58694 2009 Investment Climate Advisory Services World Bank Group Funded through FIAS, the multidonor investment climate advisory service Copyright © 2009 The World Bank Group 1818 H Street, NW Washington, DC 20433 All rights reserved June 2009 Available online at www.fias.net The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint, please send a request with complete information to: Copyright Clearance Center, Inc. 222 Rosewood Drive Danvers, MA 01923, USA t. 978-750-8400; f. 978-750-4470 www.copyright.com All queries on rights and licenses, including subsidiary rights, should be addressed to: The Office of the Publisher The World Bank 1818 H Street, NW Washington, DC 20433, USA f. 202-522-2422 e-mail: pubrights@worldbank.org The Investment Climate Advisory Services of the World Bank Group helps governments implement reforms to improve their business environments and encourage and retain investment, thus fostering competitive markets, growth, and job creation. Funding is provided by the World Bank Group (IFC, MIGA, and the World Bank) and over 15 donor partners working through the multidonor FIAS platform. The Organizations (IFC, MIGA, and IBRD), through FIAS, endeavor, using their best efforts in the time available, to provide high quality services hereunder and have relied on information provided to them by a wide range of other sources. However, they do not make any representations or warranties regarding the completeness or accuracy of the information included in this publication. The findings, interpretations, and conclusions expressed in this publication are those of the author and do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. Cover photo credits: globe­Patricia Hord Design (also appears on chapter opening pages); photo inserts (left to right)­Agata Urbaniak/stock.xchng; Curt Carnemark/World Bank; Curt Carnemark/World Bank; Ilco/stock.xchng. June 2009 Acknowledgements This report was produced by a team led by of Economics), Andrew Bennett (Georgetown Gokhan Akinci and Peter Ladegaard of the University), and Tom Kenyon (World Bank multidonor Investment Climate Advisory Group consultant). In addition, the project Services of the World Bank Group. It was benefited from the inputs of Laszlo Csaba, produced as a synthesis of important lessons Zsofia Czoma, Imre Verebelyi, and Hungarian derived from case studies about Hungary, the refugees who wish to remain anonymous Republic of Korea, Mexico, and Australia/Italy/ the United Kingdom. The team designed the The team is grateful for comments provided by approach and provided inputs for the cases and Etienne Kechichian, Kathy Lalazarian, Gregory synthesis, which were authored by a team at Kisunko, Joel Turkewitz, Randi Ryterman, Scott Jacobs and Associates: Cesar Cordova, Stoyan Tenev, Andrew Stone, Roger Grawe, Jong Seok Kim, Tae Yun Kim, Junsok Yang, Vivien Foster, Bernard Drum, Jose Eduardo L. Scott Jacobs, Ali Haddou-Ruiz, Carlone Varley, Campos, and Warrick Smith. Rex Deighton-Smith, and Luigi Carbone. Neil Roger, Suzanne Smith, Nigel Twose, and The team was comprised of Gokhan Akinci, Sunita Kikeri provided guidance to the team in Peter Ladegaard, Vincent Palmade, Fatima designing the approach. Paul Holtz, Alison Shah, Zenaida Hernandez, Ksenija Vidulic, and Strong, Patricia Steele, and Amit Burman Delia Rodrigo Enriquez. The report benefited provided editorial support and comments in from the contributions from external experts on finalizing the draft for publication. the topic: Michael Barzelay (the London School ii Contents Executive Summary ............................................................................. 1 1. The Search for Effective Reform....................................................... 5 2. Defining and Measuring Effective Reform........................................ 8 Defining Effective Reform 8 Measuring Effective Reform 10 3. Summary of Reforms in Six Countries ........................................... 12 Hungary 12 Republic of Korea 15 Mexico 15 High-Income Countries 15 Australia 15 Italy 16 United Kingdom 16 4. Drivers of Change: Theory and Experiences ................................. 17 Globalization or Competitiveness 18 Crisis 19 Political Leadership 19 Unfolding Reform Synergies 22 Technocrats 23 Changes in Civil Society 24 External Pressure 25 5. Critical Factors for Successful Reform ............................................ 26 Exploiting Drivers of Reform 26 Setting the Reform Agenda 27 Implementing Reforms 30 Monitoring Reforms 32 Sustaining Reforms over the Medium Term 33 6. Lessons for Reformers .................................................................. 35 References ......................................................................................... 39 Acronyms and Abbreviations ............................................................. 40 iii Tables 1 Drivers of Regulatory Reform in Hungary, Mexico, and the Republic of Korea ........... 4 2 Regulatory Reform Timeline in Six Countries ........................................................ 13 3 Key Drivers of Regulatory Reform in Six Countries................................................ 20 4 Critical Factors for Reform Success in Six Countries.............................................. 28 Box 1 What Are the Drivers of Change? ........................................................................ 2 iv Governments around the world are basing their This paper focuses on core aspects of the political economic development and poverty reduction economy of reform, drawing on case studies of strategies on efforts to expedite and expand three economies transitioning to stronger reforms that improve their countries' business envi- business environments (Hungary, the Republic ronments. Reforms of the "enabling environment" of Korea, and Mexico) and three countries with have become the norm in developing countries well-developed business environments (Australia, seeking higher, sustainable growth. The enormous Italy, and the United Kingdom). The purpose is inefficiencies constraining growth must be ad- threefold: first, to identify so-called drivers of dressed mainly at the microeconomic level, such as reform among successfully reforming countries; through broad legal and regulatory reforms. second, to explore how a reform strategy can make optimal use of the opportunities provided Yet broad reforms are difficult to implement and by the drivers of change; and third; to suggest sustain. Successful reform requires overcoming how these lessons can be proactively used by vested interests in the public and private sectors, other reformers to design and guide reforms. fears of change, and the complexities and uncertainties of change in dynamic economic The case study findings suggest that, regardless and social environments. of the content of reform, success is influenced In recent years, considerable knowledge has by an evolving mix of seven drivers of change: been accumulated on implementing successful i) globalization or competitiveness; ii) crisis; regulatory reforms in developing countries, iii) political leadership; iv) unfolding reform including a body of research based on the synergies; v) technocrats; vi) changes in civil experiences of the World Bank Group's Doing society, and vii) external pressure. (See Box 1 for Business and FIAS programs. The case-study a short description of the drivers, and Table 1 at evidence documents the factors leading to good the end of the Executive Summary for an outline reforms and the results of these reforms. of how they played out in the subject cases.) BO X 1 What Are the Drivers of Change? Drivers of change are forces within a country's political economy that expand opportunities for reform. The seven main drivers of change are: Globalization or competitiveness. As capital and corporations move more freely across national boundar- ies, governments are forced to engage in regulatory competition. Crisis. Crisis, or a sense of impending crisis, can be important at the start of reforms and can provide an opportunity to stimulate action. Political leadership. Whatever the other drivers, political leadership is the yeast that makes them rise. Opportunities for reform are maximized when crisis leads to political shakeup. Unfolding reform synergies. Market-oriented reforms in one area can increase pressures for reform in other areas--and even change the political economy so that voices for reform emerge. Technocrats. Reform can be driven by technocrats--that is, politicians and senior civil servants with training in economics or other fields who develop rational policies to lead the country forward. Changes in civil society. Reform is not a task only for governments, even in countries with weak civil societies. Other stakeholders, such as firms and workers, can help build and sustain support for reform. External pressure. External commitments and pressures are often essential to reform, even in developed countries. External obligations allow reform-minded governments to shift responsibility--and hence the political costs of reform. The paper then asks how a reform strategy can crisis. The case studies provide little support for make optimal use of the opportunities provided the "champion" model of reform.1 by the drivers of change. The case studies suggest that few factors are truly exogenous. The studies show a similar pattern in how With proper sequencing, governments can do a drivers of change were sequenced: lot to create conditions for change. Step 1. A crisis, or a sense of impending crisis, or pressures from external obligations The case studies also suggest that reformers can were important at the start of reforms. influence the direction and pace of change by These drivers redefined the political econ- mobilizing and exploiting drivers of it. Rather omy of launching change, weakened defend- than a cause-and-effect scenario in which a single ers of the status quo, and emboldened driver--such as a crisis--creates and defines the reformers inside government. success of a body of reforms, what happens is an unfolding series of events in which various drivers Step 2. The first wave of reforms came only become more and less important in defining when politicians set reform agendas without phases of the reform process. For example, by regard for traditional insider interests. itself crisis does not create reform, nor does Agendas were imported from other countries, political leadership. Although reformers often or politicians permitted reform-minded applaud crisis, it is a risky approach to reform if it technocrats to define the specific goals and is not quickly supported by other drivers. More- content of reforms--sometimes in a "stealth" over, reforms launched on the back of a crisis are mode that caught opponents off-guard. difficult to sustain, and there is no guarantee that 1 The "champion" model of reform uses a single strong leaders will make the right decisions in the face of reformer to achieve sustainable results. Step 3. The first wave of bold reforms increased reform to succeed. Weakness in one area may momentum for further change by creating be compensated for in another area. new pressures and allies, and new institutions Active management and support of the were built that gave technocrats more power reform process are essential, primarily through and influence. Reforms were embedded in dedicated, day-to-day leadership in the public international agreements, limiting backtrack- administration. Governments that strength- ing. And some reforms increased the costs of ened capacities for promoting, monitoring, not reforming. For example, opening markets encouraging, and assisting reforms across the led to deeper domestic reforms as domestic entire administration seemed to do a better businesses faced external competition. job of implementing them. Step 4. Reforms became sustainable only Implementation is stronger when there is when they were institutionalized into the continuous learning. It is important to machinery of government and constituen- benchmark based on good practices in cies for change were mobilized and included similar countries and to assess, pilot, inno- in policy processes. Reforms were more vate, and learn from past experiences. successful when governments built wider Monitoring and evaluation at all levels of networks of reform-minded institutions implementation should be a priority in throughout the public administration. order to capture a complete record of past experience to improve upon. How these steps unfold defines the reform path. Strategically exploiting successive drivers of Aim for systemic change, but use one-off change appears crucial to achieving sustainable reforms to build momentum. One-off and reform. This does not suggest that the reform visible projects can contribute to systemic path can be controlled or even anticipated, since change. Early results help build credibility much that happens is beyond reformers' control. and momentum, and success breeds success But it does suggest that better understanding of Put transparency at the heart of the process the drivers of change and their sequencing can and reform contents. Transparency is not increase the chances of broad, successful change. only a tool for strengthening reform drivers, This paper concludes with a series of recom- it is also crucial in reducing regulatory mendations on how these lessons can be applied risks--one of the main goals of reform. Strict proactively in the design and management of adherence to principles of transparency and reforms. Among the most important: accountability is vital to market confidence in a modern regulatory state. Reforms should Use a crisis (if available) to stimulate reform, include developing new transparency habits but sustain reform by locking in political across the public administration. New leadership and bipartisan political support technologies such as electronic registries can through formal agreements, legislation, also support openness, and at lower cost. international agreements, and new institutions. These case studies primarily focus on reform dynamics, rather than the technical aspects of the Success factors seem to be interrelated--more applied regulatory reform tools, procedures, and successful governments seem to invest simul- techniques. Knowledge about the relevance and taneously in strategies such as managing the adaptability of these tools, however, is as critical for reform program, ongoing public-private successful reform as the reform dynamics described dialogue, and results monitoring. All these in this paper. For further guidance on regulatory factors do not have to be highly developed for governance tools and their application for transitional and developing economies, please adapting regulatory governance tools such as consult www.fias.net for activities under the Better Regulatory Impact Analysis, tools to review the Regulation for Growth (BRG) program. The BRG regulatory stock, regulatory reform institutions, and program focuses on synthesizing, reviewing and indicators for regulatory quality. TAB LE 1 Drivers of Regulatory Reform in Hungary, Mexico, and the Republic of Korea Driver Hungary Korea, Rep. of Mexico Globalization Reform was triggered by the To increase foreign direct invest- In the 1980s competition for interna- or competitive- need to create a market- ment, reforms had to remove explicit tional capital and investment was ness based economy and join the investment barriers and excessive growing, and leaders saw the benefits European Union. regulations. of liberalizing trade for assembly plants exporting primarily to the U.S. market. Crisis An unprecedented change The 1997 crisis produced the most In the 1980s a collapse in oil prices in political regime and painful economic contraction in and default on massive external debt, collapse of the economy OECD history: 1998 was the first followed by five years of economic created new elites and year since 1979 in which Korea stagnation, triggered privatization, growing expectations for had negative growth. trade liberalization, and regulatory real change. reform. Political Successive prime ministers The president elected in 1997 The president and a small group of leadership actively backed reforms to supported reforms. The National advisers initiated extensive reforms secure democracy, the rule Assembly provided support by using a top-down approach based on of law, open markets, and enacting legislation needed to traditional command and control eventually EU membership. implement them. mechanisms. The resulting backlash slowed reforms. Unfolding So many reforms were Initial top-down reforms produced Market-opening reforms increased reform launched in such a short impressive results, but lack of stakeholder pressures for economic synergies period that reform could be incentives for regulatory reform liberalization, which increased public slowed, but not stopped-- within the government slowed further sector capacity for good regulation. without disaster. reforms after a few years. Technocrats The strongly independent, The Regulatory Reform Committee-- In 2000 an agency was created in the professionally staffed staffed partly with academics, Ministry of Economy to impose quality Hungarian Competition supported by civil servants, and and transparency on the public sector, Office played a vigorous co-chaired by the prime minister--is and highly trained technocrats role in privatization. responsible for examining new and (economists) had legal authority and existing regulations and maintaining political backing to drive reforms regulatory quality. Changes in Reform was legally based, Political support for reform was built Early reforms were not transparent, civil society with active involvement by on a popular campaign to eliminate which limited reformers' ability to gain Parliament and extensive corruption, which coincided with an support from private stakeholders. Later, consultation with stakehold- upsurge of NGOs focused on the as political support wavered, special ers such as businesses, trade issue. In the 1990s NGOs grew private bodies were created to oversee unions, and disadvantaged very quickly: by 2000 there were the reforms and provide sustained social groups. up to 8,000, providing a new force support. for political change. External Close relationships between OECD membership brought new Mexico's close relationship with the pressure government officials and demands for openness and good United States--cultivated through outside think tanks and regulatory practices. In 1997 the NAFTA--helped it recover quickly from international organizations government, in cooperation with the the 1995 liquidity crisis. helped reforms through IMF, began deregulating the inflows of new ideas, shared financial sector. experiences, and funding. Note: This table itemizes the drivers of reform in the three developing countries only. Governments everywhere are basing their private sector performance. In countries with economic development and poverty reduction legacies of instability, rent-seeking behaviors, strategies on efforts to expedite and expand excessive government intervention, and weak reforms that improve their countries' business public and market institutions, better private environments. Such broad reforms can be sector performance demands better performance difficult to implement and maintain across the by the public sector as well--particularly in how entire public administration and over several the public sector relates to the private one years. through its legal and regulatory functions. Reforming these functions is part of the body of What strategy for broad regulatory reform reforms sometimes referred to in discussions of maximizes the chances for genuine, enduring the "enabling environment" for private sector success in environments hostile to reform? And performance. how can a reform strategy best use the opportu- nities provided by drivers of change? This paper This paper does not review why reforming the provides a qualitative assessment that links enabling environment is important. The role of exogenous factors with the choices available to such reforms in stimulating economic perfor- each government. It concludes that very little is mance through productivity growth has been truly exogenous, and that success involves widely analyzed. It is sufficient to note that, just changing what can be changed and using what as regulatory reform became the norm for cannot to best advantage. microeconomic policy in the 1990s in Organisa- tion of Economic Co-operation and Develop- Successful development depends on making the ment (OECD) countries, reforms of the right changes quickly, and achieving better enabling environment have become the norm in outcomes than have been achieved through the 2000s in developing countries seeking previous approaches. Achieving sustained higher higher, sustainable growth. The enormous growth requires fundamental improvements in inefficiencies holding back growth must be addressed mostly with microeconomic rather As a result, reformers often tackle the easiest than macroeconomic policy. or most isolated issues, with marginal and unsustainable results. The obstacles to successful reform are equally familiar. To succeed, reform must overcome For these reasons many attempts at reform have vested interests in the public and private sectors, been disappointing. Results have usually failed to fears of change, and the complexities and match expectations, leaving reformers exhausted uncertainties of change in dynamic economic and disillusioned. Reformers often underestimate and social environments. For three reasons, or are intimidated by the scale of problems, and transforming how the public sector conducts its isolated, one-off reforms usually do not produce regulatory and administrative functions is lasting benefits for the private sector. extremely difficult: Those who believe that public sectors in devel- First, it is a far-reaching agenda, requiring oping countries are slow to act have never governments to make the transition from considered the regulatory function. In 2005, state- to market-led growth. Transformation Kenya's government estimated that there were of the public sector goes beyond changing up to 600 business licensing requirements. In policies and legal mechanisms, because the 2006, it became clear that businesses actually role and style of regulation in society are suffer from more than 1,300 licensing and other deeply embedded in traditions, capacities, fees imposed by 178 state bodies. Moldova's interests, and the distribution of power. reformers originally estimated that its 67 Making extensive change to the regulatory inspectorates had created 300­500 regulations function stretches from legal instruments to for businesses; the actual number was more than government institutions, processes, and 1,100, many illegal and never published.2 capacities--and even further, to the rule of Reforms aimed at achieving single processes and law and changing relationships between the rules will never catch up with the capacities and state, markets, and society. Because the incentives of governments to create regulations culture of governance is relatively path- and controls. The issue is systemic in nature. determined, reforms can often be reversed or ignored. The challenge is to find ways swift ways of changing the complex system of instruments Second, existing incentives strongly favor and behaviors, enabling the economic growth the status quo. Interest groups inside and needed to achieve the ambitious poverty reduc- outside the public sector have organized it tions promised and sought in many countries. for their benefit. Reform often encounters There are always lags between market and legal massive resistance, both passive and orga- changes, but the lags need to be shortened so nized, that delays implementation or that legal systems catch up with market needs. undermines its results. Governments that have managed to effect Third, capacities and strategies for change meaningful reforms have reaped the benefits. are often insufficient. Even if a government Countries that have succeeded in managing decides to move forward, weak political broad reform programs over several years--even leadership, poor coordination, fragmented over several administrations--have shown the policy jurisdictions, low skill levels, and fastest changes and greatest gains in economic limited accountability--within the larger development. In just 10 years, Hungary moved context of a weak rule of law--conspire to make successful reform extremely difficult. 2 Scott and Astrakhan (2006). from having planned to market-led economies, less developed countries.3 But highly developed with larger roles for the private sector than in countries can also summon the energy and most Western European countries. This transi- support to embark on major new directions. tion required massive deregulation and re- regulation, complete rebuilding of the countries' The question is, how? How can genuine, lasting institutional frameworks, and the creation of success be achieved in a governing environment strong transparency and accountability mea- resistant or hostile to change? Can general sures. The success of these efforts--including lessons be learned from the countries discussed Hungary and Poland's rapid achievement of above? This paper analyzes the political econ- membership in the OECD and European omy and institutional mechanisms of successful Union--was due to the adoption of strategic reforms to help governments implement good and systemic approaches for building regulatory practices based on international experiences-- policies, tools, and institutions, backed by not only in Hungary, Korea, and Mexico, but external pressures and political flexibility. also in Australia, Italy, and the United Kingdom. It focuses on how governments can speed up But success is not limited to the extraordinary and broaden reforms to improve the business transformations in Eastern Europe. Korea elimi- environment by building capacity to plan, nated half of its regulations in less than a year organize, implement, and sustain a government- through a national reform program, while Mexico wide, multi-year reform strategy. The paper also reversed 70 years of economic controls by revising assesses the relationship between the design of more than 90 percent of its national legislation in reforms and the constraints posed by a country's about six years, opening and transforming its political economy. economy. Results from Kenya's licensing reform suggest that similar processes can be initiated in 3 Jacobs, Ladegaard, Musau (2007). Before identifying lessons of reforms to improve on a national scale, but a few countries are the business environment, it is essential to first slowly improving their understanding of how define and then measure what is meant by regulatory systems change over time in deliver- effective reform. ing net benefits. A measure of success, then, would be a steady increase over time in net social benefits from all Defining Effective Reform regulatory and administrative practices. But this Viewed as a whole, the business environment measure goes beyond the impacts of regulatory goes far beyond the impacts of regulatory and and administrative practices on business, and administrative practices, and includes a range of includes the wider societal benefits of regulation. issues such as infrastructure, natural resource As a practical matter, it is not necessary to take endowments, political risk, and macroeconomic such a wide scope to measure success for the stability. But regulatory and administrative business environment. And methodologically, it issues require their own policy agenda, so the is impossible to adopt a net benefit approach at discussion here is limited to them. this time. Over time though, reformers must increasingly balance regulatory costs and benefits, How should success in improving the regulatory since improvements in regulatory benefits--such and administrative environment for business be as higher health, safety, and environmental defined? The most advanced countries working standards--are crucial even in countries with on regulatory reform have taken a broad social terrible business environments. welfare approach to measuring regulatory improvements. This approach uses various Instead, a measure of success in improving the techniques to assess the net social gain from the business environment could focus on the government's regulatory function. No country specific impacts that the regulatory and adminis- has developed a way of making such assessments trative environment have on business decisions. These impacts can be divided into two catego- administrative environment for economic ries: costs and risks. activity, the more likely it is that aggressive rent seeking and short-term profit taking will replace Regulatory costs for businesses fall into three longer-term investment. This is the main reason categories: it is difficult to attract infrastructure investments in uncertain regulatory environments. Operating or transaction costs. Sometimes called administrative costs, these include When regulatory and administrative impacts on costs imposed by paperwork, formalities, the investment environment are discussed, it is corruption, and operating procedures such as usually specifically in terms of how regulatory information disclosure. Such costs usually costs and risks affect businesses themselves. The last for the life of the company, so their net assumption is that as regulatory costs and risks present value tends to be high. These costs rise for a company, its projected return on also have a fairly high fixed component, and investment declines. That is not always the case, are particularly hard on small and medium- because some regulatory costs--such as con- size enterprises. Unless they can be passed on sumer protection--may produce higher gains to consumers, these costs reduce profitability. than losses for companies. But if governance is poor and public services are of low quality, this Capital costs. Capital costs usually refer to relationship is indeed almost always inverse. the costs of buying new equipment and land. Though often high upfront, they fall Thus a reasonable definition of success for over time as new equipment characteristics reform of the enabling environment, and the are built into equipment design and invest- one used in this paper, is: reform that increases ment planning. In the early years of a private returns on investment by reducing net business, capital costs can distort basic regulatory risks, costs, or both. The word "net" decisions such as on the trade-off between is critical here. Investors make aggregated labor and capital. Regulations imposing decisions about returns on investment. All capital costs diminish investment in produc- regulatory costs and risks must be combined to tive activities and so reduce firm innovation obtain an accurate view of future returns. This is and productivity. an enormous undertaking in countries that are Reductions in the value of business assets by highly over-regulated because few reforms will, eliminating opportunities for higher returns. in isolation, significantly change returns on Regulators can impose such costs by allow- investment. ing monopolies or imposing other barriers to market entry, slowing innovation, reduc- Prior to the 2005­07 licensing reform in ing business flexibility (say, in labor deci- Nairobi, Kenya, for example, a taxi driver was sions), or forcing businesses to spend required to have 12 permits to drive from the resources on strategic behavior. These lost city center to the airport. Investors in a taxi opportunities force investment decisions service had to consider the cumulative effects of into lower-return activities. all 12, plus any new ones that might be added in the future. Business environment reforms that Regulatory risks--that the rules of the game will eliminate six low-cost permits can be negated by change or be understood only once an invest- the addition of one high-cost permit or by ment is sunk--reduce the amount, return, and enforcement changes in the other six. Thus, to social value of business investments. Investments genuinely change the business environment by will fall because their projected returns decrease. increasing projected returns on investment, it is The more uncertain and risky the legal and necessary to have a comprehensive view of regulatory costs and risks facing the businesses wide range of possible inputs into a good business of interest. Reform boosts business activity only environment. These assessments typically assert if net benefits are achieved. that certain indicators are correlated with eco- nomic performance. The implication is that a This definition of success has important implica- country that seeks to improve its performance tions for the reform strategy, as discussed later in based on these indicators will improve its business this paper. Efforts to change net costs and risks environment, encouraging investment and growth. lead to strategies that are systemic, longer-term, top-down, and institutionalized. Efforts to change Some of these indicators take a bottom-up selected costs and risks, by contrast, tend to be approach, selecting regulatory and administra- shorter-term, bottom-up, and limited in scope. tive issues considered high priorities and devel- oping quantified measures of regulatory costs Another possible measure of success in reforming and, increasingly, risks. The World Bank's the business environment is the extent to which influential annual Doing Business report is one of economic gains are passed from businesses to several projects that uses such indicators: consumers. Business environment reforms that increase competition are not always beneficial "The data offer a wealth of detail on the to business profitability. In fact, increased specific regulations and institutions that competition--particularly after a period of high enhance or hinder business activity, the protection--often results in more business biggest bottlenecks causing bureaucratic turbulence and restructuring. In such cases, good delay, and the cost of complying with reforms might lower returns on investment in regulations. Governments can identify, after those activities. Here success could be measured reviewing their country's Doing Business in terms of sustained increases in consumer indicators, where they lag behind and what welfare, not returns on investment. But the to reform"(www.doingbusiness.org). distributional issues of business environment reforms are not necessarily a primary concern in Here success means moving up the indicators' countries where the top priority is increasing rankings on the things being measured. Some overall economic growth. When setting priorities datasets generate synthetic indicators of the for business environment reforms, it might be "overall business environment" by aggregating preferable to focus on reforms that produce the large numbers of indicators of specific problems. highest gains in household income, instead of Performance on these meta-level synthetic returns on investment. That would be a reason- indicators is increasingly seen as a proxy for real able adjustment of the definition of success. changes in the business environment. Taking this approach, this paper measures Measuring Effective Reform reform success as steady and sustained improve- ment, objective or relative, in individual How should the success of business environment indicators--or, preferably, in broad, synthetic reforms be measured? This is a key question, indicators of inputs to the business environ- because often the measurement technology de ment. Some of these indicators, such as those facto defines what is meant by success. Unfortu- used in the Doing Business project, have been nately, the ways of measuring the net effects of extremely successful in attracting political regulatory costs and risks are not always reliable. attention to the problems of the business environment and in drawing reform resources to In the past few years, a flood of business environ- the problems being measured. In many ment indicators and assessments has produced a countries business registration is likely much more efficient and transparent today than it was decreasing. The problem with using such indica- five years ago as a direct result of the Doing tors as a measure of success for a reform program is Business database. The same may be true for that business perceptions are notoriously difficult other procedures measured by this and similar to compare over time and across countries, they databases. Such indicators would seem to have change for many reasons besides actual regulatory an important place in any monitoring program. risks and costs, and they often suffer from a lag of uncertain length between reforms and changes in Yet as a means of designing a national reform perception. Moreover, such measures are often strategy for the business environment, this viewed with suspicion by government officials, and approach does not seem intuitively satisfying. so may not have the credibility needed to under- Indeed, none of the case studies summarized in pin reforms. It would be difficult to use these this paper took such an approach. Because these indicators as a measure of success for a national indicators are based on individual inputs, they reform program, though they could be used to risk undue attention to a few trees in the forest validate information from other sources. rather than the health of the entire forest. This method is also limited by the indicators chosen, Another aggregated approach to measuring which in turn are limited by the measuring success in business environment reform programs methods used for each indicator. Synthetic is to avoid using proxies and instead monitor indicators are based on some implicit weighting revealed preferences--that is, actual business deci- scheme that may or may not correspond to the sions. This approach would require a monitoring actual importance of each indicator. Most impor- exercise aimed at sectors or activities affected by tant, these indicators do not measure net changes. reforms, and developing indicators of changes in Changes in the business environment outside the business profitability, investment, hiring, expan- scope of the indicators are simply ignored--and sion, and other measures of revealed business in the vast, complex, continually changing confidence. These indicators can be measured in regulatory and administrative environments of real time, but have the weakness of aggregating every country, this limitation seems significant. factors beyond the regulatory and administrative environment. Accordingly, they will probably Another approach is to collect general percep- measure only the most significant impacts of tions of the business environment using inter- reforms that are visible through the noise. views with business people and investors. Most indicator databases collect specific information None of the reform programs in the case studies on regulations, government administration, and summarized in this paper was followed up with other perceptions immediately relevant to this kind of detailed monitoring. Instead, the regulatory costs and risks. This is the approach results of the reforms were embedded in larger taken by the World Bank's World Business macroeconomic results, such as national invest- Environment Survey (covering 10,000 firms in ment flows. 80 countries), A.T. Kearney's Foreign Direct Investment Confidence Index, and Transparency The approach used to measure the success of International's Corruption Perceptions Index. reforms is likely to drive their content and strategy. If the focus is on reducing net costs and This kind of indicator seems to better capture net risks, then aggregate measures are needed effects, because they aggregate the perceptions of relevant to broad, systemic reforms. But such businesses on the costs and risks they face. Such measures are not yet sufficiently developed for perceptions drive business decisions. Strangely, widespread application. This gap between the almost none of these surveys actually ask whether goals of reform and monitoring techniques anticipated return on investment is increasing or merits attention. The case studies summarized in this paper actors and steps were linked together in a cover middle- and high-income countries that momentum for reform. have successfully conducted broad reform programs. Some of the findings may not be Hungary directly applicable to low-income countries, but the overall lessons--linking reform strate- By 2001, after more than 10 years of deter- gies with reform drivers--seem transferable, mined reforms, Hungary had largely completed with care, to countries with weak reform its historic social, political, and economic institutions and environments that are hostile transition. One indicator of the scale of this to reform. change is that, by the end of 1998, the private sector generated 85 percent of gross domestic This chapter does not provide detailed summa- product (one of the highest shares in the ries of the case studies, which are available OECD), up from 16 percent in 1989. The separately.4 Rather, brief descriptions of reforms transition involved both new regulation and in each country are followed in Chapter 4 by deregulation, and a conceptual as well as a analyses of the drivers of reform and in Chapter 5 technical transformation. by the criteria deemed critical to success across the six countries. Table 2 provides a timeline Starting in 1989, successive administrations of significant reform events in the six countries. eliminated large swathes of laws and other It illustrates a point made repeatedly in this regulations designed for a centrally planned assessment: that broad, sustainable reforms did economy. In addition, every year Parliament not occur rapidly, evolved over time (sometimes passed more than a hundred laws, the unpredictably), and unfolded through a series government adopted twice as many decrees, and of steps that required the efforts of many ministries promulgated many hundreds of actors. Success was determined by how these orders. From government procurement laws to property rights, bankruptcy, and business 4 See www.fias.net startup rules, many of the regulations and TABLE 2 Regulatory Reform Timeline in Six Countries Hungary Korea, Rep. of Mexico Australia Italy United Kingdom Pre- 1960s and 1979 1980 1970s Conservative Anxieties Party comes develop over a to power long-term determined decline in to reverse economic economic performance. decline. 1980 Late 1980s 1980s 1980­86 1980s 1980s and early 1980s Focus on Deteriorating Economy Economic crisis Public backs 1990s Soaring privatization; macroeconom- becomes too leads to stagnant substantial public deficit and European Union ics and growing large and economy and federal reform corruption scandal (EU) Single corruption. complex for cumbersome program. prepare way for Market spurs government-led bureaucracy. reforms. reforms. 1987­88 development. "Reform 1988 Salinas 1988 Next Steps communists" government initiative transfers take power and pushes for rapid public service support market economic delivery from economy. reform. ministries to tightly managed 1989 1989 High-level agencies. Political Economic upheaval leads Deregulation to institutional Unit created. and legal reforms. 1989­90 First guillotine review (driven by the prime minister). 1990 1990­94 1992 New 1991­94 1994 Success 1990 First Reforms slow as regulatory reform NAFTA requires of earlier administrative bureaucratic laws and structural reforms reforms leads to procedure and support institutions have and key adoption of antitrust laws solidifies; key little impact due privatizations. National enacted. laws passed; to poor staffing Competition macroeconomic and ministerial 1994 When Policy (NCP). problems resistance to currency continue. change. collapses, 1994­95 businesses State 1994­98 1992­96 demand reform. governments Second Regulatory initially resist guillotine review reform commit- because NCP (driven by tees established seen as federal legislature). under president power and have little clout money grab. and are not part of bureaucracy. (Continued ) TAB LE 2 ( Con t in ued ) Hungary Korea, Rep. of Mexico Australia Italy United Kingdom 1995 1998­2002 1997 Asian 1995 1995 Federal 1996­2001 1997 Labor Party Reforms financial crisis Presidential and state "Bassanini comes into slow; shifts politics and decree requires competition reforms"--single power and privatization leads to key regulatory entities created minister promotes reenergizes continues. Basic Act on impact analysis. to oversee a series of broad reforms. Administrative reforms; regulatory reforms Reforms. 1995­99 financial to better position 1997 Better Guillotine review incentives Italy in EU; key Regulation Task. 1998 eliminates 45% bring states support comes Force formed to Influential of business red onboard. from three give voice to Regulation tape. successive prime stakeholders. Reform 1995­99 ministers and Committee 1997­2000 Stakeholders general public. 1999 Central created with Congress and see urban areas regulatory quality civilian and Judiciary block as benefiting 1999 Central office created government reform initiatives. more than rural Regulation and regulatory members. areas. Simplification Unit reform official established; placed in each 1998­99 regulatory impact ministry. President orders analysis only on Regulatory 50% reduction in an experimental impact analysis number of basis. white paper regulations published. 1998­2002 Regulation Reform Committee limits number of new regulations and helps interministe- rial coordination. 2000 2003 New 2000 Although 2000 Modest 2000 2000­03 Series government Cofemer changes to Government of legislation reenergizes established as NCP include allowed to use enacted to market-oriented strong central better decrees to bypass improve business reforms. agency, public interpretation of parliamentary environment and backlash against "public interest bottlenecks in competitiveness. 2004 reforms test." getting regulatory Hungary continues. reform tools. joins EU. 2004 Plans made for 2001 Ministerial second wave and bureaucratic of reform. resistance to reforms increases; support among stakeholders wanes. institutions needed for the smooth operation of (though this aspect should not be exaggerated, markets were established and secured. since the country's reform process was turbulent and not always coherent) and of accompanying Important lessons from Hungary include the market liberalization with governance reform. value of consistent reforms over several years Hungary's reforms also show that institutions play a crucial role in economic performance and state. Domestic reforms were boosted and good governance. underpinned by new international commitments as Mexico joined the General Agreement on Republic of Korea Tariffs and Trade (GATT), Asia-Pacific Eco- nomic Cooperation (APEC) consortium, and During 1993­2002 Korea's growth slowed, the OECD, and signed the North American Free performance of its chaebol (huge conglomerates) Trade Agreement (NAFTA) as well as other free contributed to the massive financial crisis of trade agreements with Latin American countries. 1997, and the country joined the OECD, forcing it to open its markets. In response to these challenges, an ambitious regulatory, High-Income Countries financial, and structural reform program was A single case study was conducted of three launched in the late 1990s to make the economy high-income countries--Australia, Italy, and more competitive and restore the foundations the United Kingdom--that are representative for sustainable growth. of successful, broad, multi-year reform pro- grams resulting in much stronger business and The program worked, boosting the confidence of investment environments. Though the focus of investors both domestic and foreign. The reforms reforms varied by country, the processes faced moved Korea from a highly interventionist, similar challenges: conceptualizing, organizing, authoritarian model of economic development to marketing, implementing, and sustaining a market-oriented, open model based on con- major regulatory reforms despite institutional sumer choice, democracy, and the rule of law. weaknesses, incentive problems, and resistance The changes made to Korea's public sector are from public and private interests. While the among the most far-reaching reforms of regula- ways that reforms were enacted were tailored to tion ever undertaken in an OECD country. each country, this paper draws general lessons about institutions, externalities, capacities, and organization of reform energies that sustained Mexico change in the face of vested interests. Mexico made regulatory reform a central element in its transformation from an Australia inward-looking economy to an open, market- based one. The rapid pace, broad scope, and In 1994 the heads of Australia's federal, state, and considerable depth of Mexico's regulatory territory governments adopted a national compe- reforms exceed those of most longtime OECD tition policy. The policy sought to accelerate and countries, and are comparable to those of the broaden microeconomic reform to achieve emerging market economies in Eastern Europe higher, sustainable economic and employment that recently joined the OECD. growth. A unique feature of the policy is that it was designed as an integrated strategy that would By 1998 virtually all price controls had been apply consistent competition principles across an eliminated. A deregulation program adopted in extremely wide range of policy areas and mul- 1995 attacked myriad forms of government tiple levels of government. It aimed to embed a intervention in economic activity and promoted presumption in all regulatory processes that com- better regulatory techniques throughout the petition would not be restricted, and imposed public administration (including at state and strict public benefit tests to limit such restric- municipal levels). These efforts were supported tions. A key goal was to ensure the existence of a by others aimed at modernizing the Mexican single open market for goods and services across Australia. The National Competition Policy played in economic life led to policy and (NCP), which was implemented over six years, institutional changes. As the political landscape represented a long-term policy commitment, was redrawn, aspects of the centralized state building on long-term microeconomic reforms were dismantled and many statist economic that began in the 1980s. policies were replaced with more transparent, pro-competition policies. Italy Starting later than many countries, Italy devoted United Kingdom the 1990s to catching up with leading OECD Since the early 1980s regulatory reform has been countries on economic and governance reforms. a key part of successive U.K. administrations' The scope, speed, and consistency of structural ambitious structural reform programs, intended reforms over multiple administrations were to strengthen competition and private sector remarkable. Regulatory reform was only one of vitality. Four features of recent regulatory many changes in Italy in the 1990s, but it was reforms in the United Kingdom are particularly an essential one. After the macroeconomic relevant. First, an extensive program of privati- stabilization program of the early 1990s, regula- zation, deregulation, and targeted re-regulation tory reform helped attack many of the was conducted. Second, deregulation occurred underlying structural problems in the economy at the same time as extensive re-regulation and the public administration. through the creation of numerous new regula- tory bodies. Third, reducing regulatory burdens The confluence of multiple political and eco- on small businesses was a central feature of the nomic challenges--domestic and foreign--was program. Fourth, public sector reforms sought in some ways shock therapy for Italy. Rigidities to ensure that public services were of high and practices accumulated over decades were quality, effective, and homogeneous. reassessed, and many abandoned. Growing awareness of the excessive role that the state Opportunities for genuine reform come A greater understanding of the dynamics of rarely--often only when crises and external change is emerging primarily as a result of pressures make clear the costs of inaction and decades of study in fields such as political change the balance of power that previously science and new institutional economics. These protected the status quo. In most countries efforts recognize that sustained changes in where donors are active, the dynamic of change economic policy can be understood only in the is controlled by public choice and captured context of wider changes, particularly in the state interests. stock of knowledge and institutions--such as market institutions changed by globalization Such interests almost always run contrary to and political institutions changed by upheaval. the role of the state as envisioned in business environment reforms. In most developing This macro perspective drives some advocates of countries, improving the business environment new institutional economics to pessimism requires that governments unwind extensive because of the difficulty of bringing about broad state involvement in the economy, discourage change. But it should not obscure the fact that entrenched rent seeking behavior, build new reformers can influence the direction and pace regulatory and administrative capacities, and of change. This perspective emphasizes the roles create market-based regulatory regimes and of drivers of change, defined here as forces that institutions that support investment, innova- expand opportunities for reform within the tion, and vigorous competition. How can political economy of a country. This chapter drivers of change work against drivers of the reviews the seven main drivers of change status quo? identified in the academic and development are proxies for relative performance. Improve- literature: ment in the indicators is supposed to improve economic performance. Second, a country Globalization or competitiveness targeted for reform is usually described as falling behind peer countries. This message is Crisis intended to convey a sense of urgency to the Political leadership government in pushing ahead with reforms in order to catch up--that is, capture its fair share Unfolding reform synergies of global wealth. Technocrats The competitiveness driver of reform is familiar to donors, who often rely on it to persuade Changes in civil society political elites that the costs of not reforming External pressure will be higher than the costs of reform. In this case the costs of the status quo are seen as rising, These drivers are assessed for their relevance in reducing the cost of change. each of the six case studies discussed here (Table 3). The studies show that, rather than a Competitiveness was important in all the case cause-and-effect scenario in which a driver of studies. In every country reforms were an explicit change creates and defines the success of a body response to fears of falling behind, losing na- of reforms, what happens is an unfolding series tional markets, and seeing rising imports. These of events in which various drivers rise and fears were especially strong in countries trying to fall--becoming more and less important in integrate with markets where competition was driving reforms. If this conclusion is correct, keener (Mexico with North America; Hungary, strategic exploitation of drivers of change is key Italy, and the United Kingdom with Europe). to sustainable reform. These fears were also strong in countries drop- ping barriers to foreign trade and investment, exposing domestic businesses to new interna- Globalization or Competitiveness tional competitors (Australia, Korea). As capital and corporations move more freely Concerns about competitiveness can lead to across national boundaries, governments are damaging policy reforms, such as protection and forced to engage in regulatory competition. To government intervention. But such concerns can retain current investments and attract new also lead to market-oriented reforms. Decisions to ones, they must lower the costs of doing respond with market-oriented reforms in the six business in their countries (Vogel and Kagan countries were due to other drivers, such as strong 2004, 3). Thus, globalization drives regulatory external pressures to open markets and consensus reforms intended to reduce the costs or risks of that growth depended on private sector perfor- investment and increase expected returns on mance. Indeed, regulatory reforms were widely investment. seen as a way to deal with competitiveness concerns. The first round of regulatory reforms The globalization or competitiveness driver is in Korea cut by more than half the number of often supported by the use of comparative industries subject to strong entry barriers, while indicators of performance that are intended to continued efforts to drive down regulatory costs carry two messages. First, to the extent that pulled Korea up on the World Economic such indicators can be correlated with eco- Forum's Global Competitiveness Report from 48 nomic performance, rankings on the indicators of 53 countries in 1997 to 26 of 75 in 2002. The nature of regulatory competition in global were probably not well understood outside the markets has been the source of much debate in reform elite. The other three countries (Australia, the developed world. Some feel that regulatory Italy, United Kingdom) did not face alarming competition has led to a "race to the bottom" in short-term crises, but were beset by a sense that which environmental and labor standards are crisis was looming unless real change was made. undermined by companies seeking to become In these countries, competitiveness fears substi- more competitive. Other groups, supported by tuted for a real crisis. most academic studies, believe that regulatory competition tends to increase efficiency and Reformers may applaud the opportunities quality rather than laxity--and that higher afforded by crisis, but crisis is a high-risk economic growth generally leads to higher approach to achieving reforms. Italy, and to protection through improved regulation some extent, Korea, show that reforms launched (Drezner 2000). For that reason the competi- on the back of a crisis can be difficult to sustain. tiveness driver must be carefully deployed, to There is also no assurance that leaders will make avoid the impression that competitiveness is the right decisions in the face of a crisis, rather strictly about expanding deregulation and than making things even worse. Mexico went reducing burdens on businesses. through a long series of peso crises in which policy reforms followed no coherent strategy-- The globalization driver has the potential to before finally arriving at the sustained market- drive a broad reform program. But often, oriented reforms of the 1990s. because its starting point is the interests of large investors, it leads to a narrow focus on their needs. This is the inherent contradiction of the Political Leadership globalization driver: competitiveness is a far- reaching concept, yet reforms related to com- Even when a crisis becomes apparent, lack of petitiveness often focus on the needs of large, political leadership can result in little or no action. export-oriented investors. There is little question that whatever the other drivers, political leadership is the yeast that makes them rise. Political leadership is at its most fearless just after elections, when promises of reform and Crisis the forbearance of the electorate are at their "A crisis is a terrible thing to waste," wrote height. When crisis leads to political shakeup, Thomas Friedman (2005). Many theories of opportunities for reform are maximized. But by reform start with the idea of a galvanizing then, the costs of reform can be much higher. event--some kind of crisis that upsets the balance of power that has preserved the status Public choice theory assumes that courageous quo. This approach has much appeal because it political leadership will not occur because seems to be one of the few realistic ways of politicians will always maximize their well-being loosening the grasp of powerful interests that by splitting up the economic pie in a way that have captured the state apparatus. ensures their re-election. But even under the public-choice paradigm, predatory states The six subject countries in the case studies sometimes create a situation where radical present a mixed picture of the importance of reform is a self-interested strategy. In such cases crisis in reform. Three (Hungary, Korea, Mexico) "political leadership" simply means a political sought reform while recovering from painful elite skilled enough to recognize that its advan- economic and political crises. All three used the tage lies in reform. This type of skilled elite does crisis to launch reforms whose consequences not emerge very often. TABLE 3 Key Drivers of Regulatory Reform in Six Countries United Driver Hungary Korea, Rep. of Mexico Australia Italy Kingdom Globalization or Reform was To increase In the 1980s, Australia, a small An important U.K. reforms competitiveness triggered by the foreign direct competition for (in population) factor for Italian were need to create a investment, international and isolated reform was the instigated by market-based reforms had to capital and country, was need to meet strong support economy and remove explicit investment was deeply conscious economic for building the join the EU. investment growing, and of the impor- conditions for Single Market, barriers and leaders saw the tance of keeping entry into the which brought excessive benefits of up with global Eurozone; that with it many regulations. liberalizing trade economic trends need also EU harmoniza- for assembly and competition. triggered fears of tion laws as plants exporting falling behind in well as open primarily to the Europe. trade. U.S. market. Crisis An unpre- The 1997 crisis In the 1980s, a Economic crisis Economic crisis Economic cedented produced the collapse in oil was not a crucial was triggered by crisis was a change in most painful prices and trigger, but spiraling public crucial trigger political regime economic default on between 1960 debt and radical of reforms. The and collapse of contraction in massive external and 1992 political country had the economy OECD history. debt, followed Australia had changes. also faced created new 1998 was the by five years of fallen from being economic elites and first year since economic the 3rd richest decline relative growing 1979 in which stagnation, OECD country to to its neighbors expectations for Korea had triggered 15th. leading up to real change. negative growth. privatization, the financial trade liberaliza- crisis of the tion, and late 1970s. regulatory reform. Political Successive prime The president The president Prime Minister Reform was The election of leadership ministers actively elected in 1997 and a small Paul Keating, a driven almost Prime Minister backed reforms supported group of advisers former finance entirely by strong Margaret to secure reforms. The initiated extensive minister, was leadership from Thatcher in democracy, the National reforms using a committed to one ministry and 1979 gave rule of law, open Assembly top-down adopting the the prime the country markets, provided support approach based National minister. a leader and eventually by enacting on traditional Competition determined EU membership. legislation command-and- Policy. to reverse its needed to control economic implement them. mechanisms. The decline and lift resulting backlash state economic slowed reforms. controls. Unfolding So many reforms Initial top-down Market-opening Opening markets There was little The country reform synergies were launched in reform produced reforms years earlier success in experienced such a short impressive increased produced strong building reform a rolling period that results, but lack stakeholder consensus on momentum succession of reform could of incentives for pressures for domestic outside of reforms, each be slowed, but regulatory reform economic reforms. General political and of which not stopped-- within the liberalization, agreement on technocratic sowed the without disaster. government which increased National pressures. This seeds for further slowed further public sector Competition compromised the efforts--though reforms after a capacity for Policy reforms speed, if not the the need for few years. good regulation. partly resulted implementation, ongoing from the clear of further reforms negotiations economic in those areas. impeded some reforms. TAB LE 3 (Con t in ued ) United Driver Hungary Korea, Rep. of Mexico Australia Italy Kingdom benefits of earlier reforms, but it took considerable effort to reach bipartisan agreement on the structure of reform. Technocrats The strongly The Regulatory In 2000, an Active support An academic Reform had independent, Reform agency was from the finance minister of public many professionally Committee-- created in the ministry was administration institutional staffed staffed partly with Ministry of important. The and his aides champions: a Hungarian academics, Economy to National drove reforms in dedicated unit Competition supported by civil impose quality Competition league with a at the center of Office played a servants, and and transparency Council, a technocratic government vigorous role in co-chaired by the on the public dedicated entity prime minister. responsible for privatization. prime minister--is sector, and created to But a powerful overseeing responsible for highly trained monitor reforms, new institution regulatory examining new technocrats ensured did not quality, a and existing (economists) had consistency and emerge--one number of task regulations and legal authority transparency in reason the reform forces and other maintaining and political reporting. faltered with a groups, and the regulatory backing to drive change in National Audit quality. reforms. administration. Office. Changes in civil Reform was Political support Early reforms Reforms in the Identifying Italian Common law society legally based, for reform was were not early 1980s reforms so traditions with active built on a popular transparent, reduced closely with a against involvement by campaign to which limited economic strong minister developing Parliament and eliminate reformers' ability decline. Their enabled them to systemic extensive corruption, which to gain support success showed be implemented approaches consultation with coincided with from private that much of the in the short term, across stakeholders such an upsurge of stakeholders. population but efforts government as businesses, non-governmental Later, as political accepted that dissipated when led to an ad trade unions, organizations support painful reforms the minister left hoc approach and disadvan- (NGOs) focused wavered, special were essential to and the to reform that taged social on the issue. private bodies reaching administration made public groups. NGOs grew very were created to economic goals. changed. buy-in harder, quickly: by 2000 oversee the increased there were up to reforms and costs, slowed 8,000, providing provide results, and a new force for sustained contributed to political change. support. reform fatigue. External Close relation- OECD Mexico's close Opposition was Ministerial and Reform was pressure ships between membership relationship with defused by bureaucratic aided by an government brought new the United including in the resistance to active EU officials and demands for States--cultivated National further reforms Commission outside think openness and through Competition and reversion to legislating for tanks and good regulatory NAFTA--helped Policy provisions the status quo the removal of international practices. In it recover quickly for the federal ante took hold barriers to the organizations 1997 the from the 1995 government to after 2001. free movement helped reforms government, in liquidity crisis. make "competi- of services, through inflows cooperation with tion payments" to goods, and of new ideas, the International states (contingent people. shared Monetary Fund on successful Inconsistency experiences, and (IMF), began completion of with European funding. deregulating the reform obliga- competition financial sector. tions). law caused modernization of U.K. law. Political leadership was essential in the six subject "avalanche theory of reform," where making a countries. All six benefited from champions of small change can lead to a landslide of reforms reform at the center of government (a prime over time. minister or president) or a strong cabinet minister (finance, public administration). Indeed, political Several mechanisms can be used to create a leadership guided reforms away from damaging self-sustained and expanding reform movement. responses to crisis into more open, market-based If consumers see tangible benefits early on, they reforms. In two countries (Australia, United are more likely to support continued reform. Kingdom) very strong, almost autocratic politi- New interests can increase pressures for reform cians drove reforms forward despite strong but in other areas. Reform in one area can make disorganized political resistance. costs of regulation in other areas more visible and painful. Tariff reform has stimulated reform Political orientation does not seem to matter of national product markets facing competition much in terms of propensity to lead reforms. In from imports. Italy, Korea, and Mexico the reform governments were on the left or nationalist. In Australia and Four of the six countries studied here (as well as the United Kingdom, the governments were others studied elsewhere, such as New Zealand) strongly to the right on market economics. And were able to exploit such links between reforms.5 in Hungary, ideology had collapsed. This mixed Australia initiated competitiveness reforms pattern seems to support theories about the "end several years after tariff reforms increased of history" and the weakening of political pressures from foreign competition in the ideology as a driver of reform. domestic economy. In Mexico, the integration of the North American economy through However, politicians on the right seem to have NAFTA strengthened technocrats and induced been slightly more proactive in looking to the private industry associations to lobby for less future than were politicians on the left. The best government intervention. The United Kingdom political leadership is proactive, rather than carried out a rolling program of reforms, but reactive, in the midst of crisis. Skillful political was less successful in linking successive reforms leadership is needed to increase capacity for due to a need for extensive negotiations and change in the run-up to crisis, and to design and political investment at each stage. In the two implement reform strategies quickly to lower the countries that did not exploit such links (Italy, cost of lost opportunities and ease the pain of Korea), reforms slowed after a few years or transition. Sometimes political leadership simply halted when the administration changed. watches a crisis unfold without taking action, as in Japan during its long banking crisis. Recent World Bank research, including the six country case studies examined here, also found that linking reforms was a powerful driver of Unfolding Reform Synergies change. It concluded that in virtually all in- stances reforms were linked to or resulted from OCED countries have long recognized impor- trade and other liberalizing reforms, and that tant complementarities across product, labor, increased pressures from international competi- and capital markets. These complementarities tion often led firms to demand a better business are relevant because market-oriented reforms in one area can increase pressures for reform in 5 New Zealand initiated labor market reforms in the early other areas--and even change the political 1990s, but only after radical regulatory reform in product markets in the 1980s contributed to massive unemploy- economy downstream or upstream so that other ment because the labor market could not adapt to the new voices for reform emerge. This can be called the environment. environment (World Bank 2006). It also noted Technocrats such as President Carlos Salinas of that in India trade liberalization created a need Mexico, President Lee Teng-hui of Taiwan for infrastructure investment and supply chain (China), and Minister of Finance Manmohan improvements, leading the government in 1996 Singh of India played significant roles in defin- to initiate reform of the country's inefficient ing and driving dramatic economic reforms. ports by allowing private investment. Although Skilled technocrats at various levels of govern- direct causality is not clear, the regions that have ment have also been crucial to regulatory made the least progress on microeconomic reforms in many other OECD and developing reform (such as South Asia and the Middle East economies. and North Africa) also have the highest barriers to trade and foreign direct investment. Similarly, technocrats were extremely important to the success of reforms in the six subject Links across policies lead reformers to debate countries discussed here. These technocrats were how to sequence reforms, and how important most effective when they were highly trained sequencing is. The optimal sequence from an and based in independent or reform-oriented economic perspective (in terms of rapidly institutions with legal mandates to advance reducing transition costs and achieving benefits) change. may differ from the optimal sequence from a political perspective (in terms of maximizing In some cases, existing technocratic institutions political momentum for reform). There is little were given mandates for regulatory reform. evidence that engineering the sequence of Competition offices, with independent reforms works well. Most countries have ap- investigation and even veto authorities, were proached sequencing pragmatically, since important in Australia and Hungary, as was an waiting for the optimal sequence can delay independent national audit office in the United reforms for a long time. For that reason, the Kingdom. Finance ministries were important in OECD has advised its members to carefully only a couple of these countries, which is consider sequencing, but not to abandon interesting given the frequent reliance on such opportunities while waiting (OECD 1997). ministries as the counterpart for donors in developing countries. Technocrats Special regulatory reform institutions in Korea, Mexico, Australia, and the United Kingdom A popular notion in development literature is provided a central focus for technocrats to build that reform can be driven by politicians and new, specialized regulatory expertise. The senior civil servants with training in economics top-down reforms in Korea and Mexico were or other fields who develop rational policies for driven almost entirely by dedicated teams of leading their countries forward. These techno- technocrats who were either Ph.D economists crats develop reforms based on the promotion of (Mexico) or supported by strong academic and the general good--a goal formalized as maxi- research institutions (Korea). mizing the social welfare function based on a value called the "Pareto criterion." Neoclassical These experiences suggest that technocratic theory says that the general good will be pro- drivers of reform work better with a strategic moted under certain conditions in competitive approach aimed at strengthening the muscle and markets, a theory that has received considerable capacity of pro-reform technocrats relative to empirical support over the past 20 years. Such a parts of the state governed by public-choice theory of reform is in direct opposition to public motivations. Institutions can be built that give choice theory. such technocrats more influence in the governing system. This was the effect of NAFTA in Mexico and poorly understood by the general public. and OECD accession in Korea--both events But as political support began to waver, changes reduced the grip of politicians on policymaking to the reforms created more visible private sector and increased the power of technocrats. In effect, advisory groups, which played a very participa- politicians ceded power to technocrats through tory, hands-on role in the reforms. This support legal devices in the form of international has helped sustain reforms even as political agreements. regimes have changed. Donors tend to choose technocrats as counter- In Italy, limited civil society participation in parts because they are more stable in the politi- and understanding of reforms made them less cal process and more sympathetic to the theories sustainable. Indeed, the reforms were rapidly and goals of microeconomic reform. As a result, wound down once the administration changed. technocrats play a larger role in donor reform strategies than is probably warranted. Fostering an active, reform-minded civil society is a key driver of reform--one that has been neglected in most developing countries, where Changes in Civil Society donors have focused on making changes to governments. Encouraging civil society support Reform is not a task only for governments, for reform is not just a notion, but an even in countries with weak civil societies. operational strategy. Using civil society to help Other stakeholders, such as firms and workers, expand opportunities for reform requires that a can help build support for reform and share crucial stage of reform precede the actual start information across borders. As civil society of reforms: selling reform to an often skeptical develops, the balance of power protecting the public. Citizens need to understand why status quo can change, and opportunities for reform is so important to their future well- reform widen. being and that of their children. Open dialogue with major stakeholders on the benefits and This is clear from Korea, where a rapid jump in costs of reform can improve understanding on the number of non-governmental organizations all sides of short- and long-term effects of (NGOs rose from a few to more than 8,000 in action and inaction, and of the distribution of a few years) increased the focus on issues such costs and benefits. In most countries, reform as corruption, good governance, and capture of would benefit from wider, more informed the state by the chaebol. This new political debates less dominated by special interests that movement helped break the decades-long grip stand to lose the most. on regulation held by bureaucrats and special interests. Korean reformers included an un- The OECD has found that developing and precedented degree of transparency in the articulating transparent policies for regulatory reforms, and ongoing media coverage kept reform--both government-wide and for indi- political attention on reforms longer than vidual sectors--can generate political commit- otherwise would have occurred. It could even ment, result in more coherent and carefully be argued that as reforms became more rou- planned reforms, mobilize constituencies for tine, public and media attention dropped-- reform, and focus public debate on benefits and contributing to fewer and less effective reforms costs. Reforms are more credible when the path in later years. forward is clearly defined, and credibility is vital if the private sector is to invest and workers are Mexico's reforms started with little support from to accept bearing some risks in addition to civil society. They were top-down, technocratic, reaping benefits. Communication can strengthen the voices of quiet game of claiming credit for reforms back those who support and stand to gain from home, while publicly giving credit to the reform. Important allies of reform include reforming government. Yet there is skepticism consumers and businesses who will gain from that donors are especially effective at driving lower-cost, higher-quality goods and services, successful reforms. Recent evaluations by the and employees in fields where job creation and World Bank have found low compliance with wage growth are constrained by unnecessary policy conditions for Bank structural adjustment regulatory restrictions. loans, even though these policy reforms are leveraged, negotiated, and monitored.6 External Pressure In two of the countries studied here (Hungary and Korea), conditionality for OECD member- One surprising finding of the six case studies is ship was important in strengthening other the importance of external commitments and reform drivers. Conditionality seems most drivers, even for governments in highly developed effective when reform is already supported by countries. In some cases external institutions other reform drivers, such as political leadership seem to act as an escape valve, permitting a and preexisting commitment to change. A 2004 reform-minded government to shift the responsi- evaluation of the FIAS administrative barriers bility for reform--and hence the political program found that conditionality works when it costs--to external players. In other words, is supported by reformers in the client country external drivers can weaken the public-choice who need support during the implementation driver in which individual politicians are account- phase. In Croatia and Latvia, for example, able to special interest groups. External drivers implementation of FIAS recommendations was have included international bodies such as the part of World Bank structural adjustment loans. OECD and International Monetary Fund (IMF), This pressure was welcomed by Croatian reform- intergovernmental organizations such as the ers facing political fatigue. And Latvian reform- European Commission, trade agreements such as ers actually volunteered the idea of putting the NAFTA, and bilateral relationships with donors. most difficult FIAS recommendations into the structural adjustment loan conditions. The most compelling example is in Mexico, where a trade agreement made trade liberaliza- By itself, conditionality seems insufficient to break tion a binding national obligation that reformers the balance of power that maintains the status used to justify further privatization and eco- quo. But when teamed with other drivers of nomic deregulation. The trade agreement reform--especially reform-minded technocrats-- shifted discretion away from a government that donor pressure seems to expand or at least was previously unable to quickly move away maintain opportunities for change. from special interests and toward technocratic and reform-minded institutions. 6 The nature of conditionality, particularly as applied by the World Bank, is changing in response to perceived failings in enforcement; see World Bank (2001). For a Donors have a mixed record in terms of using recent review of the literature on policy conditionality, external drivers strategically. Most donors play a see Mosley, Noorbakhsh, and Paloni (2003). The drivers of reform are the fuel that enables As noted, the six countries discussed here do not governments to overcome pressures to maintain show a linear cause-and-effect scenario in which the status quo. But these drivers must be chan- a single driver of change creates and defines the neled into a reform strategy that identifies, success of reform. Crisis did not create reform; adopts, develops, communicates, and imple- nor did political leadership. All six countries ments beneficial changes. The design of these used a changing mix of drivers through an changes is the real technology of reform. unfolding sequence of events. Despite country- specific situations, there seems to be a pattern to This chapter identifies critical success factors for how drivers were sequenced: the reform strategies in the six subject countries. Its sections correspond to major components of A crisis, a sense of impending crisis, or the reform process identified in previous studies: external obligations were always important at exploiting drivers of reform, setting the reform the start of reforms. They redefined the agenda, implementing reforms, monitoring political economy of launching change, and reforms, and sustaining reforms over the me- emboldened reformers inside the government. dium term (Table 4). Crisis and obligations generated market- Exploiting Drivers of Reform oriented reforms when politicians allowed technocrats to design the way forward, Making strategic use of drivers of reform--even define the content and goals of reforms, and those exogenous to the policy process--is one key spearhead their implementation. to successful reform. Drivers of the status quo can be overcome only with a mix of drivers of reform. Market-oriented reforms became sustainable How can the drivers identified in this paper be with institutionalization and mobilization of amplified to maximize opportunities for reform? constituencies for change. The way that these steps work together is the with special powers and responsibilities, to reform strategy, and the effectiveness of using support implementation over several years. In drivers to seize opportunities for reform will the United Kingdom, when political momen- vary depending on the strategy used. Korea tum faltered, government institutions-- shows the importance of using the right including task forces and other partnerships strategy to exploit opportunities for change: its already established in the bureaucracy--took growing NGO population was empowered over and ensured that reforms continued. In through the unprecedented transparency and Italy, however, a failure to separate the roles of consultation procedures of the regulatory politicians and civil servants undermined the reform. The transparency of Korea's reforms sustainability of reforms. was ideally matched to encourage and benefit from the emergence of an NGO constituency Setting the Reform Agenda that was proactive and ready to challenge the government. In Mexico, the opportunities pro- These six countries exhibited remarkably similar vided by NAFTA were realized only through reform patterns. Crisis generated market- the creation of new institutions charged with oriented reforms when agendas were set outside preparing the country to become more com- traditional insider-interest processes. Reform petitive. In both cases the governments were agendas were imported from other countries, or not satisfied with simply reacting to the drivers politicians allowed reform-minded technocrats of reform: they also created situations where to define the goals and content of reforms. The the drivers were amplified and sustained over a risks of getting reform wrong are highest when long period. pressures to reform are highest, because of a strong incentive for short-term efforts to get fast Hungary used the imperative of transformation results. If reform is captured by insider interests and EU membership to launch its reforms, but at this stage, it may simply paper over underly- made extensive efforts to build new institutions-- ing causes, leading to a harsher crisis later. Many both top-down and bottom-up--throughout analyses of the 1997 Asian financial crisis the public administration. Rapid initial concluded that this was what had happened to economic deregulation and constitutional earlier efforts to address the growing economic reforms, driven by the prime minister's office, imbalances in the region. Thus initial agenda were followed by a period of consolidation and setting is crucial. institution building throughout the public sector to build the mechanisms needed to In all the countries discussed here--both oversee free markets. This pause was needed to moderately and highly developed--reform maintain the support of an increasingly alarmed agendas were strongly influenced by interna- public and to build new constituencies for tional practices and pressures. Whether in the reform in the public sector itself. It was followed interest of the European single market, the by new rounds of reforms. North American market, or OECD member- ship, outside agendas became domestic agendas. Although crisis and political leadership can The benefits of integration and convergence launch reform, institutionalizing reform is came to be seen as more important political crucial to combating resistance. In Australia, the advantages than continued deference to the National Competition Policy reform effort insider interests that had previously enjoyed began in 1994 with support at the highest levels. primary influence. In addition, international But in 1995 the government realized that it had benchmarks of reform practices increased to create the National Competition Council, transparency for reforms that had gone off track. TAB LE 4 Critical Factors for Reform Success in Six Countries United Factor Hungary Korea, Rep. of Mexico Australia Italy Kingdom Exploiting Institutional The country's Potential While the A failure to When political drivers of drivers of reform expanding opportunities National separate the leadership reform were shifted NGO arising from Competition roles of faltered, at opportune population was NAFTA Policy was first politicians and government times to have given more accession were adopted in civil servants institutions-- reformers be power to help amplified by 1994, the undermined the including task the ones most reforms through creating new government saw sustainability of forces and other adept at deliver- government government the need in reforms. partnerships-- ing needed adoption institutions 1995 to create took over and results. of transparency charged with the National ensured that and preparing Competition reforms consultation Mexico to Council to continued. procedures to compete. ensure the advance policy's regulatory implementation. reform. Setting the High-level Political parties Current Clear Unions involved Creation of reform agenda commitment to supported difficulties in competition with reform the Better market-oriented reforms to furthering principles set represented Regulation Task reforms was counter the market-oriented standards of both public and Force, vital to securing fiscal crisis. reforms indicate accountability private workers, containing support from The public that earlier ones for the new helping to many private foreign investors supported were too National balance stakeholders, and creditors reforms to top-down to Competition concerns of spread on whom the reduce overcome Council and potential ownership of government corruption. institutional counterpart winners with reforms. It depended for Mutually resistance and state groups. those of recommended economic reinforcing build outside The council was possible losers. necessary growth. goals sustained constituencies. supported by actions and long-term the well- The sustainabil- monitored Though seeking support. Enacting federal respected ity of reforms success. a dramatic shift competition and competition was undercut to free-markets, The 1998 Basic administrative authority and because Ad hoc groups Hungary relied Act on practice laws powerful political support with both public on existing Administrative provided more finance ministry. did not extend and private legal and Reforms created certainty to Clearly defined beyond the members administrative the Regulatory businesses and, commitments prime minister initiated frameworks to Reform Body through greater and responsibili- and a strong reforms, and implement and mandated transparency, ties helped minister. No central ministries change. Periods quality controls improved public increase single, powerful institutionalized of intensive such as acceptance. stakeholder new institution the process. But reform were regulatory Market support for emerged, and lack of an followed by impact analysis. openness reform. the finance overarching periods of Reformers based increased ministry did not strategy slowed building these analyses pressures for play a major some reforms institutions and on OECD liberalization, role. Reform and results. The broadening guidelines and which led to momentum build-up of new ownership of used the OECD reforms in waned when initiatives was changes. peer review public sector the government often hard to process as an capacity for changed. digest and external pressure good coordinate with to maintain the regulation. stakeholders. quality of reforms. TAB LE 4 (Con t in ued ) United Factor Hungary Korea, Rep. of Mexico Australia Italy Kingdom Implementing In just a couple In addition to An account- National The short-term Businesses and and monitoring months, a legislating able, transpar- Competition goal of cutting consumers were reforms courageous information ent, efficient Policy red tape was invited to join in guillotine review disclosure, regulatory agreements backed up by the reform helped Korea required framework was between the tangible, visible process through eliminate independent enhanced by national and tools, strategies, participation in obsolete reviews of placing draft state govern- and structures ad hoc regulations. regulatory regulations and ments provided (self-certifica- advisory Another led to quality, regulatory a public tion, one-stop groups. harmonization supported by impact analyses benchmark for shops, with EU legal consultations online for public all subsequent codification, standards. with stake- review and review and regulatory holders. comment. reforms. impact analysis, e-government). Sustaining Early market An independent Three mutually Initial bipartisan Initially, strong Strong political reforms over openness regulatory supportive agreements central leadership was the medium- anchored the review agency elements-- meant that the leadership was important to term restructuring of at the center of market public received complemented initiate the government government openness, consistent by measures review effort ministries. countered the privatization, messages about that engaged because of a pro-regulation and regulatory the benefits of stakeholders general cultural tendency of reforms-- reform, helping and promoted hostility to the ministries. helped build to maintain their ownership development of constituencies public support of reform. systematic to advance despite approaches needed changes in across initiatives. government. government. Measuring the extent of problems has become a important part of the strategy, communica- growing element of reform strategies. tion, and political engagement needed for Governments are using an increasing range of success. The agendas in most of the six coun- cross-country indicators to set priorities and tries were initially set by fairly narrow groups goals for regulatory reform. This is sensible if in response to a national consensus that the indicators are sophisticated and flexible something had to be done about a specific enough to advance a broad program aimed at problem. This can be a risky period, because net reductions in regulatory costs and risks-- insider groups are strongest at this stage. But changes that actually influence business behav- technocratic groups setting agendas already ior. None of the six countries studied used existed in the governments, newly empowered indicators of business costs to drive reforms; to implement reforms that they had already rather, they were heavily influenced by indica- been promoting. Regulatory reform had been tors of macroeconomic performance. The promoted for at least eight years in Korea, narrower, bottom-up indicators increasingly with few results. Italy had already adopted used to set reform agendas may have a very legislation for the European single market, but different effect on results and sustainability. with little effect on its reams of domestic regulations. Mexico had tried for years to open Although experiences are mixed, the process its economy. Hungary had launched market- of setting the reform agenda seems to be an oriented reforms years earlier. These various reform-minded groups were empowered by Mexico's difficulties in advancing further urgent crisis, external pressures, and political direc- reforms (particularly in the energy sector) after tion to define much bolder reform agendas. 2002 indicate that earlier reforms were too Their experiences with reforms were extremely top-down and autocratic to overcome institu- useful in showing which would not work and tional resistance and build outside constituen- the way to new, innovative strategies. cies. Italy's reforms were so closely identified with a strong minister that reform efforts These technocratic agendas, at different speeds, dissipated when that champion left office. received support from a growing circle of public Indeed, the six case studies provide little support and private interests--promoting further evolu- for the "champion" model of reform. None of tion of the agendas. In most of the six countries, the six countries used a single strong reformer to public-private arrangements were used to reach a achieve sustainable results. shared vision on the nature of problems and desired outcomes. Mutually reinforcing goals helped maintain support for reform. In Hungary, high-level commitment to market- Implementing Reforms oriented reforms was vital to securing support Drivers, decisions, and designs are good starts, from foreign investors and creditors, who had but the fatal weakness of many broad reforms powerful interests in maintaining rapid eco- is failure in implementation. At the nexus of nomic growth. Foreign investors were extremely public administrations and interest groups, influential in maintaining the country's focus on public choice incentives are highly protective reform. In Korea, the main political parties of the status quo. Reforms designed by a agreed to support reforms to fight the fiscal single technocratic group or political cham- crisis; the public supported them to reduce pion can easily run into problems during corruption. implementation, when the incentives and capacities of existing institutions constrain In the United Kingdom, the 1997 creation of progress. Passive resistance is common, and the Better Regulation Task Force with mem- reforms are easily reversed. The six countries bers of many private stakeholder groups-- studied offer several lessons about successful large and small businesses, consumer groups, implementation. unions--spread ownership of reforms and helped communicate its importance and benefits. In Australia, at the start of reform, First, reforms must be tailored to the country's the national government used financial incen- institutional apparatus. The six countries tives to bring on board stakeholders from state mostly took pragmatic approaches in this governments, an important step given the regard, building reforms into familiar institu- uncertain distributive effects of moving to a tional and legal structures, powers, and competitive marketplace with the privatization incentives--and then, if needed, creating new of many utility monopolies. In Italy, it helped institutions and regimes. Hungary knew that it that the unions involved with reforms repre- needed to make dramatic shifts to move rapidly sented both public and private workers--that to a free market economy (for which there were is, the potential beneficiaries and possible many external models), yet used decades-old losers from reform. legal and administrative frameworks (some from the 1930s) to implement change. Korea The six countries also show examples of the used structures in the prime minister's office, converse lesson: lack of public-private consensus and an influential network of research institutes on reforms reduces the likelihood of success. attached to ministries. Only the United Kingdom built mostly new structures, but this is probably authorities to seek a balance between strong easier in a common law, rather than a civil law central leadership to sustain common goals, and system. autonomy at the local level to implement local solutions. But once top-level political support Second, active management and resourcing weakened, local autonomy allowed a return to of the reform process--primarily through the previous state of affairs. dedicated leadership in the public administration--is essential. Governments Fourth, backing administrative procedures with that strengthened capacities for promoting, judicial action helped embed new behaviors in monitoring, encouraging, and assisting in public administrations--an approach that was reform across the entire government seemed to especially important in anticorruption efforts. do better in implementation. The Office of The power of administrative procedures to Regulation Review in Australia, the various provide new protections and rights in a regulatory better regulation units in the United King- system is often underestimated. Mexico adopted a dom, the Presidential Commission on Regula- new Federal Competition Law, but also amended tory Reform in Korea, and the Economic its Federal Administrative Procedures Law to Deregulation Unit and Cofemer in Mexico protect citizens against bad regulation. Providing institutionalized reforms inside the machinery greater legal security for businesses and individu- of government and began creating incentives als changed the conduct and perception of federal for good regulation. Where such units were public administration in Mexico. In Korea, the weaker, in Hungary and Italy, reforms were Basic Law of Administrative Regulation estab- more variable in speed and scope. This does lished quality controls on new regulations. Italy not suggest that reforms should not be embed- embedded a "silence is consent" approach into ded throughout the public sector (as discussed laws affecting hundreds of formalities. These in the next paragraph), but that centralized, procedures have become a permanent function of accountable, expert leadership of broad reform government, internalized in the public adminis- is closely correlated with success. tration system and protected by the public administration and courts. Third, reforms were more successful when governments built progressively wider networks Fifth, implementation seemed stronger when of reform-minded institutions through the there was continuous learning. In Australia, public administration. Australia built a formal Korea, and Mexico, efforts to benchmark based network of regulatory reform bodies. In the on good practices in similar countries and to United Kingdom, networks of regulatory reform assess, pilot, innovate, and learn from past ministers and units were established throughout experiences were especially important. the central ministries, creating a continually growing, expert bureaucracy. In Mexico, a Although reform agendas depended on country network of regulatory reform units was created needs, international learning was clear: all six in state governments, which began competing countries moved from specific, short-term for good regulation. strategies to longer-term management strategies such as the OECD agenda. Italy's reform plan Countries that failed to build allies--Hungary initially emphasized cutting red tape for citizens and Italy--needed more political energy to keep and businesses, but expanded to improving reforms moving, and faltered faster when broader dimensions of regulatory quality political attention weakened. Italy initially through regulatory impact analysis. These goals created partnership agreements with local were backed by the deployment of an array of tools, strategies, and structures--self-certification, stakeholders to participate in the effort and one-stop shops, codification, regulatory impact provide ongoing oversight. analysis, e-government--to promote regulatory quality. Hungary used a courageous guillotine In Mexico, the public was invited to participate regulatory review that in just a couple months in rulemaking for the first time. Draft regula- helped eliminate obsolete regulations. A second tions and regulatory impact analyses were review focused on deregulating and simplifying posted online for public review and comment. licenses and government authorizations, and a Reviews of each ministry's efforts to produce third used EU legal harmonization to modernize high-quality regulations were made public. A regulatory oversight. In Korea, the target for a national benchmarking project allowed citizens fast 50 percent reduction in each ministry's to compare the quality of state regulations. regulations was accompanied by a suite of new disciplines and controls such as regulatory The Korean government set a public target of impact analysis and new administrative cutting ministerial regulations by half, holding the procedures. entire government accountable for performance. This public accountability was largely responsible for the success of this reform. In addition to legislating information disclosure, Korea opened Monitoring Reforms up its regulatory system by requiring and The six countries studied suggest that integrating disclosing independent reviews of regulatory results monitoring with the reform process from quality by the public-private Regulatory Reform an early stage sustains political and bureaucratic Committee, supported by consultations with attention to reforms. Monitoring is crucial for stakeholders in regulatory development. two reasons. First, it helps maintain active In Australia, agreements between the national management and political attention to the and state governments on the National Competi- regulatory process during implementation. tion Policy provided an agreed, publicly available Second, it helps build some pro-reform drivers, benchmark for all subsequent review and reform such as new constituencies for reform in civil efforts. These clear principles for promoting society. competition and a constant, comprehensive approach provided explicit standards to which Two types of monitoring were used in these six government efforts would be held accountable. countries. The first was ongoing monitoring by Furthermore, the National Competition Council, stakeholders through consultation, transparency, working with state-level competition policy units and participation in the reform process. The and competitive neutrality units, was responsible second was more traditional monitoring, for monitoring results. involving the measuring of results once imple- mentation was complete. In both cases, moni- The United Kingdom invited businesses and toring was especially effective when it was a consumers to join in the reform process through public-private exercise rather than one con- participation in ad hoc advisory groups. This trolled entirely by government. participation provided these stakeholders with a sense of ownership of reforms. Clear quality standards and goals for reforms were powerful aides in pushing ahead. Even These experiences suggest that monitoring, more important was monitoring progress rather than being a technical exercise of check- in reaching standards and goals. Support ing results, should be conceived as ongoing, for reform was strengthened by inviting active oversight built into reform implementa- strategically, but not economically, important. tion and post-implementation. Stakeholders The most important benefit is how well short- should be continuously and heavily involved. term reform strategies prepare governments to Properly designed monitoring actually improves move to more sustainable strategies. Initial the results of reforms. reforms should lead directly to secondary reforms aimed at institutionalizing central units for regulatory reform, creating systematic Sustaining Reforms over consultation procedures, and building capacities for regulatory impact analysis. The six countries the Medium Term studied show how broad, evolving reform One of the main messages of this paper is that programs can progressively change the role and market-oriented reforms become sustainable culture of governments. only when they are institutionalized and con- stituencies for change are mobilized. The case Mexico did not start with public sector reforms, studies describe how that was done in the six but adopted a comprehensive reform plan with subject studies. mutually supportive elements--market open- ness, privatization, and regulatory reforms. A point worth repeating is that well-designed Each reform revealed weaknesses in the public reform programs do not work only within sector that had to be corrected. For example, existing limits, but work actively to expand rapid privatization showed that competition opportunities by exploiting reform drivers, and regulatory oversight frameworks were relying on good design, and building allies to not sufficiently developed to oversee private weaken drivers for the status quo. Moreover, markets. Throughout the process, Mexico's efforts to sustain reform did not occur in fits reformers used the OECD peer review and starts in any of these countries. The best process as an external pressure to maintain scenario is an unfolding reform sequence that momentum. produces its own momentum, as in Australia Korea explicitly attacked the public choice and Mexico. foundations of regulation. Reforms took an institutional approach that sought to reduce Public sector resistance to change is one of the incentives for capture and rent-seeking behavior. most formidable obstacles to sustaining reforms. Regulatory quality was ensured by an indepen- In fact, in none of the six countries was there dent agency at the center of government in- significant opposition to reform by citizens or tended to check the pro-regulation tendency of the private sector--only in the public sector. So, ministries. from the start the strategies in these countries aimed at institutionalizing new regulation Australia created entirely new incentives for methods, with public sector reform at the center quality regulation in the public sector. A nation- of all of them. This lesson is easily generalized. ally coordinated series of regulatory reviews, If countries are to achieve sustainable higher with performance targets and incentive pay- growth rates, their public sectors must adopt a ments, was essentially a wholesale assault on the different culture of governance geared to cozy relationships between the public sector and market-led growth. Indeed, this could even be producer groups that had developed over the definition of sustainable reform. decades. The imperative of public sector change must Finally, sustainable reform requires achieving shape the reform strategy. Short-term results are growing social consensus on market-based growth: the "liberal consensus." All six of these In the United Kingdom, converging views in the countries achieved such consensus partly by European Union on market freedom, privatiza- stoking fears about national competitiveness, but tion, structural reforms, and (later) EU impetus this seems like a fragile basis for long-term for changes to competition policy provided a change. In the most successful of these countries, rationale and allies for change. In Korea, the regulatory reforms sought to exploit and then most difficult of the six cases in terms of accep- reshape social attitudes toward markets. Austra- tance of markets, the ambitious regulatory lia's reforms were built on bipartisan agreements, reform program was supported by messages from and this political consensus meant that the the government that imposing market discipline public received consistent messages about the was a tool for achieving important national goals, benefits of reform--which helped maintain rather than a threat to social stability. The public support across different administrations. struggle between these views continues in Korea. The ultimate goal of this type of work is to one area may be compensated for in another. generalize operational lessons for countries other For example, a stable political context based on than those studied. Reforms were hard enough cross-party consensus may be unattainable in in those six countries, but are likely to be even many countries. This implies paying more more difficult in countries with more hostile attention to building pro-reform coalitions reform environments and weaker institutions in among a broad range of stakeholders that can the public sector, private sector, and civil society. survive the ups and downs of political enthusi- Still, the key question is the same: how can asm and discord. If there cannot be stable reforms be designed to maximize their chances cross-party consensus, working to develop for sustained success--that is, real and lasting institutions in the bureaucracy as long-lasting benefits for businesses? reform champions is another way to develop and sustain reform momentum. Though there seem to be clear patterns corre- lated with success, there is no single model for Reformers seeking to launch reforms that foster regulatory reform. The six countries studied higher, sustainable economic growth rates show that many institutional and design factors should consider the following actions. are important in developing and sustaining reform momentum. They also show that success Identify and exploit multiple drivers of reform. factors seem to be interrelated, with the more successful governments investing simultaneously The reforms analyzed in this paper occurred in in strategies such as managing the reform an unfolding sequence in which various drivers program, promoting ongoing public-private were amplified and sustained through clever dialogue, and monitoring results. reform strategies. Although substantial ele- ments of reform were beyond their control, These factors do not all have to be highly reformers were able to exploit and extend the developed for reforms to succeed. Weakness in pro-reform pressures from those drivers. This shows how drivers of reform changed over and "demonstration projects" that can fuel time, and how strategies of reformers encour- further reforms. That might be accurate if they aged and supported the emergence of new are part of a larger medium-term strategy, but drivers of change. often they are not. Because the problem of poor business environments is systemic, genuine Use a crisis if available, and lock in political solutions must be systemic as well. leadership and bipartisan political support through new institutions, formal agreements, Still, one-off and visible projects can certainly implementing legislation, and international contribute to systemic change. Early results help agreements. build credibility and momentum, and success breeds success. A crisis can provide an opportunity to stimulate action, but is generally a poor basis for sustained Start reforms with a clear, well-designed reform. The six countries show that opportuni- medium-term strategy that has room to evolve. ties provided by crisis should be used to lock in reform commitments and build expectations An effective medium-term reform strategy among enduring constituencies. International sustains reforms and provides a focus and agreements, formal involvement by stakeholders, rallying point for them and a basis for moni- and new public sector institutions can help toring progress. The strategy should be based maintain reform as a crisis fades or new political on careful appraisal of linked issues that need imperatives take over. One approach used by to be addressed. Although a piecemeal ap- several of these countries was to create new legal proach is possible, success may be less likely rights for citizens and businesses through because of the higher risks of derailment and administrative procedure laws--making it poor sequencing. The strategy should synchro- impossible to reverse the new rights later. nize regulatory reform with public sector reform that adjusts the state's role, functions, Spreading ownership of reform across as many and capacities. Personnel and budget changes stakeholders as possible ensures that reform should follow naturally as commitments and champions emerge who will outlast the depar- responsibilities are allocated through the public ture of any particular individual. The case administration. studies show that sustainability is at risk if reforms rely on narrow political bases. Momen- Put transparency at the heart of the process and tum for reform should be maintained by educat- reform contents. ing citizens on its desirability, monitoring changes, and informing the public on progress. All six of the countries studied created a public reform process and public expectations for Aim for systemic change, but use one-off success. Reform programs were based on public reforms to build momentum. participation and stakeholder involvement, while the actual reforms aimed to institutional- All the countries examined here tackled reform ize greater transparency in the government's through systemic change--in contrast to the regulatory function through tools such as regula- tendency of most governments and donors to tory impact analyses, public consultations, and pursue narrow, one-off reforms. Because such registries of regulations. reforms seem to promise rapid results and provide quick fixes to highly visible regulatory Transparency is not only a tool for strengthening problems, pressure for "quick fixes" will likely reform drivers, it is also crucial in reducing continue. Donors describe them as "realistic" regulatory risks--one of the main goals of reform. Strict adherence to principles of transparency and Because political support is likely to shift to accountability is vital to market confidence in a another crisis before long, institution building is modern regulatory state. This is an aspect of needed to create sustained reform incentives in systemic reform. Reforms should include develop- the machinery of government. The leading ing new transparency habits across the public countries studied here have adapted existing administration (for example, through administra- institutions or built new ones to create support- tive procedures or information access laws). New ive, pro-reform networks. They established technologies such as electronic registries can also "reform engines" at the center of government, support openness, and at lower cost. supported by competition offices, networks among ministries, audit offices, finance minis- Maintain effective, ongoing communication at tries, and other pro-reform institutions. all levels. Encourage change and develop relevant skills Communication is a key part of reform efforts. in the public administration. In most of the countries studied here, clear and continuous communication of reforms' pur- Steps are needed to equip the civil service to pose and progress--both to participants in the implement reforms--which at some stage may reform process and the general public--was have to involve public sector reform. The important. If poorly informed, the public is bureaucracy must be encouraged to buy in to more likely to reject reforms. Consultation reforms, perhaps through changes in incentives mechanisms can also ensure that key stakehold- and skills. Centrally placed structures and ers (such as businesses) stay on board. Commu- support from finance ministries can be very nication of reform purposes and tools can helpful in this process. prepare civil servants for their role in reforms, and reduce the anxiety that often accompanies Monitor and evaluate to keep players on track, change. and publicize results to sustain reform momentum. Ensure that the implementation strategy adapts to different stages of reform. Effective monitoring and evaluation of specific reform targets as well as of the complete picture There is a progressive "locking in" strategy as are essential for sustaining reform against active different stakeholders become involved in and passive resistance. The main goal is to reform. At the beginning, political support demonstrate credible benefits of reform to may require pushing, commanding, and stakeholders and so disarm critics. A participa- expending political capital to overcome resis- tory evaluation process can sustain stakeholder tance. Political leaders are better off if they support. Evaluation also helps keep players on build technocratic institutions early. But as track by creating feedback loops that allow reforms are adopted, laws enacted, and imple- reform programs to be monitored, modified, mentation starts, political leadership and and improved over time. top-down direction may need to give way to guidance, management, and increasingly open Prepare for a long commitment. and participatory approaches involving more stakeholders. Different stages of building Effective, durable reform is a dynamic, long- ownership and constituencies generally require term process--not a single, static program. different leadership styles, communication Reforms can be expected to span more than one skills, and mixes of incentives. political cycle, probably several. Gains from reform tend to dissipate over time with countries.7 Regardless of the type of tools economic and social changes, and losers from used--such as regulatory impact analyses or reform may exert constant pressure to reverse regulatory guillotines--country-specific adapta- or undermine achievements. New needs and tion is key to successful implementation. expectations will require continuous adjust- ments. Regulatory reform programs that began Third, although some ideal sequencing of 25 years ago can be just as dynamic as those reforms could be envisaged, no prescribed created last year. Reform mechanisms, institu- sequence of reforms can be generalized across tions, and processes must be robust enough to countries. For example, eliminating administra- endure the long haul. tive burdens does not always precede making broader attempts at systemic reform. The The 11 lessons above carry three key, cross- imminent intertwining of reform components cutting messages. First, sustainable reforms must and the multiplicity and shifting of its drivers be embedded in an effective institutional require that reformers have a flexible strategy framework. Such a framework is critical because with well-defined medium- and long-term goals. it can guide, monitor, and sustain reform A clear strategy allows reformers to better exploit momentum beyond what may sometimes be the shifting drivers and fine-tune efforts in line with relatively short attention spans of policymakers changing circumstances. and political cycles. 7 The general usefulness of most of these approaches is widely accepted, though additional research and testing are Second, the country context has implications for needed. FIAS, in cooperation with the U.K. Department how reform tools and techniques can be applied. for International Development and the Netherlands government, recently launched a two-year Regulatory In recent years, a range of regulatory governance Governance Program intended to further develop and tools have become available to developing adapt regulatory governance tools to developing countries. Drezner, Daniel. 2000. "Bottom Feeders." Policy Research Working Paper 3986. Foreign Policy (November­December): 64­70. Washington, D.C. Friedman, Thomas L. 2005. The World Is Flat: OECD (Organisation for Economic Co-operation A Brief History of the Twenty-First Century. New and Development). 1997. "Report on Regulatory York: Farrar, Straus, and Giroux. Reform." Paris. Mosley, Paul, Farhad Noorbakhsh, and Alberto Jacobs, Scott, Peter Ladegaard, and Ben Musau. Paloni. 2003. "Compliance with World Bank 2007. "Kenya's Radical Licensing Reforms, Conditionality: Implications for the Selectivity 2005­2007: Design, Results, and Lessons Approach to Policy-Based Lending and the Learned." Paper developed for the Africa Design of Conditionality." Research Paper Regional Consultative Conference, "Creating 03/20. University of Nottingham, Centre for Better Business Environments for Enterprise Research in Economic Development and Development: African and Global Lessons for International Trade, Nottingham. More Effective Donor Practices," November 5­7, 2007, Accra, Ghana. Vogel, David, and Robert A. Kagan. 2004. Dynamics of Regulatory Change: How Global- Jacobs, Scott, and Irina Astrakhan. 2006. ization Affects National Regulatory Policies. "Effective and Sustainable Regulatory Reform: Berkeley and Los Angeles: University of The Regulatory Guillotine in Three Transition California Press. and developing Countries." Jacobs and World Bank. 2001. World Development Report Associates, Washington, D.C. 2000/01: Attacking Poverty. New York: Oxford University Press. Kikeri, Sunita, Thomas Kenyon, and Vincent Palmade. 2006. "Reforming the Investment World Economic Forum. 2002. Global Competi- Climate: Lessons for Practitioners." World Bank tiveness Report 2001­2002. Geneva. APEC Asia-Pacific Economic Cooperation Consortium EU European Union GATT General Agreement on Tariffs and Trade IMF International Monetary Fund NAFTA North American Free Trade Agreement NGOs non-governmental organizations OECD Organisation for Economic Co-Operation and Development