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A European triumph amid the chaos

Published in Business Spectator (Melbourne), 19 May 2010
http://www.businessspectator.com.au/bs.nsf/Article/A-European-triumph-amid-the-chaos-pd20100519-5KTFZ?OpenDocument

As the horror news stories from Europe are now coming in on an almost daily basis, perhaps it is worth noting that the old continent still holds a few positive lessons for the world. It is even more astonishing that one such lesson can be found in a field where one would least expect it: deregulation.

Europe is hardly the prime suspect for innovative, light touch regulation. Quite the reverse is true. The perception that Europe is not the easiest place to do business has more than a grain of truth to it. A Google search for ‘Europe AND over-regulated’ returns 107,000 results.

There is a reason why 70 per cent of the world’s literature on tax law is allegedly written in German. The British Chambers of Commerce estimate the burden by new regulations placed on UK business since 1998 to be £77bn ($124bn).

According to Open Europe, a London-based think tank, the growing body of EU law known as the acquis communautaire runs over more than 170,000 pages. This probably explains why there are still countries wishing to join the EU. The translation of the acquis into the national language would be a veritable stimulus program in itself.

Where there is huge complexity, there should also be the greatest desire to cut it back. So perhaps it’s only natural that the most interesting way of reducing the costs of regulation originated right in the heart of Europe, in the Netherlands.

In many ways, the Dutch are just like the Germans, except that nobody hates them. In their desire to regulate things thoroughly, they can easily keep pace with their bigger neighbour. Over time, bureaucracy in Holland blossomed like a Dutch tulip field.

It was an academic at the EIM Business & Policy Research institute in Zoetermeer, a small town near The Hague, who came up with a brilliant idea in the 1990s. Where other deregulation initiatives had started off by questioning the necessity of the regulation, Andre Nijsen understood that this would inevitably lead to political conflicts. So why not separate the costs of bureaucracy from the politics of regulation?

The approach hardly sounds revolutionary, yet it was. There may be big political disagreements over the need to regulate a certain area in the first place. However, once a regulation is passed, no-one could disagree that it should be administered in the most cost-efficient way. Who could possibly argue that the costs of regulation should not be kept to a minimum?

Nijsen’s considerations eventually developed into a model for measuring the costs of red tape. Under the ‘Standard Cost Model’, the bureaucratic costs of each government regulation can be estimated in a simple and straightforward way.

This is how the model works. First, it is determined how much time it takes to deal with a bureaucratic requirement. For example, it would be measured how many minutes a typical employee would spend filling in a tax form. Second, the time spent is then multiplied with the employee’s hourly wage. Third, the total number of forms filled in per year over the entire economy is multiplied by the costs of filling in a single form. As a result, the total bureaucracy cost of this particular form would be determined.

Fortunately for the Netherlands, Nijsen’s idea did not share the fate of most academic proposals that only excite a close-knit research community. Instead, the Dutch government under Prime Minister Wim Kok picked it up. He established a small, independent commission to apply the Standard Cost Model to all Dutch regulations.

The Dutch were astonished when the commission delivered the results of its initial two-year long measurement. They calculated that the combined Dutch red tape cost amounted to 3.4 per cent of GDP. To put this into perspective, if Australia’s bureaucracy was as high as that, it would cost the economy about $38bn.

With administrative burdens that high, cutting red tape became a political priority. The Dutch government’s ambitious target was to drive down the costs of bureaucracy by 25 per cent over a five year period. The target was achieved and the Dutch are currently in their second five-year period in which they are trying to repeat this reduction.

The Dutch success was the result of many small steps to reduce bureaucratic requirements. For example, where previously companies were required to produce separate accounts for the Chambers of Commerce and the tax authorities, they merged this into just one financial statement for both. In a similar way, reporting requirements for new industrial developments were bundled so that entrepreneurs only had to submit their applications once instead of having to deal with many different authorities simultaneously.

Perhaps the biggest change of all was a cultural shift. For the first time, bureaucrats had to keep track of the red tape costs they cause. New legislation is now routinely sent to an independent watchdog for a calculation of the expected administrative burdens. The goal is to prevent unnecessary burdens before they are imposed, and to continuously check existing regulations for their simplification potential.

The Dutch model has been so successful that other European governments have eagerly copied it. It has been adopted in more than 20 countries so far, among them the UK, Germany and France. European governments estimate that a 25 per cent reduction in administrative burdens as achieved in the Netherlands has the potential of increasing GDP by between 1.0 and 1.5 per cent.

In Australia, too, the Standard Cost Model is being used, albeit in only one state. In 2006, Victoria was the first Australian state to introduce it in its Reducing the Regulatory Burden initiative. To date, cost savings of more than $246m have been achieved, and the Victorian government has issued a new target of a $500m reduction in regulatory costs by July 2012.

With success stories from around the world and from Victoria underlining the best practice status of the Standard Cost Model, what is stopping other Australian governments, state and federal, from joining in? Although precise data on the cost of red tape in the Australian economy are still missing, it is safe to assume that there are billions of dollars that could be saved. It is a saving that would probably exceed the effect of the scheduled reduction in company taxes, desirable as that is in itself.

Bureaucrats of the world unite: you have nothing to lose but your red tape.

Dr Oliver Marc Hartwich is a research fellow at the Centre for Independent Studies. His report ‘Towards a Red Tape Trading Scheme: Treating Excessive Bureaucracy as Just Another Kind of Pollution’ can be downloaded from the Centre’s website.

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