Enhance Prosperity And Improve Health: Slash Regulations

By Steven H Hanke – Re-Blogged From http://www.Silver-Phoenix500.com

Productivity and economic growth continue to surprise on the downside in most countries. While there is a great deal of handwringing over the so-called productivity puzzle, little attention is given to the real elixir: freer markets and more competition. Indeed, the policy tide is moving in the opposite direction in most places.

To get a grip on the productivity puzzle, let’s lift a page from the late Senator Daniel Patrick Moynihan, who once said, “You’re entitled to your own opinions, but you’re not entitled to your own facts.” Yes. There is nothing better than a hard look at empirical evidence to see if it supports those who espouse freer markets or those who embrace the regulatory state as models to enhance our prosperity and health.

The World Bank has been rigorously measuring the ease of doing business (DB) in many countries for over ten years, producing a treasure trove of empirical evidence. The Bank publishes its results identifying levels of economic freedom (read: regulatory freedom) each year in a volume entitled Doing Business. Ten sets of indicators that capture important dimensions of an economy’s regulatory environment are quantified. The accompanying table defines each of the ten quantitative indicators. These are each measured by using standardized procedures that ensure comparability and replicability across the 189 countries studied. For each indicator, the scores range from a potential low of ‘0’ to a high of ‘100’.

Using the DB scores, we can determine whether there is a relationship between a freer regulatory environment (a high DB score) and prosperity as measured by GDP per capita. The accompanying chart shows that there is a strong, positive relationship between DB scores and prosperity. For example, the United States’ DB score is 82.15 and its GDP per capita is $55,836, while Indonesia’s DB score is only 58.12 and its GDP per capita is $3,346. All the remaining 187 countries are plotted on the chart. There are only four countries that are “outliers”, with outsized GDP per capita relative to their DB scores: Qatar, Luxembourg, Switzerland, and Norway.

In addition to the strong, positive relationship between regulatory freedom (ease of doing business) and prosperity (GDP per capita), deregulation yields increasing returns. That is, each increment increase in the DB score yield larger and larger gains in GDP per capita. With each improvement in the DB score, there is a more-than-proportionate improvement in prosperity. This explains why post-communist countries that embraced Big Bang economic liberalizations, like Poland, have done so much better than the gradualists. The Big Bangers literally got more for their buck.

Economic prosperity is, quite literally, a matter of life and death. The relation between income growth and life expectancy is, of course, complex. Economic prosperity affects life expectancy through many channels: higher individual and national incomes produce favorable effects on nutrition, on standards of housing and sanitation, and on health and education expenditures. While it is true that reductions in mortality have sometimes been the result of “technological” factors, in the larger sense, it is clear that sustained economic growth is a precondition for the kinds of investments and innovations that, over time, significantly reduce mortality. The evidence on this point is abundant and unequivocal.

So, knowing that a freer regulatory environment is associated with higher levels of GDP per capita, we should observe that a freer regulatory environment (a higher DB score) is associated with higher life expectancies. Sure enough, it is. The accompanying chart shows a strong and positive relationship between DB scores and life expectancy – albeit one characterized by diminishing returns (given additional increments in DB scores yield smaller and smaller gains in life expectancy.)

Many of the 189 countries reviewed in the Doing Business 2016 report are far away from adopting “best practice” policies when it comes to the regulatory frameworks they impose on businesses. In consequence, prosperity and health are inferior to what they could be. Just how can that be changed? The easiest way is the simplest: just mimic what is done where “best practice” policies prevail. This is an old, tried-and-true technique that is used in industry, particularly when competitive markets prevail. Just copy what the “good guys” do. If you do so, you will become productive and competitive. These lessons about the diffusion of “best practice” and how it improves productivity are documented in great detail in a most insightful book by William W. Lewis: The Power of Productivity. Chicago: University of Chicago Press, 2004. The same strategy can be used by governments to slash regulations.

For example, until 2009, those seeking to import and sell pharmaceuticals in the Republic of Georgia faced the same regulatory review process as one would if the drugs were produced domestically. Applicants would pay a registration fee and file a two-part form with the Departmental Registry of State Regulation of Medical Activities at the Ministry of Labor, Health, and Social Protection. The subsequent review involved both expense and delay, with a fair amount of back-and forth between applicant and bureaucracy as technical examinations led to agency demands for corrections. This process was not intended to exceed about six months, but often took far longer. In addition, the government required all importers to obtain trade licenses from foreign manufacturers, adding to their costs.

In October 2009, however, the Georgian government did something remarkable. Recognizing that its regulatory machinery was, in fact, unnecessarily duplicating that in many developed countries, it adopted a new “approval regime.” It compiled a list of foreign authorities with good regulatory track records (including, for example, the European Medicines Agency and drug administrations in the United States, Japan, Australia, and New Zealand), and pharmaceuticals that were approved for sale by those entities could henceforth gain automatic approval for sale in Georgia. In addition, the registration fee was slashed 80 percent for brand name drugs and packaging regulations were greatly simplified under a new “reporting regime.”

This regulatory outsourcing compressed the time and greatly reduced the expense required to compete in the Georgian pharmaceutical market. The hope was that this would put significant downward pressure on prices and improve access to drug therapies in the domestic market. It did so very quickly. (These results are documented in Steve H. Hanke, Stephen J.K. Walters, and Alexander B. Rose. “How to Make Medicine Safe and Cheap.” Regulation, Fall 2014.)

To grasp the huge potential for increasing productivity, prosperity, and health, let’s look at Indonesia. The accompanying table shows Indonesia’s DB score for each of the ten indicators. Each is compared to the score of the country with the best DB score in that indicator. For example, Indonesia has a deplorable score on enforcing contracts. Indeed, the gap between Indonesia and Singapore, which scores the best on that indicator in the 189 countries studied, is huge. So, the potential improvement for Indonesia by adopting the best practice for enforcing contracts is enormous.

Just what overall improvements in Indonesia’s regulatory regime would do for prosperity is displayed in the last table relating incremental DB score improvement to GDP per capita. Indonesia’s current score is 58 and its GDP per capita is $3,346. So, if Indonesia attempts to slash its regulations and move closer to best practice – let’s say it improved its DB score by 10 points, yielding a score of 68 (the same as Greece and Serbia) – Indonesia’s GDP per capita would be expected to jump by $4,999, or 2.5 times. 

With an appeal to the facts, the productivity puzzle is easy to solve. Just slash regulations by mimicking observed best practices.



9 thoughts on “Enhance Prosperity And Improve Health: Slash Regulations

  1. Wouldn’t it be more interesting, rather than ignoring the outliers, to as the important question – why do they have such superior GDP WITHOUT the matching DB curve inputs?

    But that might shake up the author’s predispositions. Better to ignore data we cannot explain.

    Also interesting is the first sentence, versus the rest of the paper: “Productivity and economic growth continue to surprise on the downside in most countries.”

    The rest of the paper looks at a particular moment in time, and extrapolates forwards and backwards from there. More interesting would be to look at the relationship OVER time. I suspect that, at least for the US, lower regulatory burdens and “increasing freedom” (as they like to call it) doesn’t correlate with US productivity gains and losses over time.

    It’s weird when your opening statement sets out one thing, but your article attempts to “prove” another about progress over time, while ignoring time.


  2. It also says the numbers have been gathered only for the last 10 years – hardly enough time to divine trends. Since regulation is one of those socialism vs capitalism things, let’s agree to disagree.


    • 12 years is plenty of time to look at trends.

      As I was taught these things back in the day, there is a reasonable tension between pure unregulated capitalism, and an over-regulated market. I think it is widely understood (and probably easy to agree) that zero regulation would significantly reduce quality of life in America, and that excessive regulation has equivalent downsides.

      The question ought to be -what is the optimal level of regulation, wherein we can balance the benefits to owners of businesses against the benefits to the population at large.

      Many of the anti-regulation papers that I read, even when they attempt to be based upon data, only look at half that metric. “What’s better for business”. In this paper, Gross Domestic Product is being used as a proxy for the citizens. That’s got some correlation – but at a time of dramatically increasing income inequality and increased economic instability and pressure on the “99%”, it’s a less accurate measure.

      (It’s the Bill Gates Problem. If Bill and I were on an elevator, on average were worth a couple Billion apiece. But when Bill gets off the elevator… there go my average Billions.)

      Regulation is HARDLY a “socialism versus capitalism” thing. Look at the table in the data. Page 5

      The highest 15 ranking nations for ease of doing business are:
      1. Singapore
      2. New Zealand
      3. Denmark
      4. South Korea
      5. Hong Kong, China
      6. United Kingdom
      7. United States
      8. Sweden
      9. Norway
      10. Finland
      11. Taiwan
      12. Macedonia
      13. Australia
      14. Canada
      15. Germany

      I see a reasonable mix there between nations we might easily describe as Democratic Socialist (Sweden, Norway, Finland, Germany, Denmark), highly regulated Communist/Socialist (Hong Kong), etcetera.

      You’d have to be blind to confuse a reasonable discussion about optimal regulation with a dichotomy between socialism/capitalism. EVERY ONE OF THOSE NATIONS IS CAPITALIST, that’s why it’s a measure of doing business.


  3. Beyond laws requiring that you do what you say you’ll do and that fraud is a crime, I’ reticent to agree that regulation is of value to anyone – business or consumer – other than to the regulators. Also, keep in mind that many regulations are for the benefit of the regulated. I’ve seen this in several areas, with moving companies one which affected me personally.

    So, “optimal level” is a way to avoid the basic discussion. Regulation has prevented body glue (a life saver during the Viet Nam war) from bringing benefits to the US. Regulation put a company whose customer hospitals were very happy with their pre-filled syringes out of business. (And, don’t try using the precautionary principle, or I’ll come back with that argument on Syrian refugees.)


    • I lack the time to recite history for you.

      We have food regulation because of history of unscrupulous behaviors, we have employment safety regulations because of histories of dangerous jobs, we have regulations against discrimination because even today discrimination is rampant.

      We have the SEC because of the collapse in 2007 (and many others before, see the S&L crisis, or 1929), we have banking regulation because Wells Fargo, we have environmental regulation because VW Diesel, we regulate airlines because of safety, we have….

      It’s astounding to me that you find that hard to remember.

      For the intrinsic value of regulation, I’d recommend reading ‘Liars and Outliers”. Fascinating book and very readable.


  4. I don’t have trouble remembering – I was taught about beneficial government in school too. I just have given some thought to the reasons and find that they are Polyannish excuses. The reason for regulation tends to be for the benefit either of the regulators or the benefit of those regulated. That some good for consumers sometimes offsets some of the negatives for consumers is a confusing factor.

    Recall if you will the three big lies:
    1. The check is in the mail
    2. Yes I’ll still respect you in the morning
    3. I’m from the government, and I’m here to help you


    • “The reason for regulation tends to be for the benefit either of the regulators or the benefit of those regulated”.

      There are three parties in the transaction. The government (who is, sometimes, actually here to help), the regulated business, and the consumer.

      Your analysis is failing because you seem to be only counting the first two. 🙂


  5. On the contrary, as a consumer myself, I don’t like being hurt (on balance) by regulations which are supposed to help me. I read recently that regulation currently costs $1+ Trillion a year. I really would prefer the almost 10% cost instead to stay within the Private, Productive Economy. Consumers are not so stupid or incapable of protecting themselves – and businesses are not so evil if not regulated – that Big Brother needs to intercede.


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