regulatory policy: oecd experience and evidence

274Oxford Review of Economic Policy vol. 22 no. 2 2006

© The Author (2006). Published by Oxford University Press. All rights reserved.

REGULATORY POLICY:OECD EXPERIENCE AND EVIDENCE

OXFORD REVIEW OF ECONOMIC POLICY, VOL. 22, NO. 2DOI: 10.1093/oxrep/grj017

NICK MALYSHEVOrganization for Economic Cooperation and Development1

In the past 20 years a key topic of public-sector reform in OECD countries has been the emergence of regula-tory policy. During this period, the nature of regulation has undergone profound and rapid change. This paperreviews the development of regulatory policy in OECD countries over the last quarter-century. It identifies arange of tools and institutions that have been used by OECD countries to develop high-quality regulation. Theanalysis attempts to show that while there is considerable commonality on broad objectives of regulatorypolicy, considerably diversity remains in the implementation of regulatory policy across OECD countries.

1 E-mail address: [email protected] paper draws extensively from OECD (2002a) and a series of OECD Regulatory Reform Reviews, available at www.oecd.org/

countrylist/0,2578,en_2649_37421_1794487_1_1_1_37421,00.html

I. INTRODUCTION

In the past 20 years a key topic of public-sectorreform in OECD countries has been the emergenceof regulatory policy. During this period, the nature ofregulation has undergone profound and rapid change.It evolved from early efforts at eliminating regula-tion and gave way to more systemic regulatoryreform, involving a mixture of de-regulation, re-regulation, and improving the effectiveness of regu-lations. However, these initial formulations of regu-latory reform often assumed that change was epi-

sodic in nature. Moreover, they aimed to restore aregulatory structure to some ideal state through aone-off set of interventions. Experience demon-strated that such views were untenable and theygave way in turn to the concept of regulatorymanagement. Regulatory management differed inseeing the process of reform as being a dynamicone. With time, the process became increasinglyintegrated into public policy-making. Today, almostall OECD countries have established explicit institu-tions and tools to implement regulatory policy. Aswith other core government policies, such as a

monetary or fiscal policy, regulatory policy is anintegral role of government and is pursued on apermanent basis.

This paper documents the development of the regu-latory policy agenda. It reviews policies, tools, andinstitutions adopted in OECD countries, identifyingthe most promising practices as well as less suc-cessful initiatives.

II. HISTORY

The history of regulation is not one of coherentgovernment strategy, but rather of reactions to thechanging objectives and requirements in differentcountries, industries, and policy contexts. Followingthe rapid growth in the scope and scale of regulatoryinterventions through most of the twentieth century,shifts in the economic environment began to revealmore clearly the previously hidden costs of out-dated, low-quality, and constantly expanding regula-tory structures. Yet, while the problems caused bypoor-quality regulation were increasingly apparent,reform was consistently being delayed or blocked.For many years, the complexity of reform anduncertainty about its expected results blockedprogress. This was due in part to policy fragmenta-tion in the structure of government. Governmentslacked the coordination and planning capacitiesnecessary to move forward with horizontal pack-ages of policies and reforms. Governments alsogave too little attention to reviewing, updating, andeliminating unnecessary or harmful regulation. Manyregulations currently on the books date from periodsearlier in the twentieth century when economic andsocial conditions were very different from whatthey are today.

Incentive structures within bureaucracies did notencourage effective and accountable use of policy.Incentives too often favoured vocal rather thangeneral interests, short-term rather than long-termviews, and the use of traditional controls rather thaninnovative approaches. Vested interests were ableto block needed reform, even when the benefits tosociety at large were vastly larger (though diffuse)than the concentrated (and highly visible) costs tothe interest group. Most government officials werenot equipped to assess the hidden costs of regulation

or to ensure that regulatory powers were used cost-effectively and coherently.

The locus of regulatory authority also became dif-fuse. Regulatory powers increasingly were exer-cised at sub-national or supra-national levels. Thisincreased the tendency for duplicative, conflicting,or excessive regulations to arise, as coordinationbetween different sources of regulatory power wasoften rudimentary or non-existent.

In sum, a complex array of factors fuelled what isnow called regulatory inflation. At the same time,few efforts were made to develop an understandingof the nature of regulation as a policy tool. Theemergence of deregulation and regulatory reform inthe 1970s constituted some of the first attempts toaddress this question of the nature of regulation, andits limits as a policy tool. But the need better tounderstand the regulation was not at the heart of thereform agenda at that time.

The first efforts at ‘deregulation’ were driven byeconomic downturn and were based on the viewthat too great a quantity of regulation was imped-ing the economy by strangling innovation andentrepreneurialism. However, these early attemptsat ‘deregulation’ were, at best, only partially suc-cessful. But as the process continued, deregulationgave way in the 1980s and 1990s first to regulatoryreform, then to regulatory management, and,more recently, to the developing regulatory policyagenda.

‘Deregulation’ was superseded by ‘regulatory re-form’ and then by ‘regulatory management’ quiteearly in the development of the current regulatorypolicy agenda. This change entailed a shift awayfrom questions of what regulation should be elimi-nated and towards how regulatory structures couldbe improved in terms of design and functioning.Over time, the key elements of regulatory qualitymanagement emerged from the experiences of thereformers.

Attempts to promote regulatory quality were firstfocused on identifying important areas of poor-quality regulation, advocating specific regulatoryreforms, and scrapping burdensome regulations.Increasingly it was recognized that ad hoc ap-

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proaches to reform were insufficient. The size ofthe task required coordinated action on many fronts,while the benefits of consistent approaches and thewide application of policy learning were too sub-stantial to be forgone.

Thus, the reform agenda began to broaden to in-clude the adoption of a range of explicit overarchingpolicies, disciplines, and tools. These became per-manent, rather than episodic in nature. At thebroadest level, this shift has meant providing explicitpolicy support for the regulatory reform agenda, byadopting a reform policy at the ‘whole of govern-ment’ level, often with timelines, targets, and evalu-ation mechanisms. It has also included the adoptionof consistent approaches to the rule-making processand the implementation of new policy tools, such asthe use of regulatory-impact analysis, administra-tive simplification, and regulatory alternatives. Per-haps most importantly, the adoption of regulatorypolicies has meant that responsibility for elements ofthe programme has been allocated to specific gov-ernment agencies.

III. REGULATORY POLICIES

Regulatory policy is the systematic developmentand implementation of government-wide tools andinstitutions used to shape how governments usetheir regulatory powers. This includes integratingcompetition policy and market openness initiativesin the regulatory policy agenda and changing theculture of regulators so that flexibility and outcome-oriented approaches are systematically favoured inregulatory design.

All regulatory policies are based on a mix of eco-nomic, legal, and public-management principles.The underlying policy objectives sought are largelycommon among OECD countries, though the em-phases may differ widely, reflecting their differentspecific circumstances. Some examples can illus-trate the diversity of policy approaches in facingspecific policy challenges. In Japan and Korea—where there was a widely held view that the majorregulatory problem was one of over-regulation andstate interference in the economy—the focus hasbeen on reducing the economic role of the statethrough deregulation. In the United States—with

relatively few barriers to entry in most sectors but acostly federal regulatory structure in social policyareas—the focus has been on improving regulatoryquality through rigorous application of benefit–costprinciples. In the Netherlands—which was re-ori-enting the corporatist state towards a more market-based approach—the regulatory agenda has fo-cused on public consultation and the reduction ofadministrative burdens. In Mexico—which has beenintegrating its regulatory frameworks into the NorthAmerican Free Trade Agreement—the priority hasbeen to eliminate inconsistent and overlapping regu-lation and improve the credibility and enforceabilityof the law.

While the varying political, constitutional, and ad-ministrative environments of OECD countries re-quire different models, the basic elements of effec-tive tools and institutions do not seem to changeacross countries. Countries with explicit regulatorypolicies consistently make more rapid and sustainedprogress than countries without clear policies (seeOECD, 2002a). The more complete the principles,and the more concrete and accountable the actionprogramme, the wider and more effective wasreform.

A regulatory reform policy serves several importantpurposes in implementing, sustaining, and deepeningregulatory reforms. It signals the government’scommitment to reforming the regulatory environ-ment government-wide. This enhances the effec-tiveness of coordination and cooperation effortsamong related structural reforms, such as competi-tion policy, corporate governance, and sectoral re-forms.

A regulatory reform policy authorizes and mobilizesaction in the administration, improving public-sectorefficiency, responsiveness, and effectivenessthrough public-management reforms. Reform canbe risky and unwelcome for many civil servants,particularly when vocal interest groups supportthe status quo. Political support and direction isneeded both to overcome resistance internal tothe administration, and to shield reforms from ag-grieved interests.

Regulatory reform policy also helps show politiciansand the public why the policy objectives are impor-

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tant. The need for political support means that therelevance of regulatory reform to larger social andeconomic goals must be clarified and communi-cated with stakeholders and the public.

In addition to these points, adopting an explicit policyis highly important from the governance perspec-tive. It means that government is making transpar-ent the objectives and strategies of its reform pro-gramme, and so creates accountability for the out-comes. Accountability here has both the dimensionof government accountability to citizens and ac-countability by regulators toward government fordelivering on the stated policy. Also, as noted above,adoption of an explicit policy favours coherencebetween it and other related arms of policy.

OECD (2002a) also provides an extensive analysisof the key weaknesses in the implementation ofregulatory reform policies. The major weaknessesidentified are:

• lack of clearly specified regulatory quality prin-ciples, in particular explicit adoption of thebenefit–cost principle, and lack of clarity as tothe results to be achieved;

• important gaps in the coverage of the policy,both in terms of the range of national regulationincluded within its ambit (primary, secondaryregulation, regulation not approved by Cabinet,sectoral regulator’s regulations, etc.), in termsof the almost universal exclusion of sub-na-tional regulation, as well as substantial exemp-tions from the policy’s general ambit;

• lack of consultation during policy development,leading to a lack of public support for regulatorypolicy;

• lack of institutional and strategic support tosustain the policy, with fragmentation of re-sponsibility being of paramount concern in theface of entrenched opposition;

• lack of guidance on implementing the policy, forministries and other agencies of government;

• lack of enforcement powers and mechanismsfor the institutions made responsible for thepolicy; and

• insufficient focus on monitoring, evaluation,and reporting progress, both as a means ofpolicy feedback and as a means of maintainingand expanding constituencies for reform.

IV. TOOLS TO IMPROVEREGULATORY DESIGN

The task of improving regulatory decision-makinghas a number of dimensions. A range of tools mustbe deployed in a consistent and mutually supportingmanner if systemic quality assurance is to be theresult. The essential tools are regulatory impactanalysis, administrative simplification, public con-sultation, and consideration of regulatory alterna-tives. The use of regulatory impact analysis isprogressively improving the empirical basis for regu-lation in most OECD countries. Its role in this regardis supported by greater dialogue with affected par-ties, through the increasing use of a range of consul-tation processes and tools. In addition, the policy-makers’ ‘tool-box’ is expanding, as greater atten-tion is given to alternatives to traditional ‘commandand control’ models of regulation. Finally, numerousefforts to improve the ‘user friendliness’ of regula-tory requirements are being put in place, often underthe heading of ‘administrative simplification’ or‘red-tape reduction’. These are programmes thatseek to reduce compliance costs without compro-mising regulatory benefits by improving compliancerequirements and increasing access to regulation.

(i) Regulatory Impact Analysis

A trend toward more empirically based regulation isunder way in OECD countries. High-quality regula-tion is increasingly seen as that which produces thedesired results as cost-effectively as possible. Thewidespread use of regulatory impact analysis (RIA)is a clear example of the trend towards moreempirically based regulation and decision-making.RIA examines and measures the likely benefits,

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costs, and effects of new or changed regulations. Itis a useful regulatory tool that provides decision-makers with valuable empirical data and a compre-hensive framework in which they can assess theiroptions and the consequences their decisions mayhave. A poor understanding of the problems at handor of the indirect effects of government action canundermine regulatory efforts and result in regula-tory failures. RIA is used to define problems and toensure that government action is justified and appro-priate.

Many OECD countries have substantial experiencein RIA. The majority began to introduce it during thelatter half of the 1990s. The use of this tool spreadrapidly, and today the governments of most OECDcountries rely on at least some form of RIA (seeFigure 1).

OECD practicesThere is no single model that OECD countries havefollowed in developing RIA programmes. Theirdesign has to take into account the institutional,social, cultural, and legal contexts of the relevantcountry. That said, the experiences of OECD coun-tries have made it possible to establish certainpractices associated with effective RIA.

To be successful in changing regulatory decisions inhighly charged political environments, the use ofRIA must be supported at the highest levels ofgovernment. The most effective programmes havebeen those that require RIA as a condition for theconsideration of new regulations and laws. Toachieve this goal, high-level instruments such aslaws or prime-ministerial decrees supporting the useof RIA are essential. In Italy, for instance, a prime-ministerial decree in March 2000 formalized a legaltechnical analysis (Analisi tecnico-normativa) anda full RIA must be submitted with any draft text tothe Council of Ministers. Mexico integrated the useof RIA in amendments to its Federal AdministrativeProcedure Law in 2000.

Responsibilities for RIA are generally shared be-tween ministries and quality-control bodies. In amajority of OECD countries, ministries are primarydrafters of both RIAs and regulations. Ministrieshave better access to the expertise and informationthat high-quality RIA depends upon. A number ofOECD countries have found that a centrally locatedbody can have an important role in quality controland oversight of RIA. Australia, Canada, the CzechRepublic, Hungary, Italy, Korea, Mexico, the Neth-erlands, Poland, Sweden, Switzerland, the United

Figure 1Aspects of Regulatory Impact Analysis in OECD Countries

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Kingdom, and the United States have independentcentral bodies for quality control. In Canada, Korea,and the UK, these independent bodies have the rightto ask ministries to revise drafted regulation.

Determining which method to apply is a centralelement of RIA design and performance. SeveralRIA methods are commonly used in OECD coun-tries. Australia, Canada, Denmark, Italy, Japan,Korea, Mexico, New Zealand, Norway, Poland, theUnited Kingdom, and the United States have asimilar impact-analysis system with regards to scopeof coverage, quality control, cost–benefit analysis,and the consideration of effects on competition andmarket openness. A number of other OECD coun-tries have somewhat different systems: the Nether-lands has adopted the business effects analysis,focusing on the impacts arising from business; theCzech Republic uses a system that measures finan-cial and economic impacts; Austria, France, andPortugal use fiscal analysis, focusing on the directbudget costs for government administration; Finlandhas a wide range of partial impact analyses that arenot integrated and are performed by various minis-tries; Belgium carries out risk assessment in casesof health, safety, and environmental regulations;Spain fills in a checklist on the impacts arising fromregulations.

OECD (2005a) found that governments tend toimprove RIA programmes gradually, so that overtime they increasingly support application of thebenefit–cost principle. This step-by-step approachshould help to instil the benefit–cost principle asroutine, while acknowledging the practical and con-ceptual difficulties this analytical method poses inthe short term.

Ideally, RIA should be applied to all significantregulatory requirements, regardless of their formallegal status. But analytical capability is a scarceresource that needs to be allocated using some ruleof reason. Countries often target RIA where regu-latory outcomes will have a noticeable economicimpact. In the United States, a full benefit–costanalysis is required if a regulatory measure is deemed‘economically significant’—if it is expected to rep-resent annual costs exceeding US$100m; if themeasure is likely to impose a major increase in costs

on a specific sector or region; or if it will havesignificant adverse effects on competition, employ-ment, investment, productivity, or innovation. TheUnited States’ Office of Management and Budgetreviews roughly 600 regulations a year (15–57 percent of the regulations published), of which fewerthan 100 (1–2 per cent of the regulations published)are considered ‘economically significant’.

Targeting has two significant benefits. First, focus-ing RIA resources on key areas enhances thecredibility of its results and increases the rewardsthat ensuing policy improvements bring. Second,because the RIA process has to be supported atboth the administrative and the political levels, it isimportant that stakeholders do not view RIA assimply a costly bureaucratic process that analysesinsignificant policy proposals with little to be gainedby the exercise.

Data collection is one of the most difficult parts ofRIA. The usefulness of an RIA depends on thequality of the data used to evaluate the impact of aproposed or existing regulation. The informationthat RIA requires can be collected in numerousways. Public consultation is an important collectionmethod, but it must be carefully structured and theinformation it provides should be carefully reviewedand tested to ensure it is of the quality needed forquantitative analysis. A number of countries havefound that regulators can ensure better data qualityby involving expert groups in the consultation proc-ess, such as academic and other research bodiesthat do not have strong sectoral interests in the issue.In Italy, the government publishes a manual thatoutlines a number of possible RIA data collectionmethods, including opinion surveys, direct inter-views, and the use of focus groups. Denmark usesa similar approach, publishing ‘Business Test Pan-els’.

Regulators must have the skills to conduct high-quality RIA. It is particularly important to providetraining in the early stages of an RIA programme,when both technical skills and the cultural accept-ance of the use of RIA as a policy tool need to becultivated. A high level of investment is often requir-ed to assist in developing the broader cultural changesthat must be achieved across entire organizations.

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RIA manuals and other guidelines have been impor-tant complements to training, but not a substitute forit. The United Kingdom has placed considerableemphasis on strengthening its RIA capacity. Gov-ernment policy and guidance for regulators andpolicy-makers on how to prepare RIAs are set outon the website, www.cabinetoffice.gov.uk/regula-tion/ria/index.asp

Problems and limitationsRIA is a challenging process that needs to be builtup over time. It has to be integrated into the policy-making process if the disciplines it brings are tobecome a routine part of policy development. RIAhas been seen in some administrations as an obsta-cle to decision-making or legislative work. In thosesituations when RIA is undertaken in the earlystages of the decision-making process, it does notappear to slow the process down. Where RIA is notintegrated with the policy-making process, impactassessments can become merely justifications ofdecisions after the fact. Integration is a long-termprocess, which often leads to significant culturalchange within regulatory ministries and among con-sumers of the analysis—primarily ministers andlegislators.

The overall assessment of RIA is mixed. There isnearly universal agreement among regulatory man-agement offices that RIA, when it is done well,improves the cost-effectiveness of regulatory deci-sions and reduces the number of low-quality andunnecessary regulations. Undertaken in advance,RIA has also contributed to improve governmentalcoherence and intra-ministerial communication.Formsma (1997) estimates that in the Netherlands20 per cent of regulatory proposals are modified orretracted as a result of RIA. Canada (2001) showsthat prolonged use of RIA, together with the provi-sion of guidance and training, has induced a culturalchange among regulators.

Yet positive views continue to be balanced byevidence of non-compliance and quality problems.The scope of coverage of RIA remains patchy andexemptions are often broad. RIA is rarely used atregional or local levels.2 Uneven coverage of RIA

programmes seriously reduces effectiveness. More-over, RIA is most of the time applied to a singleregulation, rather than regulatory regimes as awhole. It thus can provide only very broad estimatesof the cumulative impacts. Lastly, RIA has mostlybeen designed for command-and-control regula-tions. The increasing use of performance-orientedregulations and regulatory alternatives provides sub-stantial challenges to the effectiveness of RIA. Theresult of these limitations is likely to be the need forfurther consideration of the design and implementa-tion of RIA requirements, including evaluation of itseffectiveness in assessing the likely performance ofnon-traditional instruments.

(ii) Administrative Simplification

One of the most widespread complaints raised bybusinesses and citizens in OECD countries con-cerns the amount and complexity of governmentformalities and paperwork. Enterprises and citizensspend considerable time and devote significant re-sources to activities such as filling out forms, apply-ing for permits and licences, reporting businessinformation, notifying changes, etc. In many cases,practices have become extremely complex, or irrel-evant and cumbersome, generating unnecessaryregulatory burdens—so-called ‘red tape’. The costsimposed on the economy as a whole are significant.When excessive in number and complexity, admin-istrative regulations can impede innovation, createunnecessary barriers to trade, investment, and eco-nomic efficiency, and even threaten the legitimacyof regulation and the rule of law.

In response to these challenges, OECD govern-ments have over the past two decades increasinglyfocused on reviewing and simplifying red tape.Initiatives to improve the efficiency of transactionswith citizens and business have included removingobsolete or contradictory provisions, producing guide-lines on administrative regulations, and introducingnew ways to measure administrative regulationsand reduce their impact. Increasingly, innovativethinking and skilful use of information technology(IT) are leading to new and more effective ap-proaches to administrative regulation.

2 Australia is a notable exception, where several Australian states have pioneered the use of RIA.

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OECD countries have focused on four broad trendsin their efforts to cut red tape. First, and among themost important, is a gradual shift from an approachfocused on easing administrative burdens after theevent to one that recognizes the need to ensure thatunnecessary or unreasonable burdens are not imple-mented in the first place.

Second, while simplification initiatives have gener-ally been ‘bottom-up’ in nature over the past years,they are being supplemented by ‘top-down’ initia-tives by governments and increasingly integratedinto broader reform programmes. Typical bottom-up initiatives are business licence services. Theyoften initially serve a specific need of a particularconstituency, but tend to broaden their profile overtime by identifying additional information and trans-actions of value to the same or related constituen-cies. A prime example of ‘top-down’ initiatives isthe adoption of government Web portals and themerger of one-stop shops.

Third is a trend toward market-based policies thatencourage simplification. Administrative simplifica-tion policies are increasingly influenced by the ideathat economic agents should be free to conduct theirbusiness unless compelling arguments can be madefor the need to protect the public, replacing previousmore restrictive approaches to reform.

Finally, IT is putting governments under increasingpressure to cut red tape. IT is not only the mostimportant ‘physical’ tool enabling governments toreduce the amount of paper-shuffling involved indealing with the public and business; it also providesstrong dynamics and pressure to reduce administra-tive burdens. The exposure on the Internet ofbureaucratic, unclear, or duplicative forms has inmany cases triggered strong direct reactions fromusers and media. Such pressure often goes beyondaspirations for further ‘simplification’ of regula-tions. They can also lead to substantial changes inregulations and how they are applied.

In the absence of evidence-based appraisals, poli-cies to simplify administration are often made in aninformation vacuum, where governments are una-ware of the actual size of the burden and unable tomeasure progress and setbacks in reducing it. Meas-

uring the existing administrative burden can be animportant approach to foster political support fordeveloping a policy to reduce it. Determining thesize of the existing administrative burden can alsoform the basis for evaluating what policy initiativesare needed to improve and sustain long-lastinggovernment efforts.

Improving rule-making ex anteAn important trend among countries is to avoid thecreation of administrative burdens by improvingrule-making ex ante, operating procedural controlsprior to the introduction of new legislation or regu-lation. This control is mainly done during the RIAprocess in OECD countries. RIA has proved to bea useful instrument for reducing or minimizing ad-ministrative burdens. While the focus of RIAs is notspecifically on reducing administrative burdens, theydo assist in stemming the tide of new burdensomeregulation. RIAs ensure that regulatory proposals orexisting regulatory arrangements are subject to atransparent, publicly accountable, and rigorous analy-sis to determine if they meet regulatory objectiveswhile limiting costs.

In countries where RIA procedures are well estab-lished—such as Australia, Canada, the United States,the United Kingdom, and New Zealand—burden-reduction policies have been strongly linked with exante assessment processes. A major objective ofthese procedural controls on the substance of pro-posed regulation is to ensure that a rational approachto the achievement of policy goals has been takenduring policy development, and that this has beeninformed by the involvement of a wide range ofaffected groups. A growing number of countrieshave introduced impact-assessment systems whichspecifically focus on administrative burdens andapprehend precisely the potential burden creation ofnew regulation. Germany has introduced the crite-rion of administrative burdens in its RIA system in2004. The European Commission introduced a spe-cial analysis of these burdens in early 2006. Belgiumis assessing the potential impact of new regulation interms of administrative burdens using a simplifiedRIA, called the ‘Kafka Test’. In most other OECDcountries there is a trend to increase action ex ante.In Sweden priority has been given to the reductionof new burdens in recent years by focusing on the

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assessment of new or altered regulations. Japan’ssimplification strategies are principally relying on exante mechanisms to control burden creation.

One of the limits to the attempt to avoid the creationof administrative burdens by improving control onrule-making ex ante is that these estimates—on thepotential burden of new or modified existing regula-tion—sometimes differ from the actual burdensexperienced as a result of the regulation. To addressthis issue ex post, reviews are increasingly seen asnecessary so that regulations would be reviewedafter they are implemented to ensure that they arehaving the intended effect. This allows checking theperformance of regulation against initial assump-tions and is a powerful adjunct to ex ante review.The United Kingdom has, for example, decided tostrengthen the RIA system by introducing a moni-toring of regulations following their introduction. Asset out in the Budget for 2005, departments have toexplain how the regulations for which they areresponsible are going to be monitored using post-implementation reviews, before these are introduced.

New approaches to control administrative burdencreation have emerged. Some countries, such as theNetherlands or the United Kingdom, moved to-wards adopting a framework for managing regula-tion that provides a better balance or compensationbetween the creation of new measures and thesimplification of existing regulations. The rationaleof such measures is to manage and control centrallythe development trend in administrative burdenswithin each line ministry as well as globally acrossthe range of government institutions. The UnitedKingdom government explored adopting a ‘one in,one out’ approach as advised by the Better Regula-tion Task Force in 2005. Departments would beforced to remove unnecessary and outdated regula-tions as part of the RIA process when new regula-tions are being proposed. Major regulatory propos-als would require the consideration of compensa-tory simplification measures during the RIA proc-ess. New regulations could therewith only be pro-posed if the scope of off-setting simplifications hasbeen addressed. This proposal has, however, notbeen included in the 2006 New Regulatory ReformBill, which is currently in discussion. In the Nether-lands, the Dutch cabinet target of a 25 per cent cutof the burden has been translated into reduction

targets per ministry. Whenever the limit is exceededbecause of the administrative burden in new legis-lation, ministers are obliged to compensate with newreductions. This limitation of the administrative bur-den compels a ministry to moderate production ofnew burdensome legislation and ensures a processof permanent monitoring over ministerial productionof administrative burdens.

Electronically based delivery mechanismsAdministrative simplification has benefited from theunprecedented and rapid development of IT-basedtools: these offer possibilities for greater coherenceand efficiency in regulatory interactions betweengovernment, businesses, and citizens. IT mecha-nisms are essential tools in as much as they areimportant ‘physical’ enablers of burden reduction.They involve a mix of information dissemination andtransactional aspects.

The traditional informational approach is the ‘one-stop shop’ for obtaining information. One-stop shopscan be defined as offices where applicants andothers interested in government services can obtainthe information necessary to their query in onelocation. They are also referred to as ‘servicecounters’, ‘single windows’, or ‘information ki-osks’. One-stop shops are primarily designed toprovide integrated and seamless services with asfew and as easily accessible points of contact withthe clients as possible. The objective behind the one-stop shops has been to provide substantial savings ininformation search and transactions costs for usersin relation to a wide range of interactions withgovernment. There is evidence that many of thevariations of the basic idea of one-stop shops havebeen successful in reducing administrative burdenson businesses and the general public (see WorldBank, 2004). Gains have been experienced in re-ductions of time and the cost invested in seekinginformation, especially on licence and permit re-quirements.

Delivery mechanisms have expanded from tradi-tional methods, such as face-to-face interviews totelephone and mail, to the use of IT-based tools,most importantly Web portals. Today, OECD coun-tries are focusing on developing ‘multi-channel’delivery services to improve and facilitate a user’saccess to public services—channels involved can

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range from traditional channels, such as the counterand telephone, to electronically enabled channels:Internet, e-mail, SMS, digital television. 3

Notwithstanding the fast growth of Internet-basedone-stop shops, physical one-stop shops remain animportant means to reduce administrative burdensfor citizens and business. These enjoy qualities, suchas personal advice and guidance, or a level ofaccountability through the personal involvement ofcivil servants, that web-based one-stop shops can-not offer. Physical one-stop shops are also impor-tant in the light of the existing digital divide: the gapbetween those who have access to the use ofinformation and communication technology (ICT)and the Internet and those without. Some busi-nesses—for examples small and medium-sized en-terprises—or groups of citizens might have little ora difficult access to government services providedelectronically.

The use of IT made a relevant contribution to theadvancement of the one-stop shop concept with theavailability of various services online through gener-alized or specialized portals (electronic one-stopshops). In most OECD countries, one-stop shopsand specific-purpose portals have been integratedinto a broader e-government framework, where

one-stop shops have merged into the adoption ofgovernment-wide portals.

To a substantial extent, these portals can be re-garded as burden-reduction initiatives: they arebased around the presentation of existing informa-tion and requirements in a more cost-effectivemanner through the application of technology. Assuch, they provide substantial savings in informationsearch costs for both citizens and businesses inrelation to a wide range of interactions with govern-ment. In addition, they are also rooted in concepts oftransparency and accountability for good govern-ment by making access to government easier.

In OECD countries, administrative simplification isincreasingly linked to the setting up of e-governmentprogrammes and governmental portals. E-govern-ment systems deliver administrative simplificationprimarily through improved accessibility of informa-tion and services and the creation of more integratedand seamless government services. Increasingly,administrative simplification policies are becomingimportant parts of e-government plans and much e-government activity is pursuing administrative sim-plification. This is also reflected in the institutionalframework of countries, notably in France, theUnited States, and the Czech Republic, where the

3 In Spain, IT initiatives have provided better and faster access to public services and products. The government has been workingon a series of initiatives to improve regulatory information. Most are based on a growing use of IT. An important scheme has beenthe setting up of a consolidated registry of administrative procedures on the Internet. An ambitious project to create one-stop shops(Ventanilla Unica) has been launched, and will soon be supported by citizens’ assistance centres (Centros de Atención al Ciudadano).These initiatives are closely connected with the administrative simplification policy. The Ministry of Public Administration isdeveloping IT systems to support the expanding web of one-stop shops. The PISTA project will permit the interconnection ofregisters and files of all the administrations. ‘Positive security’ means that regulations must be included in the registry to have legaleffect, which ensures against any non-compliance by ministries.

In Hungary, the government has developed an online system through which businesses can complete mandatory registration formsand send them through the Chambers’ offices to the Court of Registration. The Ministry of Justice’s Company Registration andCompany Information Services coordinate the computerized system, which has greatly improved the reliability of Hungary’scompany registry.

In Denmark, IT is being used as part of an effort to reduce administrative burdens. The Danish government requires that all formsused by businesses in communicating with public authorities be made available on the Internet. Legislation and regulations arepublished in the official publication, Lovtidende (‘legal gazette’), which is also available on the Danish parliament’s website. Since1999, Denmark has also published business-impact assessments on the Internet.

In the United States, the electronic one-stop site, www.business.gov, provides practical assistance to businesses through FAQs(frequently asked questions), an advanced search function to find federal information, the option to browse through governmentdocuments, and the inclusion of business-related items from federal agencies. Dissemination of information in this way typicallyknows no borders, and access to online information is unrestricted and free of charge. In Mexico, the Federal Regulatory ImprovementCommission (COFEMER) has developed online systems for most of its programmes, including the Federal Registry of Formalitiesand Services as well as links to one-stop shops. This Registry included more than 2,400 business formalities applied by federalauthorities, and became the data set of existing formalities to be reviewed. Also a free telephone service was established to provideaccess to the information in these inventories. Similar approaches are now being pursued in states and municipalities. Based onthe six-digit ISIC definition of activities, a user-friendly online search tool (available on www.cde.gob.mx) permits any person toretrieve a list of formalities needed to start up or operate a business. The submission of RIAs was also put through an online system,with the result that in 2004, 95 per cent of RIAs prepared by federal agencies for COFEMER were submitted online.

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same departments are responsible for administra-tive simplification and e-government programmes.

Anchoring simplification strategies on quantita-tive evidenceDespite the numerous administrative simplificationinitiatives launched by OECD governments over thepast decades, governments have not always had adetailed understanding of the extent of the burdensimposed on businesses and citizens. Policy has oftenbeen made without a clear understanding both of theactual size of the burdens and of the progress thatcan be made in reducing these. To have a cleareridea of the extent of the burden, many OECDcountries have attempted to measure burdens, ei-ther through business surveys, or through quantita-tive evidence-based approaches. OECD countries’experiences suggest that quantitative approachesare increasingly supplementing or substituting forbusiness surveys as the primary source of informa-tion for assessing the burdens.

One of the initial methodologies to measure theadministrative burdens on business is the standardcost model (SCM) developed by the Netherlands.The SCM measures the administrative costs im-posed on business by central government regula-tion.4 The costs are primarily determined throughbusiness interviews. These interviews generate dataand make it possible to specify in detail the timecompanies spend complying with government regu-lation. The SCM breaks down regulation into indi-vidual components that can be measured: informa-tion obligations, data requirements, and administra-tive activities. The SCM then estimates the costs ofthese components on the basis of three cost param-eters: (i) price, which consists of a tariff, wage costs,plus an overhead for administrative activities doneinternally or hourly costs for external services; (ii)time, which includes the amount of time required tocomplete the administrative activity; and (iii) quan-tity, which comprises the size of the population ofbusinesses affected and the number of times thatthe activity must be carried out each year. Thecombination of these elements gives the basic SCMformula: cost per administrative activity = price ×time × quantity.

In order to measure regulatory burdens or to evalu-ate programmes for reducing regulatory burdenswith the SCM, a number of countries have devel-oped a ‘baseline measurement’ of the administra-tive burdens of all existing legislation. This baselinemeasurement gives an overview of the regulationand a total figure for the administrative burden onbusinesses. It also shows where burdensome infor-mation obligations and related activities lie, andwhether they have a national or international origin.The Netherlands started measuring the total extentof burdens on business with the SCM at the end of2002.5 The total of all administrative burdens as of31 December 2002 was estimated at €16.4 billion(3.6 per cent of the Dutch GDP). The burdensimposed by the Ministries of Finance, Health andSocial Affairs, and Justice account for more thanthree-quarters of the total amount of administrativeburdens on business. Denmark also completedmeasuring the baseline of all administrative burdensin early 2006. The baseline measurement includes ameasurement of all business-related regulation in 16different ministries.6

The SCM has been adopted by many Europeancountries because it allows the identification ofsimplification strategies for international and Euro-pean Union regulation, for example through bench-mark studies between countries using the samemethodology. The focus of the joint benchmark wasto analyse how EU legislation is implemented atnational level and to assess the results in terms ofadministrative burdens. By comparing national sys-tems, the most efficient ways of implementingEuropean rules can then be identified. Measuringadministrative burdens can also offer interestingoptions for simplifying European rules. Denmark,the Netherlands, Sweden, and Norway com-pleted a first international benchmark exerciseon VAT in 2005 regarding administrative bur-dens. The benchmark focused on a selection of EUVAT legislation and on how it is implemented atnational level and how much administrative burdenit represents. The OECD also launched abenchmarking project in 2006 which will analyseinternational transport legislation across a numberof OECD countries.

4 Detailed information about SCM methodology can be found in ‘The Standard Cost Model: A Framework for Defining andQuantifying Administrative Burdens for Businesses’, available at www.administratievelasten.nl

5 See www.administratievelasten.nl6 See www.amvab.dk

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In the European Union, the Commission is consider-ing an EU common methodology for assessingadministrative costs imposed by legislation (see EC,2005c). The method proposed is called the ‘EU netadministrative cost model’. Like the SCM, it is a‘micro assessment methodology’ and allows dis-tinctions to be made between national, EU, andinternational origins. It has been adapted, as itencompasses burdens on enterprises, public au-thorities, and citizens. It also considers the net costsas well as the one-off costs.

The measurement of the size of existing burdenscan be an important information-based approach todeveloping a policy on burden reduction and thebasis for the evaluation of policy initiatives taken.Quantitative evidence on the size of the burden hadraised awareness among politicians and sustained apolitical constituency to maintain initiatives and poli-cies on burden reduction. Measurable burden-re-duction goals furthermore strengthen the account-ability of reformers.

V. REGULATORY TRANSPARENCY

The concept of transparency in government hasrapidly become a central theme in governanceliterature and in public debate. Transparency is alsoa central demand of civil society groups and servesthe basic democratic value of openness. The notionof transparency embodies the familiar concept ofpublic consultation, but is considerably broader inscope. These concepts of transparency range fromsimple notification to the public that regulatorydecisions have been taken, to controls on adminis-trative discretion and corruption, better organizationof the legal system through codification and centralregistration, the use of public consultation and regu-latory impact analysis, and actively participatoryapproaches to decision-making.

Transparency’s importance to the regulatory policyagenda springs from the fact that it can addressmany of the causes of regulatory failures, such asregulatory capture and bias toward concentratedbenefits, inadequate information in the public sector,rigidity, market uncertainty and inability to under-stand policy risk, and lack of accountability. Trans-parency of the regulatory policy itself, as well as itsinstitutions, tools, and process, is equally important

for its success. Transparency encourages the de-velopment of better policy options, and helps reducethe incidence and impact of arbitrary decisions inregulatory implementation. Transparency is alsorightly considered to be the sharpest sword in thewar against corruption.

(i) Public Consultation

Public consultation is one of the key regulatory toolsemployed to improve transparency, efficiency, andeffectiveness of regulation. Consultation improvesthe quality of rules and programmes and also im-proves compliance and reduces enforcement costsfor both governments and citizens subject to rules.Public consultation increases the information avail-able to governments on which policy decisions canbe based. The use of other policy tools, particularlyRIA, and the weighing of alternative policy tools,has meant that consultation has been increasinglyneeded for collecting empirical information for ana-lytical purposes, measuring expectations, and iden-tifying non-evident policy alternatives when taking apolicy decision.

OECD countries have developed five basic instru-ments or different forms of action to perform publicconsultation.

Informal consultation includes all forms of discre-tionary, ad hoc, and non-standardized contactsbetween regulators and interest groups. The keypurpose is to collect information from interestedparties. Informal consultation is carried out in virtu-ally all OECD countries, but its acceptability variestremendously. In the United Kingdom, regulatorybodies have traditionally had close and informalcontacts with major interests, particularly businesses,and informal consultation is seen as a norm of theregulatory process, prior to formal consultation inline with the code of practice on written consulta-tion. The same tradition of informal contacts existsin France. In Japan, informal consultation is crucialin shaping consensus around the final product. InCanada, the government has encouraged regulatorsto consult informally prior to formal consultation.By contrast, informal consultation is viewed moresuspiciously in the United States as a violation ofnorms of openness and equal access, and in manycases it is a violation of the administrative procedureAct requiring equal access for all interested parties.

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Informal consultations can be less cumbersome andmore flexible than more standardized forms ofconsultation; hence, they can have important advan-tages in terms of speed and the participation of awider range of interests. The disadvantage of infor-mal procedures is their limited transparency andaccountability. Access by interest groups to infor-mal consultations is entirely at the regulator’s dis-cretion. Informal consultation resembles ‘lobbying’,but in informal consultation it is the regulatoryagency that plays the active role in establishing thecontact. The line between these two activities,however, is potentially difficult to draw.

The circulation of regulatory proposals for pub-lic comment is a relatively inexpensive way to solicitviews from the public and it is likely to induceaffected parties to provide information. Further-more, it is fairly flexible in terms of the timing, scope,and form of responses. It is among the most widelyused forms of consultation. This procedure differsfrom informal consultation in that the circulationprocess is generally more systematic, structured,and routine, and may have some basis in law, policystatements, or instructions. It can be used at allstages of the regulatory process—but is usuallyused to present concrete regulatory proposals forconsultation. Responses are usually in written form,but regulators may also accept oral statements, andmay supplement those by inviting interested groupsto hearings. The negative side of this procedure isagain the discretion of the regulator in deciding whowill be included in the consultation. Important groupswill not usually be neglected, as this is likely tocreate difficulties for the regulatory proposalwhen it reaches the cabinet or parliament. How-ever, less organized groups are in weaker positionsin this respect.

Public notice-and-comment is more open andinclusive than the circulation-for-comment process,and it is usually structured and formal. Notice-and-comment has a long history in some OECD coun-tries, and its use has become much more wide-spread in recent years. It was first adopted forlower-level regulations in the United States in 1946.The practice was subsequently adopted in Canadain 1986—called ‘pre-publication’—and in Portugalin 1991. By 1998, 19 OECD countries were usingpublic notice-and-comment at least in some situa-tions. Japan adopted notice-and-comment require-

ments for all new regulatory proposals (and revi-sions to existing rules) in April 1999. In othercountries, such as Hungary, the process is proceed-ing on an ad hoc basis, with individual ministriesdeciding their own policies.

Procedures vary widely. In the United States andPortugal, the procedure is prescribed by law andjudicially reviewed, while Canada has adopted theprocedure through a policy directive that has nolegal force. The United States model is the mostprocedurally rigid: comments are registered in aformal record of the rule-making and regulators arenot permitted to rely on factual information which isnot contained in this public record. United Statespolicy-makers may accept or reject comments attheir discretion, but those who ignore major com-ments risk having the regulation overturned in court.In Denmark, by contrast, notice-and-comment ar-rangements are also widely used in the preparationof ‘substantially important’ lower level rules, butthere is no standardized, formal, and systematic setof requirements.

The public-notice element implies all interestedparties have the opportunity to become aware of theregulatory proposal and are thus able to comment.There is usually a standard set of backgroundinformation, including a draft of the regulatory pro-posal, discussion of policy objectives and the prob-lem being addressed, and, often, an impact assess-ment of the proposal and, perhaps, of alternativesolutions. This information—and particularly theRIA elements—can greatly increase the ability ofthe general public to participate effectively in theprocess, although most countries find that participa-tion remains at quite a low level for all but a fewcontroversial proposals. Many countries have foundthat levels of participation have in practice been low.This can be particularly so when the mechanism isfirst introduced, because familiarity is lacking.Established groups may prefer to keep their specialrelations with government officials than to partici-pate in more open processes. Participation is alsodependent on the ease of response and the expectedresults of participation, including the effectivenessof the notice process, the amount of time allowed forcomment, the quality and nature of the informationprovided to interested parties, and the attitudes andresponsiveness of regulators in their interactionswith participants in the comment process.

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A public hearing is a meeting on a particularregulatory proposal at which interested parties andgroups can comment in person. A hearing is seldoman independent procedure; rather, it usually supple-ments other consultation procedures. According topreliminary results from the most recent OECDsurvey on regulatory quality indicators, 13 OECDcountries used public meetings as a form of consul-tation by 2005, but there were significant differ-ences in their use vis-à-vis procedures and otheraspects of the consultation process. In the UnitedStates a hearing is attached to the notice-and-comment procedure as needed. Hearings tend to beformal in character, with limited opportunity fordialogue or debate among participants. Experimen-tation with ‘online’ hearings has begun. In Germany,a regulatory agency circulating a proposal for com-ment may arrange a hearing instead of invitingwritten comments, or may do both. In Finland,where hearings are a relatively new approach, ahearing is usually arranged instead of, or combinedwith, the invitation of written comments. In Canada,hearings are a formal part of the development of allprimary regulatory law—conducted by committeesin Parliament. Regulatory departments also oftenhold public consultation meetings, particularly onmajor regulatory or secondary legislation proposals.

Hearings are usually discretionary and ad hocunless connected to other consultation processes(for example, notice-and-comment). Public meet-ings provide face-to-face contact in which dialoguecan take place between regulators and a wide rangeof affected parties and between interest groupsthemselves. A key disadvantage is that they arelikely to be a single event, which might be inacces-sible to some interest groups, and thus require morecoordination and planning to ensure sufficient access.In addition, the simultaneous presence of many groupsand individuals with widely differing views canrender a discussion of particularly complex or emo-tional issues impossible, limiting the ability of thisstrategy to generate empirical information.

The use of advisory bodies is the most widespreadapproach to public consultation among the OECDcountries. Some 21 countries use advisory bodies insome form during the regulatory process. Theirrelationships to regulatory bodies can vary fromreacting to a regulator’s proposals (such as theNetherlands’ Social and Economic Council, or Ger-

many’s expert advisory commissions) to acting as arule-making body, in which advice is only one ofseveral regulatory functions (such as the UK’sHealth and Safety Commission). Advisory bodiesmay themselves carry out extensive consultationprocesses involving hearings or other methods. Forexample, in Germany, the mandate of the Deregu-lation Commission states that it ‘may hear expertsfrom research institutions, the business communityand associations, and administration if it deems thisnecessary’. In Mexico, businesses and other inter-ested parties now participate in an advisory committeeto the Federal Regulatory Improvement Council(COFEMER), through a dozen or more ad hocconsultation groups organized to review existingformalities and new regulations. Korea, too, has greatlyexpanded its use of consultative committees in recentyears. This has coincided with a massive rise in thenumber of non-governmental organizations (NGOs),and hence the diversity of views to be incorporatedinto policy decisions. Committees are generallyused as means of improving regulatory quality byassuring the flow of expert advice and information toregulators, but are also important in increasing theperceived legitimacy of laws.

Advisory bodies are involved at all stages of theregulatory process, but are most commonly used earlyin the process in order to assist in defining positionsand options. Depending on their status, authority, andposition in the decision process, they can give partici-pating parties great influence on final decisions, or theycan be one of many information sources. Regulatorydevelopment—drafting and reviewing proposals, orevaluating existing regulations—is rarely the only,or even the primary, task of advisory bodies. Somepermanent bodies, for instance, may have broad man-dates related to policy planning in areas such as socialwelfare or health care. There are many different typesof advisory bodies under many titles—councils,committees, commissions, and working parties. Theircommon features are that they have a defined man-date or task within the regulatory process (eitherproviding expertise or seeking consensus) and thatthey include members from outside the governmentadministration.

Further problems and challenges have also beendetected. In both the UK and Canada, the OECDfound that extensive consultations appear to haveresulted in ‘consultation fatigue’ by interest groups

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that feel overwhelmed by the volume of materials onwhich views are requested. Consultation fatiguemay be a positive signal and stems from success indeveloping highly consultative and transparent regula-tory regimes. Alternatively, it may arise from weak-nesses in the mechanisms for responding to consulta-tion inputs and eventually erode trust in the process.

VI. REGULATORY INSTITUTIONS

The role of institutions has been largely neglected inpublic policy discussion until recent times, but it isnow receiving considerable attention. While regula-tory policy needs to focus to a large extent ondesigning and applying high-quality regulatory in-struments, without the right set of institutions toensure regulatory implementation, the regulatoryinstrument will be useless. The institutions requiredto take forward the regulatory policy agenda arenumerous and of many kinds. But at the core, theyinclude regulatory oversight bodies and independentregulators.7

(i) Central Oversight Bodies

Most OECD countries, however, have integratedoversight bodies dealing with regulatory issues intothe administration. Oversight bodies are essentialregulatory institutions, which enhance quality inregulatory processes and their reforms. Their mis-sion is to supervise, coordinate, challenge, and ad-vise regulators, while promoting reform, regulatoryquality, and its benefits. These institutions shouldhave the capacity to coordinate and maintain awhole-of-government perspective and a broad con-cept of reform, hold sufficient authority, and, pref-erably, benefit from a permanent mandate.

Effective and credible mechanisms inside the gov-ernment for managing regulation are indispensablefor reform. OECD evidence shows that a well-organized and monitored process, driven by ‘en-gines of reform’ with clear accountability for re-sults, is important for the success of the regulatoryquality policy. While in 1996 only 14 OECD coun-

tries had set up a dedicated body (or bodies) respon-sible for promoting the regulatory policy and moni-toring and reporting on regulatory reform and regu-latory quality in the national administration from awhole of government perspective, 23 countries hadone in 2005 (OECD, 2005b). These institutions havebrought important improvements for the regulatorysystems and the reform processes.

In OECD countries, there is a wide range of institu-tional bodies that function successfully. The mostremarkable aspect of the use of oversight bodies istheir variety in roles and structures. Most are lo-cated within administrations, although advisory com-missions, regulatory reform committees of Cabinet,parliamentary committees, and intergovernmentalcommittees are also relatively widespread.

A key role of oversight bodies is to coordinate andsupervise, making certain that regulatory reformmeets quality standards and complies with a generaleconomic strategy, and that RIA is undertakenappropriately. In that sense, channels of communi-cation between regulators and bodies must be prop-erly settled. Furthermore, the level of governmentfrom which the body coordinates is important, aswell as the tools used. In Korea a RegulatoryReform Committee has been set up by law with a‘general mandate to develop and coordinate regula-tory policy and to review and approve regulations’.The Prime Minister, a significant group of experts,and six ministers participate in this body. In Den-mark a Regulation Committee was established tooversee and manage the overall legislative pro-gramme and to make sure the impacts of regulationwere properly assessed. It is another example ofinter-ministerial coordination since the Prime Minis-ter’s Office and the Ministries of Finance, Justice,Economic Affairs, and Trade and Industry areinvolved.

The challenge function empowers the oversightinstitution with the competence of questioning regu-lation and its reforms by assessing quality of regu-latory policy through RIA and the gatekeeper func-tion. This implies the capacity to veto a regulation

7 The executive and legislative branches are also key institutions in the regulatory policy process. The executive is a key sourceof regulation in two ways: in terms of proposing new laws to parliament, and in terms of establishing secondary rules to give effectto primary legislation. Parliaments have a formal responsibility to review and enact primary legislation, which is why it is importantthey are closely integrated into regulatory quality systems and processes. Parliament’s approach to scrutinizing legislation shouldbe clearly aligned with the regulatory quality procedures adopted in the executive—they should be mutually reinforcing.

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which does not fulfil the requirements of quality,thus giving the oversight body considerable power.This feature has not reached all institutions and it isstill pending in many OECD countries. Australia’sOffice of Regulatory Review (ORR) vets andreviews draft regulations to ensure that they areproperly formulated and that they include assess-ments of, among others, administrative costs forgovernment, business and other affected parties.

Advocacy means to take especial consideration tomaintaining the right path for the long-term strategy.Oversight bodies can be very useful in the promotionof regulatory reform and quality. In the UK, theBetter Regulation Commission plays a continuousadvocacy role with respect to reform throughout theregulatory institutions. In Japan, the AdministrativeEvaluation Bureau promotes the appropriate imple-mentation of policy assessments by regulators, andcoordinates and publishes reports on the progress ofthe implementation of policy evaluations.

The main features of oversight bodies that contrib-ute to regulatory quality can be summarized in thefollowing points: the capacity of coordination ofinstitutional frameworks from a whole-of-govern-ment perspective; independence and sufficient au-thority; political support at a high political level; andintegration into a broad concept of reform.

From an administrative perspective, most countriesbelieve that strong oversight bodies at the centre ofgovernment are essential to progress. In manyOECD countries, oversight bodies have been placedat the centre of government—sometimes at thesame level as ministries and regulatory agencies—supervised by the president or prime minister. Oneof the pioneer bodies responsible for assessingregulatory quality was established in the UnitedStates, the Office of Information and RegulatoryAffairs (OIRA), under the Office of Managementand Budget Executive Office of the President. Inthe United Kingdom the Better Regulation Execu-tive (BRE), within the Cabinet Office, has overallresponsibility for the government’s regulatory policy.In Mexico, the COFEMER, under the Ministry ofEconomy, plays the role of an oversight body ensur-ing regulatory quality.

Other countries, often smaller and consensus-based,have chosen to set up more decentralized institu-

tions. Denmark is relatively more informal, consen-sual, and decentralized in its structures, and theRegulation Committee coordinates ministerial insti-tutions and ensures that they accurately identifypolicy problems, assess impacts, and consider alter-natives to ‘command and control’ regulation. InNorway and Switzerland, there is no central unitresponsible for managing and coordinating regula-tion and its reform.

However, lack of a central regulatory oversightbody does not imply the absence of coordination onregulatory policy issues. Instead, it can be a result ofthe relatively decentralized model of governmentadministration. Mixed institutional arrangements foroversight bodies are also possible, combining thedifferent responsibilities of supervising, advising,challenging, and coordinating, and creating a net-work of bodies operating at different levels ofgovernment. When responsibilities are spread overdifferent institutions, coordination mechanisms areneeded. The institutional framework of Canadatries to strengthen the oversight activities by creat-ing a complex but well-structured framework. First,there is a group of bodies depending directly fromexecutive authorities—the Special Committee ofCouncil (SCC), the Regulatory Affairs and Ordersin Council Secretariat (RAOICS), and the TreasuryBoard Secretariat. At the departmental (ministerial)level, the Department of Justice supervises overallinternal regulation quality, and agencies within de-partments perform internal reviews of regulatoryagendas and the drafting and quality control throughRIAs of regulations.

Oversight bodies with a permanent mandate aremore numerous among OECD countries and indi-cate a greater commitment to reforms in the longterm. A permanent mandate contributes to maintainmore independence, since limited mandates couldmake them more vulnerable to political cycles. InMexico, COFEMER was established by the Fed-eral Law on Administrative Procedures, functioningwith technical and operating autonomy and an in-definite period of mandate.

A broad concept of reform is advisable, as well asa strategic perspective of the regulatory policies andtheir reforms. The Regulatory Process Action Planin Canada sets out a structure and tools for regula-tory reform, and a network of central and depart-

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mental oversight bodies is one of the key elements.Their work is based on the strategy frameworkestablished by the Guiding Principles of FederalRegulatory Policy and the Citizen’s Code ofRegulatory Fairness. In the Netherlands, the PrimeMinister develops economic and legal standardprinciples which must be applied by all ministries andinstitutions involved in drafting regulation.

Without an overarching strategy, oversight bodiesmay act on a case-by-case basis, facing problems ofcoherence, consistency, and some short-range poli-cies. It is therefore advisable that they establish astrategy to build up constituency for their work,integrating different voices of the political, eco-nomic, and social landscapes.

OECD experience shows that the institutional de-sign of oversight bodies should reflect the legal,economic, social, and cultural characteristics ofeach country, taking into account how the regulationaffects the system. There is no unique model andstructure of institutions dealing with regulatory qual-ity. The path to building a well-functioning oversightbody is not a single straight line. Oversight bodiesshould have an incremental approach in tasks, andshould be constantly developing the capacities andskills of their staff.

(ii) Independent Regulators8

One of the key institutions of regulatory policy is theindependent regulator. Many OECD countries havenow moved towards independent regulators, estab-lishing separate ‘agencies’ at arm’s length from thepolitical system, with delegated powers to implementspecific policies in a number of sectors of the economy.They are found primarily in utility sectors withnetwork characteristics, such as energy and telecoms,and in other sectors where sector-specific prudentialoversight is needed, such as financial services.

The reasons for setting up independent regulator arewell known.9 The key benefit sought from an insti-tutional framework based around these agencies isto shield market interventions from interferencefrom political and private interests. The move to

establish independent regulators offers great poten-tial for improving regulatory efficiency. Independ-ent regulators are also a necessary institutionaldevelopment for marking out the separation of thestate’s roles as policy-maker and owner of produc-tive assets. This is a role which is especially impor-tant in countries which have chosen to maintainsignificant ownership interests in network industries.

OECD (2002a) notes that independent regulatorshave been most effective and credible where theirindependence and roles are based on a distinctstatute with well- defined functions and objectives.They also require an adequate resource base and aflexible staffing policy that allows the body to attractand keep competent staff.

At the same time, independent regulators representa significant challenge to the executive and parlia-mentary powers of government. They represent aspecial form of institution in most OECD countries,which is neither directly elected by citizens normanaged by elected officials. It is an institution thatgovernments have established to delegate authorityat arm’s length from elected public authorities.Independent regulators exist at the border betweenpolicy formulation, which remains the remit of theelected public authorities under a rule of law, andenforcement of the regulation, which is delegated tothem.

Defining the respective roles of the regulators andthe executive raises a number of political and insti-tutional considerations, in particular how the exer-cise of regulatory power is to be controlled. Theincreasing role of independent regulators has raisedconcerns in certain countries that they could resultin ‘governments in miniature’, blurring the tradition-al separation of powers (see OECD, 2002a). At thesame time, independent regulators can never befully independent from the political process. Theywill always operate under the authority of laws andgovernance structures that can be altered directlyby the legislature and courts as well as indirectly bythe executive. Thus, effective regulators have to beable to respond to the long-term political directionwhich will ultimately justify their continuing existence.

8 The following section draws extensively from OECD (2003b, 2005b).9 There is a rich body of theoretical and empirical research covering independent regulators in network industries. For recent

reviews see Laffont and Tirole (1993, 2000), Levy and Spiller (1994), and Newbery (1999).

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The framework based around an independent regu-latory authority is also subject to a number ofshortcomings. Perhaps the most cited is regulatorycapture (see Laffont and Tirole, 1991). OECD(2002a) identifies several additional risks associ-ated with independent regulators that could reducelonger-term regulatory quality in infrastructure sec-tors. Independent regulators may slow structuralchange, losing potential gains to consumers. Regu-lators are often established on sectoral lines andmay tend to obstruct convergence between sectorsand the emergence of new business models.

Independent regulators may contribute to the frag-mentation of governmental policies and actions, inparticular in the case of competition policy. Anumber of network sectors have restructured rap-idly, driven by technological innovation, thus becom-ing competitive. As a result, sector-specific issueshave become less important vis-à-vis general com-petition issues. But inertia and resistance fromsector-specific regulators could well impede trans-fers of power to the competition authority.

Many of these risks can be minimized by carefulregulatory design. However, in many OECD coun-tries, the roles of the regulatory authorities have notbeen clearly defined and accountability mecha-nisms could be improved.

(iii) Independent Regulatory Agencies inOECD Countries10

The use of independent regulatory agencies datesback to boards and other regulatory commissionsthat have been part of the regulatory framework inthe United States and Canada since the 1920s.However, the widespread privatizations of the 1980sand 1990s have seen much greater use of institu-tions of this type in a wide range of OECD countries(see Figure 2).

Regulatory agencies operating at arm’s length fromthe government encompass a wide range of institu-tional settings. They can be classified in four distinctgroups. First, ministerial departments are agen-cies that are part of the central government and donot have the status of a separate corporate body.They are part of the civil service and headed by orreport directly to a minister. They are typically andlargely funded from tax revenue. They can havestatutory independence in carrying out some regu-latory functions, and can have considerable admin-istrative autonomy from other ministries.

Second, ministerial agencies are executive agen-cies, set at arm’s length from central government,which may or may not have a separate budget andautonomous management. They may be subject to

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different legal frameworks (where laws on admin-istrative procedures or civil service regulations maynot apply). They may have a range of powers, butare ultimately subordinate to a ministry and subjectto ministerial intervention.

Third, independent advisory bodies are agencieswith the power to provide official and expert adviceto government, law-makers, and firms on specificregulations and aspects of the industry. They mayalso have the power to publish their recommenda-tions. The scope for public decisions to depart fromthis advice or recommendations may vary.

Finally, independent regulatory authorities areagencies charged with regulating specific aspectsof an industry. They are typically under autonomousmanagement, and their budget may be under aministry. However, there is no scope for political orministerial intervention in the body’s activities, orintervention is limited to providing advice on generalpolicy matters rather than specific cases. Thesebodies have a varying range of powers. As indicatedin Figures 3 and 4, independent regulatory authori-ties account for approximately two-thirds of regula-tory agencies operating at arm’s length from thegovernment.

Creating independence of the regulator from thegovernment raises a number of practical designissues. Key aspects to ensure independence are thegovernance structure of the agencies, the transpar-

ency of procedures and guarantees for due process,the selection and nomination process, and the fi-nancing of the agency. The experience of OECDcountries offers a wide range of alternatives interms of institutional design to ensure regulatoryindependence.

The governance structures of independent regula-tory agencies are an important consideration toensure accountability. In theory, a board shouldoffer more opportunities for collegial decision-mak-ing, thus ensuring a greater level of independenceand integrity. More than two-thirds of the independ-ent regulatory authorities included in the currentinventory are governed by a board, with a slightlyhigher proportion for financial regulators (Figure 5).

Even when independent regulators have beengranted some powers and some autonomy, theirindependence can often be subordinated by admin-istrative regulations. This can be reflected in theprovision of instructions to these agencies, or in thepossibility of lodging ministerial appeals after deci-sions have been made. These interventions have thepotential to reduce the effective independence ofthe agency. Figure 6 displays the proportion of agen-cies that can receive instructions, and those agenciesfor which decisions can be appealed to the minister.

The terms of appointment can have considerableinfluence on the level of independence of regulatoryagencies. In general, longer appointments that span

Figure 3Institutional Status of Regulators (by sector)

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political cycles ensure the greatest degree of inde-pendence. Figure 7 shows the length of appointmentin a number of OECD countries, with the majorityranging from 5 to 8 years.

Finally, an important practical issue is also to ensurethat independent regulators receive sufficient finan-cial resources to carry out their mandate and that thefunding mechanisms will not have an impact on theirindependence. Several arrangements have beenused in OECD countries, from directly levying feesfrom the regulated entities, to central funding fromthe state budget (see Figure 8). Funding is oftenconstrained by the nature of the agency and thepossibility of levying sufficient fees from the sector

being regulated. It may also be influenced by theneed to reduce the risk of capture.

VII. EVIDENCE

The analytical framework which underpins the de-velopment of regulatory policy is based on a signifi-cant stream of economic analysis (see Posner,1974). The analysis of the impact of regulation onthe economy has a long history and shows thatregulations can have unintended economic effects(see, for instance, Olsen, 1965, 1982; Baumol, 1990;North, 1990; Weingast, 1995). These effects gobeyond those pointed out by standard public-interest

0%

26%

8%

66%

Figure 4Institutional Status of Independent Regulators in OECD Member Countries (97 agencies)

Ministerial Agency


Independent regulatory authority


10 711

27 1720

0%

25%

50%

75%

100%

Financial Energy Telecom

Economic Sector

Perc

enta

ge o

f age

ncie

s

Board

Individual

Figure 5Governance Structure of Regulators

294


Figure 6(a) Instructions

(b) Appeals

models, which presume that existing regulations aredesigned to address market imperfections and en-hance efficiency.

Owing to the lack of comparative data on regulatoryand market environments, many studies use rela-tively simple indicators of the regulatory environ-ment. These studies tend to find a negative correla-tion between the restrictiveness of national regula-tions and growth rates for a number of economicindicators. Hall and Jones (1999) find that across

127 countries the differences in capital accumula-tion, productivity, and output per worker are drivenby differences in institutional and government poli-cies. Kaufman et al. (2005) focus more broadly ongovernance and compute an index of approximately200 countries over six biannual time periods (1996–2004). They point to a strong observed correlationbetween income and governance, and argue againstefforts to apply a discount to governance perform-ance in low-income countries. Using measures ofbusiness regulations in 135 countries, Djankov et al.

0 4

1 5

7

7

27

11

16

12

2 8

0%

25%

50%

75%

100%


Missing

Agencies that cannot be instructed

Agencies that can receive specific instructions

Ministerial department

0

8

1 6

1

5

25

11 13

11 4 4

0%

25%

50%

75%

100%


Missing

Agencies that cannot be overruled

Agencies whose decisions can be overruled by government

ministerial department

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3

1

9

10

8

14

10

12

4

1

3

5

7

80

0% 25% 50% 75% 100%

Financial

Energy

Telecom

Econ

omic

Sec

tors

Percentage of agencies

Over 8 years

6 to 8 years

5 years

4 years

fixed term under 4 yearsor at discretion of theappointer

Figure 7Terms of Appointment

Figure 8Financial Resources

Other (National Bank for specific financial regulators) Fees levied on the regulated industry or non budgetary resources Mix of State budget and fees State budget only Incomplete

Energy

Financial

Telecommunications

Note: Number of agencies of each kind financed by type of financing.

296


(2006) show that an improvement from the worstquartile of business regulation to the best results ina 2.3 per cent increase in an annual growth.

Trade openness and competition policy are also keycomponents of regulatory policy. Dee et al. (2003),look at the effects of trade-openness on total factorproductivity growth and find evidence that opennesshas had an impact on growth over the last twodecades. The specific impact of competition policyis examined by Crandall and Winston (2003) andBaker (2003), with contrasting results. Crandall andWinston (2003) find little empirical evidence thatpast intervention has provided much direct benefit toconsumers or significantly deterred anticompetitivebehaviour. Baker (2003) finds that the benefits ofantitrust enforcement to consumers and social wel-fare, particularly in deterring the harms fromanticompetitive conduct across the economy, seemlikely to be far larger than what the governmentspends on antitrust enforcement and firms spenddirectly or indirectly on antitrust compliance.

Regulatory reform has also been closely tied withenhancing competition in product markets. Aghionet al. (2001) and Gust and Marquez (2002) showthat an increase in the intensity of competition canenhance productivity by improving the allocation ofresources at a firm level. Nicoletti and Scarpetta(2003) report that regulatory environments thatfavour competition have a positive impact oneconomy-wide productivity, even when otherpotentially important factors, such as human capitaland country- and industry-specific effects, areaccounted for.

Regulatory reform has also brought economic ben-efits in terms of improved employment prospects. Anumber of studies have carried out initial empiricalanalysis in this area. Peoples (1998) and Bertrandand Kramarz (2002), use single-country sector-specific proxies for the stringency of regulation.Boeri et al. (2000) and Nicoletti et al. (2001) usecross-country OECD indicators of economy-wideregulation for 1998. Messina (2003) uses cross-country proxies of entry cost for 2000 and Griffithand Harrison (2004) analyse the macroeconomicimpact of product-market reforms undertaken in theEuropean Union over the 1980s and 1990s. Thesestudies generally show a positive effect of compe-

tition-friendly policies on employment at both sectorand macro levels.

Although the effects of product-market reform oncapital formation are ambiguous, at least in theory,Alesina et al. (2003) find that regulatory reforms,especially those that liberalize entry, are likely tospur fixed investment in some industries.

The OECD has developed a unique set of indicatorson product-market regulation in OECD countries.These indicators summarize a large set of formalpolicies and regulation and classify into three cat-egories: (i) state control, (ii) barriers to entrepre-neurship, and (iii) barriers to international trade andinvestment. Based on these indicators Conway etal. (2005) describe trends in product market regu-lation in OECD countries between 1998 and 2003.The overall results show that product-market poli-cies have become more pro-competitive in theOECD area in recent years. State control andbarriers to international trade and investment havefallen considerably over the period. Domestic bar-riers to entrepreneurship have also decreased, thoughonly slightly. To a large extent, improvement inproduct-market policies have been supported byregulatory convergence towards more liberalizedcountries. As a result, there is currently morehomogeneity in product-market policies acrossOECD countries compared with 1998. The ap-proach to competition has also become more con-sistent across different aspects of regulation insome countries, although relatively restrictive coun-tries tend to have a high degree of heterogeneity inproduct-market policies.

Notwithstanding recent progress in product-marketreform, Conway et al. (2005) note that a hard coreof regulation still curbs competitive pressures inmany OECD countries, such as in barriers to entryin non-manufacturing industries. Moreover, signifi-cant differences persist between countries withrelatively liberal and restrictive product-market poli-cies.

Conway et al. (2005) also show a number of cross-country correlations between different aspects ofproduct-market regulation. Domestic impedimentsto competition tend to be lower in countries that havelow barriers to foreign trade and investment, sug-

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REFERENCES11

Aghion, P., Harris, C., Howitt, P., and Vickers, J. (2001), ‘Competition, Imitation and Growth with Step-by-StepInnovation’, The Review of Economic Studies, 68(3), 467–92.

Alesina, A., Ardagna, S., Nicoletti, G., and Schiantarelli, F. (2003), ‘Regulation and Investment’, OECD EconomicsDepartment Working Paper 352, Paris, Organization for Economic Cooperation and Development.

Baker, J. B. (2003), ‘The Case for Antitrust Enforcement’, Journal of Economic Perspectives, 17(4), 27–50.Baumol, W. J. (1990), ‘Entrepreneurship: Productive, Unproductive, and Destructive’, Journal of Political Economy,

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gesting a virtuous circle whereby market opennessto foreign operators generates pressure for domes-tic policy reform.

Furthermore, restrictive economic regulation tendsto be associated with a burdensome administrativeenvironment. Product-market regulation also ap-pears to be linked to employment-protection legisla-tion. This may reflect the overall impact of regula-tory institutions and procedures on regulatory poli-cies as a whole. If the whole regulatory system andinstitutions are of high quality, then a presumptioncould be made that the output, in term of product-market regulation or employment-protection legis-lation, may be of high quality. This may call for asystematic approach to regulatory quality, encom-passing policies and institutions through a whole-of-government approach.

VIII. CONCLUSION

This article has reviewed development of regulatorypolicy in OECD countries over the last quarter-century. It has identified a range of tools andinstitutions that have been used by OECD countriesto develop high-quality regulation. The analysis hasattempted to show that while there is considerablecommonality on broad objectives of regulatory policy,considerably diversity remains in the implementa-tion of regulatory policy across OECD countries.

OECD (2002a, pp. 112–9) identifies a number ofkey issues for extending and deepening the regula-tory policy agenda. An overarching challenge islinking regulatory policy to the broader governanceagenda. Strengthening the links between regulatorypolicy and a number of other structural reforms—such as competition policy, market openness, and

labour and product markets—will be necessary ifthe benefits of the regulatory policy agenda are to befully realized. Broadening the application of regula-tory policies will also be important in this regard. Anumber of important agents—sub-national govern-ments, independent agencies, and international andinter-governmental bodies and legislatures—needto be more fully engaged in developing and imple-menting the regulatory policy agenda. A key task forOECD countries is to enhance the evaluation ca-pacities of their regulatory policies, tools and institu-tions. The lack of evidence-based decision-makingis a fundamental impediment to the creation of high-quality regulation. Particularly important in this re-gard is ex post policy review and evaluation, whichis generally under-emphasized by OECD govern-ments. Finally, understanding of the most effectiveinstitutional basis for driving a regulatory policyagenda remains limited. This article has discussedthe responsibilities of institutions such as oversightbodies, advisory committees, and independent regu-lators. For none of these institutions is there a clearlydefined set of best practices.

Finally, a relatively new and emerging challenge isin the area of risk and regulatory policy. ManyOECD governments have come to recognize thecritical importance of and the need for an effectiverisk policy. Public servants deal regularly with risksin many public-policy domains—economic, fi-nancial, health, safety, environmental, and na-tional security. With increasing frequency, offi-cials face decisions about regulations where fu-ture uncertainties are economically significant andunavoidable. Thus, OECD governments need toassess and manage risk—as well as inform thepublic about the nature of risks and its inherenttrade-offs—in an overall effort to develop suitableregulatory policy.

11 A number of the works listed are not cited in the text but were used in the preparation of the paper.

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regulatory policy: oecd experience and evidence

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