Introduction
This paper is based on the topic of business regulation. It seeks to explore the linkage between excessive business regulation and levels of corruption. For the purpose of the paper, business regulation is taken to mean the laws and institutions established by governments to govern the establishment of businesses either by local citizens and companies or by foreign investors. Corruption is taken to mean the misuse of authority and power by public officials for personal gain. The paper relies on the World Bank report on Ease of Doing Business (EDB) and Transparency International’s (TI) Corruption Perceived Index (CPI). It also uses data from other sources.
Discussion
Many economic analysts have argued out that there is need for governments to regulate the business environment so as to avoid market failures. Market failures happen when the government of a country does not lay out regulations to be followed in doing business in the country. Such regulations may govern things like taxation, acquisition of business permits, employment regulations, corporate social responsibility, import and export tariffs, registration of businesses and protection of investors from unfair competition.
Another perceived importance of business regulation is to curb corruption and illicit trade or illegal businesses. If there are no regulations, then corrupt public officials may take the opportunity to seek bribes from investors, who may end up parting with huge chunks of money only for them to have their business permits cancelled after a short time when regulations are put in place. If there are no regulations, it could be easy for anybody to engage in illicit trade such as sell of drugs and smuggling of weapons and ivory (Braithwaite and Drahos 45).
While it is a good thing to have the government put regulations in place, some economic analysts have pointed out that excessive regulations actually slow economic development for a country. Excessive regulations are taken to mean having too many regulations and procedures which govern establishment of a business. If there are too many regulations and procedures, the overall effect is a slow process of establishing a business. The many regulations and procedures act as a barrier to quick economic growth given that foreign investors and multinational corporations may be scared away by such regulations. If there are few foreign investors, then it means the country does not get enough foreign exchange and this slows economic development.
The argument that excessive regulations may slow economic development may not be as true as it may seem. The reason is that research has shown that corruption and poor institutions are the main culprits which make it hard to establish a business in a country. The reason is that with corruption, the regulations are just there in writing but they are not followed. When the regulations are many, potential investors may be tempted to part with bribes so as to avoid some of them. Even when the regulations are not many, public officials may create their own regulations so as to solicit for bribes from the public.
Other economic analysts have argued that corruption has been institutionalized and plays a crucial role in economic development especially for countries with excessive regulations. Through corruption, potential investors are able to obtain business permits and other requirements within a very short time and establish their businesses. Such investors consider the bribes as negligible when compared to the amounts of profits they generate once they establish the businesses. The practice is common in Africa where there are very few local investors with huge capital to establish businesses. In other situations, governments are known to give free land to foreign investors on condition that they create jobs for the youth. However, such investors are forced to part with bribes so as to enjoy such privileges.
Even though corruption is considered as unethical in any business, it plays a crucial role in the development of the emerging economies. Without it, it can be argued that the developing countries may not move forward due to absence of the adequate legal infrastructure to govern economic development.
As a general rule, countries with many regulations are the least attractive to investors. On the other hand, countries with few regulations are the most attractive to investors. The EDB therefore depends on how long it takes to start a new business and the associated costs. According to the World Bank ranking of EDB, countries in the West are ranked as the best. The reason is that they have established legal systems to guide political, economic and social development. They also have stable governments. On the other hand, countries in Africa are ranked as the worst due to poor governance and absence of strong legal infrastructure to guide economic, social and political development.
EDB and CPI Ranking
The table below shows the rankings of the top 5 and bottom 5 countries in terms of EDB by World Bank in 2013 (World Bank 87) and CPI by TI 2013. CPI is measured on a scale of 0-100, with 0 being most corrupt and 100 being least corrupt (Fletcher and Herrmann 27).
The top 5 countries in EDB have fewer regulations and requirements to establish a business. They also have a less bureaucratic system of business administration and registration. Such countries also have high success rates for businesses as well as strong economies. In terms of corruption, the countries have very low levels of corruption and this explains why it is easy to start a business. It can therefore be argued that few regulations are directly related to minimal corruption in that once the regulations are few; it means that there are no opportunities for public officials to seek bribes from potential investors.
These countries also have low levels of crime and unemployment. The reason is that they are able to provide jobs to nearly all citizens and especially to the youth. They also have social protection programs for citizens who are not financially stable and the elderly. Their development index is therefore very high since they form markets for raw products from the poor countries. They are also a preferred destination for talented manpower from poor countries who are employed to use their talents in improving those economies.
On the other hand, countries which are ranked as the worst in EDB have many business regulations. Taking the example of Chad, it takes a minimum of 60 days to undergo through 9 or more procedures to establish a new business. On the other hand, it takes a maximum of 5 days to establish a new business in Australia and New Zealand. In the countries which are ranked as the worst in EDB, there is rampant corruption which is attributed to the high number of regulations and the long duration taken to undergo through such regulations. The many regulations act as a recipe for corruption. Most of these countries are actually classified as failed states by TI.
They are characterized by high levels of unemployment, political unrest, civil strife, ethnic violence, poor health infrastructure and dwindling education levels. The countries are also known for illicit trade such as drugs and smuggling of outlawed products and small arms. The overall effect of these is high levels of corruption which is not easy to fight.
Conclusion
There is need for governments to put up regulations to govern investments in any economy. The reason is that such regulations prevent market failures. Regulations are put in form of laws and institutions which govern the business environment. However, there is need for governments to limit the number of regulations because excessive regulations are directly related to corruption since public officials use it as a tool to solicit for bribes from potential investors.
It has also been shown that countries which are ranked as the best in EDB have low levels of corruption as opposed to countries ranked as the worst in EDB, which have high levels of corruption. It is therefore prudent for governments to focus more on fighting corruption than putting the regulations because the regulations are not capable of preventing corruption. If corruption is dealt with, then the need of having many regulations for doing business would not arise.
Works Cited
Braithwaite, John, and Peter Drahos. Global Business Regulation. Cambridge: Cambridge Univ. Press, 2000. Print.
Fletcher, Clare, and Daniela Herrmann. The Internationalization of Corruption: Scale, Impact and Countermeasures. Farnham, Surrey, Burlington, VT : Gower, 2012. Print.
World Bank. Doing Business 2013 : Smarter Regulations for Small and Medium-Sized Enterprises. Washington DC.: International Finance Corporation, 2013. Print.