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Steven Bailey and Graham Boxall
Ministry of Commerce
Wellington
New Zealand

• Introduction
• Regulatory Environment
• Impact of Regulation
• Bias to Regulate
• Increasing Demands on Decision-Makers
• The Modern Regulatory Challenge
• OECD Regulatory Reform Initiatives
• World Trade Organisation (WTO)
• Is APEC Meeting the Modern Regulatory Challenge?
• Regulatory Reform Symposium
• Standards and Conformance Sub-Committee (SCSC)
• SCSC Work: Guidelines for the Preparation, Adoption, and Review of Technical Regulations
• Good Regulatory Practice
• Going Forward
• Bibliography

Introduction

APEC aims to fulfil its trade facilitation mandate by promoting policies which reduce costs (administrative and technical barriers) and stimulate competition, thereby leading to efficiency gains. It is increasingly recognised that domestic regulation can have a positive or negative impact on competition at and behind the border. APEC has therefore recently promoted the need to address good regulatory practice as part of its integrated approach to facilitating trade.

This paper examines APEC, and in particular Standards and Conformance Sub-Committee (SCSC), initiatives which promote good regulatory practice. In doing so, it seeks to develop an understanding of the wider regulatory context and the key influences and pressures placed on governments for regulatory reform. APEC initiatives will be considered as part of this framework. The paper concludes by posing some challenges open to member economies.

Regulatory Environment

Broadly, governments throughout the world engage in three main activities. They tax, they spend, and they regulate. Regulation is probably the least understood of these policy instruments, but has a broader and more far reaching impact on economic growth than do tax or fiscal policies.

Regulation is defined for the purposes of this paper as incorporating the full range of legal instruments and decisions through which governments establish conditions on the behaviour of citizens and enterprise. This includes parliamentary laws, subordinate legislation, decrees, licences, codes, and informal instruments. Regulatory systems encompass not only national and provincial rules, but also rules developed through international processes.¹

There is no doubt that there is a community demand for government regulation, particularly to achieve social and environmental goals. Regulatory interventions are necessary for sustaining the environment, saving lives, protecting consumers and vulnerable social and economic groups, and promoting better economic performance by, for example, safe-guarding competition in the market place. There is, of course, a set of costs associated with any regulatory intervention. These will vary depending on how well the regulatory regime is designed, implemented, and administered. It is the impact of regulation which I will now turn to.

Impact of Regulation

Regulatory costs are made up of the following three main components:

• fiscal costs to government: the cost of administering the regulatory regime itself, including compliance and adjudication;
• compliance costs to business and consumers: including both the capital and administrative (paperwork) costs to businesses and citizens; and
• dynamic costs to economic performance: resulting from regulation which indirectly impacts on competition, innovation, and investment. This includes regulation which diverts resources from highest value use (allocative costs), and regulation which detracts from least cost production (productive costs)

These costs are often hidden and ultimately passed on to consumers in the form of higher prices for regulated goods and services, lower quality, and reduced variety.

In the United States context, for example, studies have estimated the direct costs of government regulation alone are between 4 percent and 10 percent of GDP.² Costs are added if regulation is poorly conceived, designed, or implemented.

Regulation should therefore be approached with caution, and with a clear understanding of its potential benefits, and equally, its potential costs. Proposals to regulate need to be subject to proper analysis and scrutiny as to their necessity, efficiency, and net impact on public welfare.

Bias to Regulate

Modern political systems encourage regulatory growth because, politically, regulation can be extraordinarily convenient. Regulatory costs are difficult to specify, are often unseen, and those who bear the costs are often diffuse (and in many cases those who benefit are concentrated). The impact of regulatory expenditures is therefore not as transparent compared with the impact of fiscal expenditures. Pressure for excessive regulation also arises because those who will bear the costs (for example, consumers) are under-represented in the political process.

The nature of the government intervention is also important when considering pressures to regulate. The traditional command-and-control regulatory style continues to be the dominant regulatory approach in most developed countries. In part, this is driven by the need for governments to demonstrate to their constituents that they are taking action to solve problems. Therefore, regulation represents a visible sign of action that may be as much symbolic as real.

It is only relatively recently that we have observed an increasing use of alternative approaches to traditional command-and-control regulation (such as self-regulation, voluntary agreements, private standards setting, and economic instruments such as tradable permits). It is increasingly recognised that such approaches can provide more cost-effective ways of dealing with regulatory problems. A cultural shift away from traditional command-and-control approaches will only occur over time as experience and confidence grows.

Increasing Demands on Decision-Makers

Governments are being increasingly challenged to maintain a regulatory environment which is fair, efficient, and effective in achieving economic, social, and environmental goals. There is also increasing recognition of the complexity of the challenge. Many factors contribute to this complexity:

• An ever present and increasing demand for more regulation. A key driver of regulatory inflation is the growing complexity of modern society. The pace of change in technology, economic opportunity, globalisation, and social conditions fuel the pressure for more regulation. In the New Zealand context, for example, since 1987 the Government has enacted 1,609 new or amended statutes and 3,699 new or amended regulations. This illustrates the demands on both decision-makers and those affected by regulation.
• The total regulatory burden on business is high, requiring effective linkages to be designed into legislation or dealt with between agencies after they are enacted. Good processes and principles are therefore required to deal with the interactive and cumulative effects of regulation. For example, the New Zealand Employers and Manufacturers Association advise that they provide advice to businesses on 24 separate statutes on employment issues alone. In aggregate, the regulatory burden is substantial.
• International obligationsapplying to domestic regulatory systems are more significant than in the past, and are likely to increase. For example, New Zealand has become party to 65 multi-lateral agreements (including amendments) in the last 5 years. This requires effective systems in place to ensure compliance with its international obligations.
• Alternatives to traditional regulation offer an increasing range of policy tools to government in meeting regulatory objectives at least cost.

The Modern Regulatory Challenge

Good regulation is a product of good policy advice and good decision-making. The modern regulatory challenge is to develop a regulatory system which can effectively deal with the increasing demand for regulation, inherent bias to regulate, and complex nature of regulatory interventions. This requires that the right incentives, principles, procedures, and institutions of government are in place and working effectively to ensure that regulation is necessary, cost effective, and in the best interest of society.

OECD Regulatory Reform Initiatives

Improving economies' regulatory capability and quality is also a key focus for the OECD. It is recognised that regulatory reform which enhances competition and reduces regulatory costs can boost efficiency, bring down prices, stimulate innovation, and help improve the ability of economies to adapt to change and remain competitive.³ Recently, OECD Ministers welcomed and endorsed policy recommendations which aim to help governments assess and improve the quality of their regulatory regimes. Ministers agreed to work to implement these recommendations in their respective countries. Examples include:⁴

• adopting at the political level broad programmes of regulatory reform that establish clear objectives and frameworks for implementation. This includes establishing principles of good regulation to guide reform which draw on the 1995 OECD Recommendations on Improving the Quality of Government Regulation;
• review and strengthen where necessary the scope, effectiveness, and enforcement of competition policy;
• reform economic regulations in all sectors to stimulate competition, and eliminate them except where clear evidence demonstrates that they are the best way to serve the public interest; and
• eliminate unnecessary regulatory barriers to trade and investment by enhancing implementation of international agreements and strengthening international principles.

These recommendations constitute an action plan. The OECD has responded by conducting reviews of regulatory reform effort in Member countries, beginning this year. The reviews are based on a combination of self-assessment and peer review.

World Trade Organisation (WTO)

The WTO is the legal and institutional foundation of the multilateral trading system. It provides the principal contractual obligations determining how governments frame and implement domestic trade legislation and regulation. It is, essentially, a trade policy forum which develops rules of engagement in trade for its members. The WTO is increasingly broadening its activities to look at the convergence of trade and competition policies.

The Trade Related Aspects of Intellectual Property Rights (TRIPS), Trade Related Investment Measures (TRIM), and the General Agreement on Trade in Services (GATS) agreements are examples of the WTO's broadened role. All these agreements have competition provisions in them to some greater or lesser degree. They recognise the intrinsic link between domestic regulatory environments and efficient trade outcomes. For example, the way governments regulate intellectual property, investments policies and services markets are inseparable from trade policy.

The Agreement on Basic Telecommunications negotiated as an annex to GATS came into force in February 1998. It covers trade in nearly 95% of the world telecommunications services, currently valued at 2% of global GDP. The interesting issue to note is that WTO negotiators focused much of their time on establishing a regulatory environment conducive to market entry. A set of principles was agreed and members agreed to use these as a basis in deciding on regulatory disciplines.

Is APEC Meeting the Modern Regulatory Challenge?

APEC is concerned with facilitating trade through reducing barriers. Poorly conceived regulation restricts the free flow of goods, services, investment, and technology, all of which disadvantages consumers and firms. This also distorts the efficient allocation of resources and constrains economic growth. The member economies of APEC have recognised that, in order to minimise the distorting effects of regulation for international trade and investment, it is necessary to ensure adherence to efficient regulation principles.

The APEC approach was foreshadowed in the Osaka Action Agenda. APEC leaders recognised that with trade barriers being rapidly dismantled, and the increasing globalisation of business, attention would swing, inevitably, to behind the border issues connected with regulatory reform.

More recently, the need for further APEC work on regulatory reform has been highlighted by the difficulties faced by a number of Asian economies. Commentators have stressed that reforms are required in a wide range of sectors, including the financial sector. These difficulties have highlighted the capacity and institutional constraints in many economies which affect the formulation and implementation of sound regulatory policies.

There has been activity by APEC in identifying and promoting best-practice principles for regulatory reform. For example:

• as part of the Bogor Declaration, Leaders adopted the APEC Non-Binding Investment Principles which focused attention on ways to minimise the regulatory and institutional barriers to the outflow of investment;
• the Experts Group on Government Procurement is currently developing a compendium of Non Binding Principles which incorporate a number of Transparency and best practice principles;
• the Telecommunications Working Group and Energy Working Group have developed principles based on minimising barriers to market entry and exit through quality of regulation practice.
• the Pacific Economic Co-operation Council (PECC) is developing principles that will guide the development of an international competition framework for business. These principles are about regulatory design and regulatory quality.

Regulatory Reform Symposium

The Government of Malaysia is currently hosting an APEC Regulatory Reform Symposium on behalf of the APEC Committee on Trade and Investment (CTI). This is addressing broad policy issues associated with regulatory reform. These include:

• Interrelationships between competition policy and regulation;
• Ensuring high quality regulation;
• Role of regulatory reform/deregulation;
• Case study: occupational regulation; and
• Globalisation and the regulatory environment.

The Symposium will provide an opportunity to consider how to further develop the APEC Collective Action Plan (CAP) for deregulation.

Standards and Conformance Sub-Committee (SCSC)

SCSC has also recognised the links between standards and conformance and regulatory reform. Its approach is predicated by a recognition that standards and conformance requirements can have a significant impact on trade flows and investment in the region.

Standards, conformity assessment, and regulation can be necessary to safeguard consumer health and safety, to protect against deceptive practices and to protect the environment. The existence of such requirements adds certainty and security to trade in the region. However, misused or excessive requirements will harm international trade, increasing the cost of doing business and limiting competition in the importing economy.

SCSC Work: Guidelines for the Preparation, Adoption, and Review of Technical Regulations

As part of its work programme SCSC has begun to examine the nature of the effects of technical regulations on trade and economic activity, and the need to consider alternative approaches to achieving regulatory outcomes. In 1997 SCSC developed and adopted Guidelines for the Preparation, Adoption and Review of Technical Regulations. These Guidelines are based on WTO principles that recognise the legitimate objectives of regulation.

The purpose of these Guidelines is to provide a common framework and set of principles for APEC members for the preparation, adoption and review of technical regulations. It is intended that promoting similar approaches to regulatory management within APEC can improve the consistency and transparency of technical regulations, thereby reducing unnecessary obstacles to trade.

The following Guidelines (checklist) have been adopted by APEC.

Good Regulatory Practice

The Guidelines provide a foundation for member economies to develop a common understanding of the principles of Good Regulatory Practice. However, they go only so far.

The draft Guide for Good Regulatory Practice developed for the consideration of SCSC by Australia provides a practical application of the principles contained in the Guidelines. Promoting similar approaches to regulatory management within APEC would be another step towards reducing technical and/or regulatory barriers to trade within the region.

The draft Guide contains a number of Practices (consolidated below) that set goals for future regulatory environments. These Practices would, if implemented, result in a regulatory environment characterised by:

• regulatory requirements specified in terms of performance based outcomes, wherever possible, and supported by deemed to comply standards;
• a member economy's own standards referenced in this manner being aligned with the relevant international standard wherever possible;
• the provision of conformity assessment activities (such as test reports and/or certificates of conformity) being subject to competition by duly accredited conformity assessment bodies, such as laboratories and/or certification bodies;
• such conformity assessment bodies being accredited in accordance with international standards and guides by accreditation bodies that operate accreditation programs also in accordance with relevant international standards and guides;
• assurance of conformity being provided by way of "suppliers' declarations", together with appropriate post-market surveillance systems, rather than by way of pre-market conformity assessment systems such as product approvals and licensing;
• participation in mutual recognition agreements in both the regulated and voluntary sectors, where appropriate.
• conformance marks, where mandated, indicating that the good and/or service has been declared by the supplier/manufacturer as complying with the mandatory requirements of the economy in which it is traded.

The development of the draft Guide stemmed from SCSC debate on whether Mutual Recognition Arrangements (MRAs) on conformity assessment would benefit from the application of good regulatory practices. Clearly, any MRA will benefit if the regulatory and administrative practices of member economies reflect best practice, or where the regulatory systems across borders have similarities.

However, the application to MRAs is only one aspect of the benefits from good regulatory practice. Its underlying objective within SCSC is to reduce regulatory impediments in all areas of conformity assessment through the development of common practices between member economies. This, perhaps, is the key challenge for SCSC.

Going Forward

The performance of economies is shaped by the quality of their regulatory environments. Economies that foster competition, create certainty in the business environment, and impose low regulatory costs on business will prosper. Successful businesses are increasingly operating on a global basis, looking to source inputs, attract investments, and service markets in different parts of the globe. Globalisation means that the economic performance of any one economy will be increasingly affected by the quality of the regulatory environment of those with which that economy has economic links. Co-ordination is critical.

A growing number of economies - APEC and non-APEC alike - have embarked in recent years on programmes to reduce regulatory burdens and improve the quality and cost-effectiveness of regulatory interventions. This task requires skilful strategies to deal effectively with the increasing demand for regulation, an inherent bias to regulate, and the complex nature of regulatory interventions.

An important first step is the establishment of international quality standards or principles for regulatory intervention by individual economies. These are derived from best practices which experience tells us lead to good regulatory outcomes. The Guidelines for the Adoption, Preparation and Review of Technical Regulations adopted by APEC and the draft Guide for Good Regulatory Practice currently under discussion in SCSC are important in this regard. This paper has identified others both within and outside APEC. Common themes run through them all.

These documents provide an explicit policy statement on when and how government should exert its regulatory powers. They also act as avenues of communication between governments, officials (bureaucracy), and the public. The pay-off from regulatory reform which is consistent with best-practice regulatory principles is improvements in public welfare.

It is important, therefore, that APEC continues the momentum of regulatory reform and member economies remain committed to progressing this area. Some possible actions include:

• further developing explicit standards for regulatory quality and principles of regulatory decision-making, along with a means by which decision-makers and stakeholders are able to assess compliance with such standards;
• systematically reviewing domestic regulation with a view to minimising unnecessary costs;
• strengthening the measurement of regulatory costs and benefits. Concrete information on the costs and benefits of regulation is crucial to maintaining the momentum of regulatory reform;
• encouraging those APEC and non APEC members that are actively engaged in promoting regulatory reform programmes to share experiences with other members; and
• committing to Individual Action Plans for regulatory reform which can be subject to positive scrutiny and peer review.

Bibliography

Office of Budget and Management (September 1997), "Report to Congress on the Costs and Benefits of Federal Regulations."

OECD (1997), Working Party No. 2 on Competition and Regulation, "Regulatory Quality and Public Sector Reform."

OECD (1997), "Report on Regulatory Reform, Volume 2: Thematic Studies."

OECD (1997), "Regulatory Reform: Summary."

APEC (November 1994), "The Bogor Declaration".

APEC (November 1994), "Non-Binding Investment Principles."

APEC (1997), Sub-Committee on Standards and Conformance, "APEC Guidelines for the Preparation, Adoption and Review of Technical Regulations."

APEC (1998), Sub- Committee on Standards and Conformance, "Draft Guide to Good Regulatory Practice."

The World Trade Organisation (1994), "Agreement on Technical Barriers to Trade."

The WTO Committee on Technical Barriers to Trade (1997), "First Triennial Review of the Operation and Implementation of the Agreement on Technical Barriers to Trade."

Secretariat to the WTO Committee on Technical Barriers to Trade (1997), "Restrictive Trade Effects of Standards, Technical Regulations and Conformity Assessment Procedure."

1 OECD (1997), "Regulatory Quality and Public Sector Reform", Working Party No.2 on Competition and Regulation.

2 Office of Budget and Management (OIRA), (September 1997), "Report to Congress on the Costs and Benefits of Federal Regulations." See also OECD, (1997), "Regulatory Quality and Public Sector Reform", Working Party No.2 on Competition and Regulation.

3 OECD (1997), "Report on Regulatory Reform, Volume 2: Thematic Studies.

4 OECD (1997), "Regulatory Reform: Summary"