Regulation of Credit, Labour and Business: 10 Years Freedom Barometer

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Freedom Barometer - Regulation of Credit, Labour and Business
Regulation of Credit, Labour and Business

Business regulation is an important part of the overall business environment since it has significant influence on entrepreneurial activities. Business regulation can either promote competition and innovation or stifle them to secure rent seeking and the status quo. A heavy bureaucratic burden also leads to high administrative costs and the cost of missed opportunity since some business activities were not implemented. But as a whole, Europe remains a place of good business regulation compared to other regions of the world, although some of the traditional measures of regulation quality such as the World Bank’s Doing Business have lost much of their explanatory power due to political efforts to reform any areas measured by it.

In labour market regulation there is an overall trend of increasing flexibility, with the potential aim of reaching the ‘flexicurity’ system currently present in Scandinavia (where social security is transferred from the market to the state through social programmes). Investment regulation policy remains welcoming to investments from abroad, keeping restrictions in only a handful of industries deemed strategic (such as transport, media and utilities). Even though political pressures in practice can heavily influence regulatory policy, the use of mechanisms such as regulatory impact assessment and the stakeholder consultation process have at least some influence on decision making.

AS A WHOLE, EUROPE REMAINS A PLACE OF GOOD BUSINESS REGULATION.

Freedom Barometer - Regulation of Credit, Labour and Business Scores by Region
Regulation of Credit, Labour and Business Scores by Region

There is a clear difference between different regions in Europe regarding the quality of business regulation. It is considered to be the best in advanced Europe, while its quality decreases in turn in new EU member states, the Western Balkans and the CIS countries, although some countries from these groups can differ substantially from their peers.

THERE IS A CLEAR REGIONAL DIVIDE IN REGULATION QUALITY BETWEEN ADVANCED AND DEVELOPING NATIONS.

The business regulation scores across the regions have been mostly stable during the decade, which could be explained by the fact that their current level relied on the political equilibrium which mostly remained stable across the region, despite populist challenges.

This is even more visible at the country level. There are little, if any, vacillations in business regulation scores across the spectrum. Regional outliers are now clearly visible: Georgia outperforms not only all its regional CIS peers, but all countries in CESEE region, followed by Armenia. Croatia is the worst new EU performer, at the same level as Tajikistan, Moldova, and Russia. Some noticeable changes in score are present in Turkey, Poland, Ukraine and Slovenia, which recorded increases, and in Bulgaria and Slovakia, which recorded decreases. However, the quality of business regulation is not the only thing of concern, so is its actual, non-discriminatory implementation in practice. This does not pose an issue in countries with effective government administration and the rule of law but remains an open question in countries with weak institutions, high corruption and a political culture that favours clientelism.

Freedom Barometer - Changes in the Regulation of Credit, Labour and Business Score by Country
Changes in the Regulation of Credit, Labour and Business Score by Country

THE QUALITY OF BUSINESS REGULATION IS IMPORTANT, BUT ALSO IS ITS IMPLEMENTATION IN PRACTICE.

It is clear that possible EU accession of WB countries will not lead to an increase in administrative burden, since the EU encompasses on one hand countries with good regulatory environments, such as the Netherlands, Sweden and Denmark, and on the other hand countries with less than stellar records, such as Croatia, Greece and Bulgaria. The issue of regulatory implementation in practice remains important for most countries in the EU11, WB+ and CIS regions. Current political developments in some of these countries, however, such as stabilisation of power within a political group that undermines the already weakened system of checks and balances, as in Hungary or Serbia, might have a negative impact on the quality of business regulation in the long run. At the same time, new developments in AI and automatisation create new challenges for labour market regulation, which will eventually need to be addressed, while new technologies may also lead to a rethinking of the current business regulation, with the aim of fostering innovation. However, all these developments will face resistance from vested interest groups. The resolution of this political problem will be an important step in fostering economic growth in the region.