Is South Africa over-regulated?

Regulations have to be enforced by officials, inspectors, police and courts. That consumes wealth. They have to be complied with. That consumes wealth. They distort the economy. That consumes wealth. And yes, South Africa is over-regulated!

Regulation consumes wealth by increasing the cost of supplying goods and services to consumers, as well as the cost of saving and investing and employing people. When things cost more, people buy less, including labour. In regulated markets consumers pay more for less, the country uses more resources for less wealth-generating investment, and unemployment increases.

Although all regulations have their apologists, almost all regulations have more costs than benefits. The cumulative impact of a natural propensity on the part of politicians and bureaucrats to over-regulate, and of vested interests to support regulation that favours them, is devastating regardless of how innocuous or well-intentioned their pet intervention might seem.

Why, if it is so obvious, is our country being smothered by a seemingly boundless deluge of regulation? The reason is that vested interests are good at getting governments to heap concentrated benefits on them at everyone else’s dispersed expense, and the self-interest of everyone in or close to government is to increase their own power, status and income.

Regulations always encourage some things and discourage others, distorting the economy, usually at the disproportionate expense of middle and lower income people for the benefit of privileged elites, called “rent seekers” in economics and “regulation leeches” in ordinary English. Instead of discontinuing bad laws, governments tend to make new ones in increasingly desperate attempts to counteract deleterious effects of earlier laws. They don’t simply discontinue counter-productive measures because additional interventions expand regulatory empires and vested interests that initiate or accumulate behind regulations invest vast resources in sustaining them.

There is one small glimmer of hope in the war against over-regulation. If governments liberalise there will be so much prosperity that they will not only gain needed popularity, but also benefit directly because a slightly smaller slice of a much bigger cake is more cake.

Since the general public is the victim of over-regulation, why doesn’t it demand liberalisation? Apart from the levels of sophistication needed to appreciate the real causes of problems, most of us fancy ourselves as would-be regulators. “Why don’t they do so-and-so?” people tend to say in response to real or imagined problems. The royal “they” is, of course, government and the ideal government is … well, us.

The evidence is overwhelming that more regulation means less prosperity. According to a World Bank report “the least amount of regulation fosters the strongest economies.” The report analyses how regulation in 130 countries affects registration of companies, obtaining credit, hiring and firing workers, enforcing contracts and bankruptcy. It finds that efficient economies rely more on common-law than regulation, and social democracies (like Denmark, Norway and Sweden) benefit from streamlined business regulation. Excessive regulation stifles productivity in Africa, Latin America and the former Soviet Union. It is associated with inefficient public institutions, longer delays, higher costs, more unemployment and corruption, less productivity and investment, and illegal underground economies.
An OECD study found that over-regulation is the major cause of EU growth being slower than USA growth. The study found “no quality benefits” resulting from regulation. We all know that the government is costly, but a 75-country study found that regulations usually cost a country twenty times more than they cost the government.

In the face of mounting anti-regulation evidence, the UK passed the Deregulation Act (now the Regulatory Impact Assessment Act), created the Better Regulation Task Force, has a new Regulatory Reform Bill. The Bill will, for instance, simplify unnecessarily complicated rules and allow partnerships of more than 20 people.

Of all the obvious things about regulation, that South Africans are over-regulated is the most obvious. Not only is most of the regulatory residue of the control-obsessed apartheid regime still with us, we have added over 1000 new acts since 1994, along with hundreds if not thousands of new regulations (perversely called “subordinate legislation”), provincial laws and municipal by-laws. There are so many new laws, they are so complicated and counter-intuitive, and so few people know what’s in them, that there is a new profession called “compliance officers”. Hundreds of millions of rands of additional costs are passed on to consumers as these new professionals help victimised firms avoid prosecution and damages actions for non-compliance.

Many of our laws are formulated by sending government officials to the world’s most advanced countries, not to ask what they did historically to prosper, but to mimic their post-development regulatory excesses. Our regulators often compound matters by embellishing First World regulations, thus rendering them maximally unsuitable for our developmental needs.

Our company laws, for instance, have become a nightmare of complex regulation, one effect of which is that “private” companies are no longer private and investors in public companies are lulled into thinking risk-taking isn’t risky. Registering a new company in Canada takes 2 procedures, 2 days and 1.5% of the per capita GDP, compared with 7 procedures, 30 days and 37% in South Africa. The Economic Freedom of the World Index shows most economies getting freer, including ours, but a frightening growth in regulation, especially since 9/11. The general regulation index for South Africa deteriorated from 6.6 to 5.4 (where 10 is free and 0 unfree) from 2000 to 2002, regulation of new business plummeted from 6.9 to a pitiful 3.3, and time spent with bureaucracy fell from 6.5 to 5.3.

Mercifully, it’s not all bad news. The ANC got off to a good start by deregulating agriculture, privatising or liquidating the control boards, and ending subsidies, to give us the world’s freest market in agriculture. Road freight and airlines were deregulated. Land development and tenure upgrade were streamlined. Low-income housing was liberalised and out-sourced. Most profoundly, GEAR and NEPAD were adopted, committing the country to the rule of law, property rights and a market economy.

COSATU says GEAR should be abandoned because it failed to deliver jobs and growth. In truth, the government failed to implement it, except in the areas mentioned. While government resolutely withstood resistance from its alliance partners, it allowed bureaucracy to run amok. If we are to go from neutral to first and eventually to top GEAR, government will have to walk its talk. It must reverse the tidal wave of regulatory excess. Unless it now implements its policies, its stand on principle will have been futile.

Author: Leon Louw is the Executive Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 8 March 2005 Policy Bulletin / 05 May 2009