There is little doubt that Ukraine is crippled by vast amounts of the wrong kind of regulation. No one actually knows how much regulation exists in Ukraine, but businesses and citizens are well aware that they face annoyances and barriers to activities that are necessary for the survival of the country. Destructive regulations stop investments that create jobs, innovation that increase wages, and competition that reduces prices and increases choices for consumers.
Regulation is not itself bad. The right kind of regulation is essential to protect citizens and environment. Ukraine’s government is working to construct regulatory regimes that both protect public interests, and facilitates economic performance. Regulatory convergence with the EU acquis communautaire will require years of careful work.
But a new garden cannot grow when the land is choked with weeds. Broad deregulation that is smart, systematic, and transparent is badly needed to identify and eliminate the destructive regulations blocking the energies of the country and discouraging international investors who want to create new value in Ukraine. Ukraine has already had limited success with deregulation through the efforts of the Ministry of Economy and Trade and the Easy Business team, but a broader and sharper-edged approach is needed now.
There are good ways and bad ways to design a national program of deregulation. Many countries have tried to reform regulations, and many have failed. Failure results in the delay of critical reforms, harms people’s lives, wastes resources, and embarrasses political leadership. At this crucial moment, Ukraine cannot afford failure in economic reconstruction.
Any program must be customized and adapted to work well within the priorities, institutions, and public expectations of Ukraine. But Ukraine can also learn from other countries that have succeeded.
A successful method for broad-based national deregulation has been called the “regulatory guillotine.” The regulatory guillotine has its roots in early deregulation efforts in Europe in the 1980s, and developed as the central micro-economic strategy of countries facing economic crisis and looking for rapid reforms.
South Korea used a rigorous guillotine approach after the Asian financial crisis of 1997 to review every regulation affecting business, and eliminate half of them, or 6,000 destructive regulations, in 11 months. Those reforms created a million new jobs over the next few years, generated $27 billion in new foreign investment, and jump-started an economic recovery that continues today.
Mexico used the guillotine method in its fight against corruption and wasteful regulations when negotiating the NAFTA treaty with the United States. It reviewed thousands of procedures and rules, and eliminated over 2,000 that were destroying economic efforts and generating crime and corruption.
The Croatian regulatory guillotine project – Hitrorez or “Rapid Cut” – reviewed 2,683 business regulations in 2006-2007 when Croatia was preparing for EU accession. Hitrorez recommended simplification of 55% of the regulatory stock, reducing costs to businesses and consumers by US$65 million per year. The key success factors of the Croatian guillotine included a systematic approach that took a broad view of regulatory costs; clear project standards, performance, and deadlines; intensive business community engagement; alignment of the guillotine with EU accession process; and use of customized management software to improve efficiency and transparency.
Under contract to the World Bank, and working with Ukraine’s Ministry of Economy and Trade and the Easy Business team, we laid out in May 2015 the principles for an effective deregulation program in Ukraine, based on the lessons learned in the dozen other countries to design and carry out such a program. These principles include:
A systematic approach based on a clear, step by step plan and an inventory of rules. Ukraine should move steadily through the national regulatory stock, based on a clear plan of action and schedule. Uncertainty and lack of clarity will slow down the reform and allow special interests to influence results. The first step is to compile, using existing databases and rapid review, an inventory of rules and procedures that affect businesses and citizens, and then assigning a clear schedule for review.
A clear economically-sound standard for review. How do we know which rules are good and which are bad? Decisions about what regulations to keep and what to cut cannot be based on “opinion polls” or biased by powerful special interests. Instead, clear review criteria must be developed so that decisions are made consistently and transparently. The usual decision criteria in the guillotine process ask, through a checklist approach, a series of questions to determine if a rule is legal, needed in a free market system, and business friendly in design and implementation.
Expert technical capacity. Broad deregulation cannot be carried out by political leaders discussing every detail at Government meetings. There is simply too much to do in too short a time, and the Government would rapidly become exhausted. Much of the work of the successful reform is carried out by a dedicated, ad hoc “guillotine unit” that is recruited and trained for this purpose.
100% transparency
A reform of this scope cannot work unless it is clear to the full public what is being done and why. Otherwise, the reform can be stalled or changed to benefit powerful interests. Just as important, the reviewers do not know the real problems with rules unless they hear from people actually affected – people, businesses, investors. A complete consultation process should be built into the program – using IT tools such as a website, advisory and working groups, and other methods to protect the integrity of the reform and to ensure that changes reflect the actual situation of Ukraine.
Learning from international experience. More countries have failed with deregulation efforts than have succeeded. Lessons learned, both good and bad, are enormous value to Ukraine in designing a reform that is less likely to fail, and more likely to yield good results on the ground that will give relief citizens and businesses.
Of course, the development of a successful reform requires strong and clear political leadership. The technical work of review will empower the Government and the Parliament to make decisions based on what is good for the country, but the capacity of the political leadership to keep the reform moving against resistance, and to build bipartisan agreement across political parties for adoption in the parliament, will be crucial.
The statements of Ukraine’s leaders show an understanding of the importance of this reform for the economic recovery. There is ample experience around the world to design a reform that works for Ukraine. And time is crucial. If not now, when?
Scott Jacobs is the former director of the regulatory reform program at the Organization for Economic Cooperation and Development, and Vedran Antoljak led the regulatory guillotine program in Croatia that was awarded by United Nations Development Program in 2010 as the best regulatory reform in Europe.
