House Speaker Gloria Macapagal-Arroyo recently stressed the need to prioritize the ease of doing business, saying this is a crucial factor to investors.
She is correct.
In his book, The Road to Serfdom, Nobel Prize-winning economist Friedrich Hayek said the purpose of law in a democratic capitalist economy should be to codify the rules of the road. It should make certain that people travel in an orderly fashion. Rules and regulations should let people set their own path. They should not tell people precisely where and when they should travel—they should not micromanage markets. Hayek believed democratic capitalism was best facilitated by common law that applied to everyone, not by arbitrary laws designed to favor or penalize particular groups, enacted to carry out political agendas.
Another Nobel Prize-winning economist, Milton Friedman, thought the role of government should be to protect people from abuse and coercion by others. “Unless there is such protection, we are not really free to choose,” he wrote. “The armed robber’s ‘Your money or your life’ offers me a choice, but no one would describe it as a free choice or the subsequent exchange as voluntary.”
Gains from trade directed by competitive markets promote both economic progress and social cooperation. Government regulations, often promoted by established businesses, are a major source of trade barriers and market entry restraints. There are three major ways that regulations limit exchange and reduce the competitiveness of markets.
First, regulations often restrict entry into markets. Many countries impose regulations that make it difficult to enter and compete in various businesses and occupations. In those countries, if you want to start a business or provide a service, you have to acquire a license, fill out forms, get permission from different bureaus, show that you are qualified, show that you are a citizen, indicate that you have sufficient financing, and meet various other regulatory tests. Some officials may refuse your application unless you are willing to pay a bribe or contribute to their political coffers. Often, well-established and politically influential businesses that you would be competing against can successfully oppose your application.
Hernando de Soto, in his revealing book, The Mystery of Capital, reports that in Lima, Peru, it took 289 days for a team of people working six hours a day to meet the regulations required to legally open a small business producing garments. In an earlier book, The Other Path, he revealed that along the way, 10 bribes were solicited and it was necessary to pay two of the requested bribes in order to get permission to operate legally.
The World Bank reports that given the regulations in place in 2017, legally opening a business would take 5 days in Thailand, 19 days in Malaysia, 22 days in Vietnam, 23 days in Indonesia, and 28 days in the Philippines. In comparison, opening this same business would take only 2 days in Hong Kong and 3 days in Singapore.
Second, regulations that substitute political authority for the rule of law and freedom of contract will tend to undermine gains from trade. Several countries make a habit of adopting laws that grant political administrators substantial discretionary authority. For example, in the mid-1980s, customs officials in Guatemala were permitted to waive tariffs if they thought that doing so was in the “national interest.” Such legislation is an open invitation for government officials to solicit bribes. It creates regulatory uncertainty and makes business activity costlier and less attractive, particularly for honest people. Popular support for regulations often stems from the desire to promote a cleaner environment or provide consumers with protection against unscrupulous business operators. Regulations play a positive role in these areas. Even here, however, the law needs to be precise, unambiguous, and nondiscriminatory. If it is not, it will be a roadblock to gains from trade.
Regulations often help some businesses by restricting competitors. Because such regulations are lucrative to the few who benefit, they impose an additional cost: Businesses, labor organizations, and other special-interest groups will seek advantages for their constituents by trying to influence the political process. Some will lobby politicians and regulators to establish or increase these roadblocks, while others (those most severely harmed) will lobby to diminish their effects. Lobbying for all sides on any issue consumes the time and effort of highly skilled individuals who could be producing wealth instead of seeking political advantages from policies that reduce the productivity of others.
Third, the imposition of price controls will also stifle trade. Governments sometimes set prices above the market level. For example, some governments require that the producers of various agricultural products be paid a specified minimum price for their commodities. At the higher set price, buyers will purchase fewer units than they otherwise would. Governments also set prices lower than the market level, as in the cases of apartment rent controls and regulated electric power rates. In terms of units produced and sold, it makes little difference whether price controls push prices up or force them down; both will reduce the volume of trade and the gains from production and exchange.
Regulations often appear to be an easy way to solve problems. Want higher wages? Increase the minimum wage. Want a lower unemployment rate? Pass laws making dismissal of workers more difficult. Want more Filipinos to start and own businesses? Restrict the entry of foreigners. But there is a problem here: these simplistic policies do not enhance production and they ignore the secondary effects. Our living standard is directly linked to the production of goods and services that people value. Mutually advantageous trade and competitive markets encourage the efficient use of resources and the discovery of better ways of doing things. They help us get more value from our resources. Thus, regulatory policies that impose roadblocks against trade and entry into markets will almost always be counterproductive. If the country is going to grow and prosper, it should minimize regulations that restrict trade and the competitiveness of markets.