burden of their old systems, which were designed to serve the purpose of their erstwhile masters. Based on distrust and need for control by an alien regime, they require multiple documents and signatures and are based on an assumption that the applicant or petitioner must be lying and has to establish his or her credibility each time. Moreover, confusing rules and procedures breed corruption as people look for ways to sort through the mess. If all these systems are re-designed and based on trust, they will unleash an enormous amount of productivity and innovation.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US. >blfeedback@thehindu.co.in ).

COMMENT NOW