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How better regulation uplifts business, society

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DG of Consumer Protection Council, Dupe Atoki

DG of Consumer Protection Council, Dupe Atoki

THE Singapore story is a classic grass to grace story. Some 55 years ago, the country was a small island inhabited by less than two million people with a meagre $428 per capita income. Today, Singapore has a per capita income of $55,000.
How was this achieved?

Its founding father, and former Prime Minister, Lee Kuan Yew, had a good vision of what he wanted for his country. After a difficult independence from Malaysia, he decided that for Singapore to prosper, he needed businesses, both local and foreign.

He approached huge US business Corporations to set up shops in Singapore. He supported local businesses with funds to expand and become global. Though he was often criticized for his government’s heavy handed intervention, he understood that such interventions were necessary if business enterprise must bring about a shared prosperity for his country. He built a state of the art infrastructure, clean and efficient bureaucracy, and a strong regulatory and legal framework.

The case for regulation

Adam Smith, in his classical “Wealth of Nations”, reasoned that it is not prudent to leave businessmen unregulated in a free market. Business men cannot be trusted not to contrive against the public. In his exact words: “… people of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Governments, over the years, have intervened for so many reasons. Government has intervened to prevent market failures which occurs when one party’s actions impose uncompensated costs on another party e.g. regulations to protect the environment from emissions from private plants; or where firms control prices as a result of monopoly in the market, consider what a local distributor of electricity may do if it’s the only company connecting consumers to the source of power and there is no price regulation.

Another rationale for government intervention is to promote market efficiency. For example, if power distribution companies are allowed to operate freely in the market there would be much duplicate and waste as each company will erect electric poles in every community.

Over Regulation

However, regulation is not without its draw back. Governments have often been prone to over regulate. The burden of regulation is huge in many countries – huge costs, needlessly burdensome administrative requirements operate adversely on the economy. It’s been observed that the UK economy looses 80 billion pounds of business yearly due to regulatory burdens. The Institute of Directors also claimed that 73 hours a month is expended in dealing with regulation and administering government red tape.

The Dodd Frank Law is an example of over regulation. The Dodd Frank Wall Street Reform and Consumer Protection Act was introduced by American lawmakers who reasoned that to forestall another financial crisis, they needed to improve transparency, stop banks from taking excessive risks, prevent abusive financial practices. The law authorized regulators to seize and wind up any failing financial firm. However, the Dodd Frank Law has its problem.

At 823 pages, it’s too long. It mandates about 400 rules, this makes it too complex. Complexity costs money and businesses usually have to deal with these costs. When businesses suffer such huge losses to meeting regulatory demands then there are implications for economic growth and development.

In Nigeria, businesses have always groaned about excessive administrative burdens imposed by regulatory agencies. For example, simple matters like incorporating a company which requires 3 procedures and takes 3 days in Singapore, will require eight procedures and 28 days in Nigeria.

Over regulation puts a huge compliance costs on business. Businesses expend efforts on paper work, training and modifying process as against utilizing such efforts on how to improve quality of products, introduce new technologies and improve efficiency.

The stark reality is that when cost of compliance exceeds the potential for profit businesses will close, and move out to a more favourable regulatory environment.

Businesses that choose to stay despite huge compliance costs will put the costs on their products and services for consumers to bear. In other cases, to make up for these costs, cuts are made on jobs and reductions on employee benefits. The costs of over regulation are rarely seen but the society bears these costs in the long run.

Better Regulation for Better Business

Paul Craig Roberts, a former Assistant Secretary of the Treasury, under the Ronald Reagan Administration in the US, has argued that a well-reasoned regulation is an important factor in promoting growth.

Anywhere in the world where the Government had seriously pursued an economic development agenda, promoting business has always been at the heart of it. To promote business you need good rules – rules that establish and clarify property rights, rules that ensure that economic interaction are predictable, certain and protect contractual partners from abuse, rules that are efficient, accessible to all and simple in their implementation.

The path to economic growth and development calls for positive reforms of a country’s regulatory regime. Reforms that make it faster, cheaper or administratively easier for business to start and run operations. For example, reforms that reduce administrative burden and cost of registering property make it easier to start a business.

The purpose of any business regulation policy is to ensure that regulations are justified, of good quality and fit for purpose. Such policy must support business to grow and expand, and also assist policy makers determine what to regulate and how to regulate.

An effective regulatory policy must be anchored on three important factors: a. an evidence based impact assessment to fully appreciate the effect of any new regulation on business; b. a well-established institution and structure to drive and implement regulatory reforms; c. an active involvement of all relevant stakeholders at every stage of the regulation making processes.

The Nigerian context

Nigeria has a population in excess of 167 million people with a GDP (after rebasing its GDP data by 40 per cent) of about $375 billion. Nigeria is the second largest economy in Africa, just behind South Africa, and inevitably a huge market for consumer products. Over the last decade, Nigeria has experienced a robust economic growth of about 6-7 per cent which is largely driven by the non-oil sector of the economy.

While the country’s economy boasts impressive statistics but such huge figures is usually dwarfed by its rapid population growth. The economic growth has not been able to keep up with the pace of the increase in its population size. As a result, there is widening income inequality, and a predominant proportion of the population (63 per cent) still live in extreme poverty. 42 per cent of the population does not have access to good drinking water, 69 per cent of the population lack basic sanitation. Life expectancy is still below 50 years. Unemployment is still very high especially among the youth.

Concerned about the sustainability of its economy in the wake of the volatility in oil prices, the new Nigerian Government is determined to diversify its economy and seek investors in manufacturing and agriculture sectors as against a heavy reliance on oil exports.

As earlier noted, due to the size of its population, Nigeria is easily an attraction for investors but there are still challenges that will hinder investors from this economy. A poor monetary system, inadequate infrastructure, security concerns are issues the government must deal with. The government must also embark on an aggressive effort to improve the quality of its regulatory regime.

• Badmus, a legal practitioner and consultant lives in Lagos


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