Economic Policy Review ISSN 1313 - 0544

How Do You Make a Good Policy?

Author: Adriana Mladenova / 09.04.2009
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The institutional framework of the economy, which is determined by the type and design of the laws, the acting rules and regulations in a country and the way they are applied in practice, is a prerequisite for the existence of a favorable business environment, which is directed toward the development of the entrepreneurship and innovation. The politicians and law makers bear a great responsibility through the normative acts, which they create and pass (on a central and the local level as well), because through their decisions in most cases they affect hundred of thousands or millions of people. Even when they are not aware or do not intend. Because the action or inaction of the state is directly affecting the stimuli and market signals and creates side and invisible at first glance, effects on the market participants.

In the countries where the principles of market economy act successfully, i.e. the people live well, earn and develop due to their personal qualities and efforts, the regulation by the state is subordinate to the principal of evidence.  This means that the politicians must explicitly prove to the people and the businesses, that the regulations would create more benefits than losses for the society and that the aim is not to benefit a small group at the expense of all the rest. In these countries (USA, Australia, Canada, Great Britain) already for decades past is applied the mechanism of advanced assessment of the effect of the normative projects and strategic documents, and in this way the optimum variant is sought for a policy among several proposals. During the development of every new bill or regulation a wide consensus is sought through consultations with the interested parties and the people.  

What is actually the impact assessment? That actually means to ask the right questions to which every law maker must answer, when he is proposing certain regulation, analysis of the possible consequences and exchanging information between the decisions made and the interested parties.

The foundation of every impact assessment is the proper definition of the problem and the causes, which are creating it. Because the economic regularities are always subject to cause/effect relations, i.e. for every existing problem there is a cause. Sometimes the roots of these causes are not very clear and apparent. When the right causes are not addressed, the consequences from the undertaken government measures could lead to unexpected and unpleasant results.

For instance, in a resent study, Chris Brown, a professor of entrepreneurship in Australia, showed that the policy of the new US President Obama for encouraging the start up business and support of employment in the US would actually lead to the opposite effect. According to the government program the US budget would set aside annually $250 million to support the business incubators and the start up business, particularly in the lagging behind states.  The newly created companies could use the free of charge services of the business incubators, which would help them to establish contacts with suppliers and customers, to pay rent for the offices, would provide legal and financial consultations, etc.  The questions that the politicians, which are proposing such measure, must ask themselves are: Are the state subsidized business incubators actually creating new jobs? Do they lead to permanent employment? Contrary to the popular belief the reality is that the newly established companies in the US do not create many new jobs, and after the first year of their existence actually lead to net loss of jobs in the economy. The data shows that, for the period 1998-2002, more than 30% of the employees are made redundant in the newly founded companies in the area of the entertainment business in the US. The numbers are similar for the remaining areas of the economy. It turns out that four years after they were established; only 44% still exist and are on the market. After seven years their share is reduced to 30%. What is common between the successful newly founded companies like Google, FedEx, Dell, Microsoft, eBay? They are all a result from a market need and have not been helped by the state. The necessary financing have been provided by risk capital funds. It turns out that the government is not making a favor, by creating stimuli for the people to start up businesses in niches which they are not familiar with or the they turn out to be losing out ventures and lead to loss of valuable resources of the economy.

These are precisely the questions and analyses which the politicians must make, when they propose a new program or a modification of existing policy. For instance, would not the measure of the Bulgarian government to build 13 industrial zones with budget funds and priority financing for the small and medium size companies bring about similar negative effects?  Why is the government taking over functions of the private sector - are the benefits for the economy proven, that they are greater than the costs? Could the experts from the Ministry of Labor and Social Policy in Bulgaria be able to answer what are the expected effects from the measures of employment, undertaken this year, such as - the addition of 120 levs to the salaries of employees in companies, which are introducing reduced business hours for the staff and at the same time are most affected by the crisis and report reduction in sales and profit? What would be the effect of such support on the labor market and whether or not this would not be a stimulus for loss making companies to preserve only temporarily the jobs and at the end to spend the money of the taxpayers wastefully? Is it not better to use market stimuli to help the companies such as for example - reduction of the tax burden on labor, which would directly lead to smaller costs of labor for the business? In this way the money would come from the state budget (i.e. less revenue to the budget), but the market would decide how the financial stimuli would be distributed among the companies. The more successful companies, which preserve the jobs, would gain most and exactly they have a chance to survive and at the end of the day to bring permanent employment to the economy.

A resent study by Simeon Djankov (chief economist of the World Bank) and Georgi Angelov (senior economist at the "Open society" Institute) showed that the reducing the social security burden by 7.5 percentage points in Bulgaria would lead to saving 130 thousand jobs. This is the alternative, which must be reviewed by the social ministry and on the basis of analysis and proofs to convince us, the taxpayers, that they have selected the best variant of a policy in the area of personal incomes and that our funds are being spent in the most effective way.

Such analysis must be performed with respect to all new proposals. Particularly during the election period the politicians like to spend the taxpayers' money on populist projects with unproven economic effectiveness. The principal of impact analysis of the policies and regulations, if it is applied in practice, could help prevent hasty decisions with a populist taste.