When regulation chokes business and growth

Regulation is a tricky business. You can want more and less of it at the same time, even while trying to meet the same objective. For instance, we all want to be assured of safe air travel. So regulations that set standards for aircraft maintenance and pilot training, what passengers carry on board, and so on, are designed with an eye on safety, and we want them.

Yet, when we wait in line for a security check, we may well wonder if throwing away what is obviously a bottle of perfume because it is in a bottle slightly larger than the approved size is really going to lower the probability of this plane being bombed.

What that suggests is that even regulations that begin with noble intentions have a way of slowly going awry. They take a life of their own, growing and expanding wherever there is conducive space, much like the grass in the garden. You want it where you have reserved space for the lawn, but you don't want it between your pretty flowering shrubs.

Curbs on business

Businesses have a particularly hard time when it comes to meeting regulations. It pushes up costs of operations while trying to meet standards, making the firm less competitive, apart from tying up staff time to get permits, licences and file reports of compliance.

It is also discriminatory; only the large organisations have the money and stomach to deal with onerous regulations. They can afford the staff required to keep records and file reports. Small firms would drown in these requirements and look for ways to go around.

Regulations can also work against the interests of national development. For instance, when benefits are given to small businesses because they are small, size is defined in terms of sales revenue or numbers of people employed. This becomes an effective deterrent against growth; the thought of losing the benefit or operating to different standards can effectively result in the business staying small, and not crossing the threshold level. The nation sacrifices growth.

While on the one hand we celebrate small and entrepreneurial firms for their ability to create jobs, the number of regulations and permits that we pile on them can deter any but the bravest entrepreneur. Economists have shown that some countries such as Spain and Portugal that have an overwhelming number of small firms also suffer from low productivity because of regulations acting like a tax on firm size. Greece has rigid job rules and restrictions on land rules that prevent small firms from reaching an efficient scale of operations.

Relief for small players

The governor of Massachusetts recently called for the review of over 800 regulations across 60 state agencies. Based on the on-going review, he decided to eliminate, or revise over 150 requirements that affect small businesses. These include rules that required multiple permits for sewer lines (reduced to one), and what size bass (a type of fish) can be caught by fishermen.

He has now required that no new regulation should be approved by any agency without consulting the small business community, and without asking questions like ‘will this deter or encourage formation of business?' During the review, sometimes, nobody could explain to the officials what the rule was meant to achieve! The governor is quoted as saying, ‘Let's focus on what's necessary and stop doing what's not.'

The President, Mr Barack Obama, has also taken on a similar challenge. In the last couple of years, the federal government and Congress came in for a lot of criticism for having repealed laws that loosened restrictions on banks that are widely believed to have laid the ground that resulted in the 2008 financial crisis. Under these conditions, it would take a lot of courage to exempt firms from financial regulation.

Yet, that is what the Congress has done, with the President's support. Young companies have been exempted from reporting rules of the Securities and Exchange Commission in order to reduce costs and make it easier to raise capital. Smaller companies will be allowed to go public to raise capital sooner.

The World Bank publishes league tables on the ease of doing business by listing out the time taken to undertake various key activities. Brazil, one of our high-growth countries, recently started a clean-up of some of its regulations that is keeping the country at a rank of 120 out of 183 countries. Definitely too low for a BRIC!

HYC form?

Regulations are at the top of my mind now. I am not running a small business but I just completed a set of forms that the Reserve Bank of India site tells me is to prevent money laundering. As per the euphemistically called KYC or ‘know your customer' norms, I am required to provide very confidential information, including account numbers, specimen signatures, photo, contact information, copies of passport, address proof, etc. all in one form. Clearly designed by somebody who hadn't had their first cup of coffee in the morning. I am threatened that my account will be frozen if I do not comply by a certain date. I have done this once before but bank rules require it to be updated regularly.

I cannot for the life of me understand why my bank cannot selectively identify large customers prone to money transfers, a more likely group for money laundering. Moreover, all this information placed on one form lends itself to leakages, stolen identity, and so on.

I couldn't find any report on whether any money laundering effort been prevented since these were instituted? At least till such a review is undertaken, the RBI may be better off calling this the HYC form, to stand for Harass Your Customer.

(The author is professor of International Business and Strategic Management at Suffolk University, Boston, US.)

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