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The Guillotine That Helps People

March 17, 2011

Loup Brefort, Country Manager for Serbia, The World Bank

This article was published in NIN weekly magazine on March 17, 2011

Henry VIII used an interesting tactic in his quest to force Pope Clement VII to divorce him from his first wife Catherine of Aragon. The King of England swamped the Pope with paper – he sent over eighty petitions to Rome asking for the annulment of his marriage. The pile of those documents is stored, rolled and stacked, in the Vatican archives; each one sealed and bound with red tape, as was the custom in the 16th century.  Henry’s attempt failed but it made history, among other things, as the origin of the term “red tape”, meaning the collection or sequence of documents and procedures required to gain bureaucratic approval for something, especially when oppressively complex and time-consuming.

While Henry VIII didn’t succeed with his paper attack, many others did. Bureaucracies around the world carry the banner. Serbia is no exception. But why this matters?  Ultimately, “red tape” influences your living standards. Let me explain.

We do not live in a perfect world so some regulation is unavoidable and actually beneficial. But those regulations that impose unnecessary time-consuming paperwork and formalities on businesses have negative effects on economic performance: since time is money, they increase the cost of production; the difficulty of having to “jump the hoop” of the bureaucratic process can prove a real deterrent to entrepreneurs and, as such, discourage entry and reduce market competition; finally, many rules and regulations are drafted in a way that leaves too much room for interpretation. As such, they introduce an element of risk for the would-be investors that translates into a “risk premium” that either discourages them to invest, or makes their investment in Serbia more costly than it should. This also creates opportunities for corruption. Taken together, these obviously decrease potential for economic growth, investments, job creation and earnings. Thus, the well-being of the population and the ability of governments to fulfill important social needs hang strongly together with the ability of legitimate businesses to grow and prosper, without unproductive hindrances created by bureaucratic red tape.

What is going on in Serbia in that regard? Over three years ago the government initiated the regulatory review. The idea was to take stock of the laws and regulations, to analyze them, to recommend actions and implement them. The colloquial name for the process is a regulatory guillotine. In this process, 2024 laws and regulations were identified as impacting economic activity. Government invited the responsible regulatory bodies to justify the need to retain these pieces of legislation and called on all interested parties to propose changes or cancellation of laws and regulations negatively influencing the economy.

The result of the process was the government’s decision to call for amendments of 304 laws and regulations and the request to eliminate 192 regulations. The experts sat down and calculated that – if all the recommendations are implemented – businesses and economy in Serbia will save 188.7 million Euros annually, according to the Regulatory Reform Council. By the way, if subsidies of between 2,000 and 10,000 Euros per employee are required to attract investment the amount that the regulatory guillotine would save is equivalent to 94,000 то 18,000 jobs.

Let me give you some examples of the savings. Changing from daily to weekly cash transfer to the accounts saves businesses some 40 million Euros, according to a calculation by a Belgrade law office! If annual reports were submitted at one place, instead of two, businesses would save two million Euros. With only 12 changes in laws and regulations the Ministry of Infrastructure can save Serbia 50 million Euros, according to estimates of the Regulatory Reform Council! 

So far, so good. But what happened next?

Well, the bureaucracy doesn’t give up easily. So far, only 79 recommendations have been implemented through amendments of 20 regulations and 10 laws. It is estimated that this will save around 50.8 million Euros annually, which is only about a quarter of what can be achieved. The implementation of another 146 recommendations is under way and 93 haven’t even started.

But while authorities are trying to break the vicious circle of bureaucracy that loves paper perpetuum mobile, the Regulatory Reform Council is warning of another looming danger:  while old laws and regulations are slow to disappear, new ones pile up and introduce new costs and administrative procedures!   

Why is it happening when, in the case of regulatory guillotine, it takes only a stroke of a pen to make life easier and cheaper for businesses and economy? We can only presume that the main problem is essentially the unwillingness of the bureaucracy to give up its source of power and resistance of some entities to admit that they have outlived their “raison d’etre”.  The guillotine that would get rid of that system would be a good one!