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June 2009
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June 2009
Acknowledgements
This report was produced by a team led by of Economics), Andrew Bennett (Georgetown
Gokhan Akinci and Peter Ladegaard of the University), and Tom Kenyon (World Bank
multidonor Investment Climate Advisory Group consultant). In addition, the project
Services of the World Bank Group. It was benefited from the inputs of Laszlo Csaba,
produced as a synthesis of important lessons Zsofia Czoma, Imre Verebelyi, and Hungarian
derived from case studies about Hungary, the refugees who wish to remain anonymous
Republic of Korea, Mexico, and Australia/Italy/
the United Kingdom. The team designed the The team is grateful for comments provided by
approach and provided inputs for the cases and Etienne Kechichian, Kathy Lalazarian, Gregory
synthesis, which were authored by a team at Kisunko, Joel Turkewitz, Randi Ryterman,
Scott Jacobs and Associates: Cesar Cordova, Stoyan Tenev, Andrew Stone, Roger Grawe,
Jong Seok Kim, Tae Yun Kim, Junsok Yang, Vivien Foster, Bernard Drum, Jose Eduardo L.
Scott Jacobs, Ali Haddou-Ruiz, Carlone Varley, Campos, and Warrick Smith.
Rex Deighton-Smith, and Luigi Carbone.
Neil Roger, Suzanne Smith, Nigel Twose, and
The team was comprised of Gokhan Akinci, Sunita Kikeri provided guidance to the team in
Peter Ladegaard, Vincent Palmade, Fatima designing the approach. Paul Holtz, Alison
Shah, Zenaida Hernandez, Ksenija Vidulic, and Strong, Patricia Steele, and Amit Burman
Delia Rodrigo Enriquez. The report benefited provided editorial support and comments in
from the contributions from external experts on finalizing the draft for publication.
the topic: Michael Barzelay (the London School

ii
Contents
Executive Summary ............................................................................. 1

1. The Search for Effective Reform....................................................... 5

2. Defining and Measuring Effective Reform........................................ 8


Defining Effective Reform 8
Measuring Effective Reform 10

3. Summary of Reforms in Six Countries ........................................... 12


Hungary 12
Republic of Korea 15
Mexico 15
High-Income Countries 15
Australia 15
Italy 16
United Kingdom 16

4. Drivers of Change: Theory and Experiences ................................. 17


Globalization or Competitiveness 18
Crisis 19
Political Leadership 19
Unfolding Reform Synergies 22
Technocrats 23
Changes in Civil Society 24
External Pressure 25

5. Critical Factors for Successful Reform ............................................ 26


Exploiting Drivers of Reform 26
Setting the Reform Agenda 27
Implementing Reforms 30
Monitoring Reforms 32
Sustaining Reforms over the Medium Term 33

6. Lessons for Reformers .................................................................. 35

References ......................................................................................... 39

Acronyms and Abbreviations ............................................................. 40

iii
Tables
1 Drivers of Regulatory Reform in Hungary, Mexico, and the Republic of Korea ........... 4
2 Regulatory Reform Timeline in Six Countries ........................................................ 13
3 Key Drivers of Regulatory Reform in Six Countries................................................ 20
4 Critical Factors for Reform Success in Six Countries.............................................. 28

Box
1 What Are the Drivers of Change? ........................................................................ 2

iv
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Governments around the world are basing their This paper focuses on core aspects of the political
economic development and poverty reduction economy of reform, drawing on case studies of
strategies on efforts to expedite and expand three economies transitioning to stronger
reforms that improve their countries’ business envi- business environments (Hungary, the Republic
ronments. Reforms of the “enabling environment” of Korea, and Mexico) and three countries with
have become the norm in developing countries well-developed business environments (Australia,
seeking higher, sustainable growth. The enormous Italy, and the United Kingdom). The purpose is
inefficiencies constraining growth must be ad- threefold: first, to identify so-called drivers of
dressed mainly at the microeconomic level, such as reform among successfully reforming countries;
through broad legal and regulatory reforms. second, to explore how a reform strategy can
make optimal use of the opportunities provided
Yet broad reforms are difficult to implement and
by the drivers of change; and third; to suggest
sustain. Successful reform requires overcoming
how these lessons can be proactively used by
vested interests in the public and private sectors,
other reformers to design and guide reforms.
fears of change, and the complexities and
uncertainties of change in dynamic economic
The case study findings suggest that, regardless
and social environments.
of the content of reform, success is influenced
In recent years, considerable knowledge has by an evolving mix of seven drivers of change:
been accumulated on implementing successful i) globalization or competitiveness; ii) crisis;
regulatory reforms in developing countries, iii) political leadership; iv) unfolding reform
including a body of research based on the synergies; v) technocrats; vi) changes in civil
experiences of the World Bank Group’s Doing society, and vii) external pressure. (See Box 1 for
Business and FIAS programs. The case-study a short description of the drivers, and Table 1 at
evidence documents the factors leading to good the end of the Executive Summary for an outline
reforms and the results of these reforms. of how they played out in the subject cases.)


BO X 1

What Are the Drivers of Change?

Drivers of change are forces within a country’s political economy that expand opportunities for reform. The
seven main drivers of change are:
N Globalization or competitiveness. As capital and corporations move more freely across national boundar-
ies, governments are forced to engage in regulatory competition.
N Crisis. Crisis, or a sense of impending crisis, can be important at the start of reforms and can provide an
opportunity to stimulate action.
N Political leadership. Whatever the other drivers, political leadership is the yeast that makes them rise.
Opportunities for reform are maximized when crisis leads to political shakeup.
N Unfolding reform synergies. Market-oriented reforms in one area can increase pressures for reform in other
areas—and even change the political economy so that voices for reform emerge.
N Technocrats. Reform can be driven by technocrats—that is, politicians and senior civil servants with
training in economics or other fields who develop rational policies to lead the country forward.
N Changes in civil society. Reform is not a task only for governments, even in countries with weak civil
societies. Other stakeholders, such as firms and workers, can help build and sustain support for reform.
N External pressure. External commitments and pressures are often essential to reform, even in developed
countries. External obligations allow reform-minded governments to shift responsibility—and hence the
political costs of reform.

The paper then asks how a reform strategy can crisis. The case studies provide little support for
make optimal use of the opportunities provided the “champion” model of reform.1
by the drivers of change. The case studies
suggest that few factors are truly exogenous. The studies show a similar pattern in how
With proper sequencing, governments can do a drivers of change were sequenced:
lot to create conditions for change. N Step 1. A crisis, or a sense of impending
crisis, or pressures from external obligations
The case studies also suggest that reformers can
were important at the start of reforms.
influence the direction and pace of change by
These drivers redefined the political econ-
mobilizing and exploiting drivers of it. Rather
omy of launching change, weakened defend-
than a cause-and-effect scenario in which a single
ers of the status quo, and emboldened
driver—such as a crisis—creates and defines the
reformers inside government.
success of a body of reforms, what happens is an
unfolding series of events in which various drivers N Step 2. The first wave of reforms came only
become more and less important in defining when politicians set reform agendas without
phases of the reform process. For example, by regard for traditional insider interests.
itself crisis does not create reform, nor does Agendas were imported from other countries,
political leadership. Although reformers often or politicians permitted reform-minded
applaud crisis, it is a risky approach to reform if it technocrats to define the specific goals and
is not quickly supported by other drivers. More- content of reforms—sometimes in a “stealth”
over, reforms launched on the back of a crisis are mode that caught opponents off-guard.
difficult to sustain, and there is no guarantee that 1 The “champion” model of reform uses a single strong
leaders will make the right decisions in the face of reformer to achieve sustainable results.


N Step 3. The first wave of bold reforms increased reform to succeed. Weakness in one area may
momentum for further change by creating be compensated for in another area.
new pressures and allies, and new institutions
N Active management and support of the
were built that gave technocrats more power
reform process are essential, primarily through
and influence. Reforms were embedded in
dedicated, day-to-day leadership in the public
international agreements, limiting backtrack-
administration. Governments that strength-
ing. And some reforms increased the costs of
ened capacities for promoting, monitoring,
not reforming. For example, opening markets
encouraging, and assisting reforms across the
led to deeper domestic reforms as domestic
entire administration seemed to do a better
businesses faced external competition.
job of implementing them.
N Step 4. Reforms became sustainable only N Implementation is stronger when there is
when they were institutionalized into the continuous learning. It is important to
machinery of government and constituen- benchmark based on good practices in
cies for change were mobilized and included similar countries and to assess, pilot, inno-
in policy processes. Reforms were more vate, and learn from past experiences.
successful when governments built wider Monitoring and evaluation at all levels of
networks of reform-minded institutions implementation should be a priority in
throughout the public administration. order to capture a complete record of past
experience to improve upon.
How these steps unfold defines the reform path.
Strategically exploiting successive drivers of N Aim for systemic change, but use one-off
change appears crucial to achieving sustainable reforms to build momentum. One-off and
reform. This does not suggest that the reform visible projects can contribute to systemic
path can be controlled or even anticipated, since change. Early results help build credibility
much that happens is beyond reformers’ control. and momentum, and success breeds success
But it does suggest that better understanding of
N Put transparency at the heart of the process
the drivers of change and their sequencing can
and reform contents. Transparency is not
increase the chances of broad, successful change.
only a tool for strengthening reform drivers,
This paper concludes with a series of recom- it is also crucial in reducing regulatory
mendations on how these lessons can be applied risks—one of the main goals of reform. Strict
proactively in the design and management of adherence to principles of transparency and
reforms. Among the most important: accountability is vital to market confidence
in a modern regulatory state. Reforms should
N Use a crisis (if available) to stimulate reform, include developing new transparency habits
but sustain reform by locking in political across the public administration. New
leadership and bipartisan political support technologies such as electronic registries can
through formal agreements, legislation, also support openness, and at lower cost.
international agreements, and new
institutions. These case studies primarily focus on reform
dynamics, rather than the technical aspects of the
N Success factors seem to be interrelated—more applied regulatory reform tools, procedures, and
successful governments seem to invest simul- techniques. Knowledge about the relevance and
taneously in strategies such as managing the adaptability of these tools, however, is as critical for
reform program, ongoing public-private successful reform as the reform dynamics described
dialogue, and results monitoring. All these in this paper. For further guidance on regulatory
factors do not have to be highly developed for governance tools and their application for


transitional and developing economies, please adapting regulatory governance tools such as
consult www.fias.net for activities under the Better Regulatory Impact Analysis, tools to review the
Regulation for Growth (BRG) program. The BRG regulatory stock, regulatory reform institutions, and
program focuses on synthesizing, reviewing and indicators for regulatory quality.

TAB LE 1

Drivers of Regulatory Reform in Hungary, Mexico, and the Republic of Korea


Driver Hungary Korea, Rep. of Mexico

Globalization Reform was triggered by the To increase foreign direct invest- In the 1980s competition for interna-
or competitive- need to create a market- ment, reforms had to remove explicit tional capital and investment was
ness based economy and join the investment barriers and excessive growing, and leaders saw the benefits
European Union. regulations. of liberalizing trade for assembly plants
exporting primarily to the U.S. market.
Crisis An unprecedented change The 1997 crisis produced the most In the 1980s a collapse in oil prices
in political regime and painful economic contraction in and default on massive external debt,
collapse of the economy OECD history: 1998 was the first followed by five years of economic
created new elites and year since 1979 in which Korea stagnation, triggered privatization,
growing expectations for had negative growth. trade liberalization, and regulatory
real change. reform.
Political Successive prime ministers The president elected in 1997 The president and a small group of
leadership actively backed reforms to supported reforms. The National advisers initiated extensive reforms
secure democracy, the rule Assembly provided support by using a top-down approach based on
of law, open markets, and enacting legislation needed to traditional command and control
eventually EU membership. implement them. mechanisms. The resulting backlash
slowed reforms.
Unfolding So many reforms were Initial top-down reforms produced Market-opening reforms increased
reform launched in such a short impressive results, but lack of stakeholder pressures for economic
synergies period that reform could be incentives for regulatory reform liberalization, which increased public
slowed, but not stopped— within the government slowed further sector capacity for good regulation.
without disaster. reforms after a few years.
Technocrats The strongly independent, The Regulatory Reform Committee— In 2000 an agency was created in the
professionally staffed staffed partly with academics, Ministry of Economy to impose quality
Hungarian Competition supported by civil servants, and and transparency on the public sector,
Office played a vigorous co-chaired by the prime minister—is and highly trained technocrats
role in privatization. responsible for examining new and (economists) had legal authority and
existing regulations and maintaining political backing to drive reforms
regulatory quality.
Changes in Reform was legally based, Political support for reform was built Early reforms were not transparent,
civil society with active involvement by on a popular campaign to eliminate which limited reformers’ ability to gain
Parliament and extensive corruption, which coincided with an support from private stakeholders. Later,
consultation with stakehold- upsurge of NGOs focused on the as political support wavered, special
ers such as businesses, trade issue. In the 1990s NGOs grew private bodies were created to oversee
unions, and disadvantaged very quickly: by 2000 there were the reforms and provide sustained
social groups. up to 8,000, providing a new force support.
for political change.
External Close relationships between OECD membership brought new Mexico’s close relationship with the
pressure government officials and demands for openness and good United States—cultivated through
outside think tanks and regulatory practices. In 1997 the NAFTA—helped it recover quickly from
international organizations government, in cooperation with the the 1995 liquidity crisis.
helped reforms through IMF, began deregulating the
inflows of new ideas, shared financial sector.
experiences, and funding.
Note: This table itemizes the drivers of reform in the three developing countries only.


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Governments everywhere are basing their private sector performance. In countries with
economic development and poverty reduction legacies of instability, rent-seeking behaviors,
strategies on efforts to expedite and expand excessive government intervention, and weak
reforms that improve their countries’ business public and market institutions, better private
environments. Such broad reforms can be sector performance demands better performance
difficult to implement and maintain across the by the public sector as well—particularly in how
entire public administration and over several the public sector relates to the private one
years. through its legal and regulatory functions.
Reforming these functions is part of the body of
What strategy for broad regulatory reform reforms sometimes referred to in discussions of
maximizes the chances for genuine, enduring the “enabling environment” for private sector
success in environments hostile to reform? And performance.
how can a reform strategy best use the opportu-
nities provided by drivers of change? This paper This paper does not review why reforming the
provides a qualitative assessment that links enabling environment is important. The role of
exogenous factors with the choices available to such reforms in stimulating economic perfor-
each government. It concludes that very little is mance through productivity growth has been
truly exogenous, and that success involves widely analyzed. It is sufficient to note that, just
changing what can be changed and using what as regulatory reform became the norm for
cannot to best advantage. microeconomic policy in the 1990s in Organisa-
tion of Economic Co-operation and Develop-
Successful development depends on making the ment (OECD) countries, reforms of the
right changes quickly, and achieving better enabling environment have become the norm in
outcomes than have been achieved through the 2000s in developing countries seeking
previous approaches. Achieving sustained higher higher, sustainable growth. The enormous
growth requires fundamental improvements in inefficiencies holding back growth must be


addressed mostly with microeconomic rather As a result, reformers often tackle the easiest
than macroeconomic policy. or most isolated issues, with marginal and
unsustainable results.
The obstacles to successful reform are equally
familiar. To succeed, reform must overcome For these reasons many attempts at reform have
vested interests in the public and private sectors, been disappointing. Results have usually failed to
fears of change, and the complexities and match expectations, leaving reformers exhausted
uncertainties of change in dynamic economic and disillusioned. Reformers often underestimate
and social environments. For three reasons, or are intimidated by the scale of problems, and
transforming how the public sector conducts its isolated, one-off reforms usually do not produce
regulatory and administrative functions is lasting benefits for the private sector.
extremely difficult:
Those who believe that public sectors in devel-
N First, it is a far-reaching agenda, requiring oping countries are slow to act have never
governments to make the transition from considered the regulatory function. In 2005,
state- to market-led growth. Transformation Kenya’s government estimated that there were
of the public sector goes beyond changing up to 600 business licensing requirements. In
policies and legal mechanisms, because the 2006, it became clear that businesses actually
role and style of regulation in society are suffer from more than 1,300 licensing and other
deeply embedded in traditions, capacities, fees imposed by 178 state bodies. Moldova’s
interests, and the distribution of power. reformers originally estimated that its 67
Making extensive change to the regulatory inspectorates had created 300–500 regulations
function stretches from legal instruments to for businesses; the actual number was more than
government institutions, processes, and 1,100, many illegal and never published.2
capacities—and even further, to the rule of Reforms aimed at achieving single processes and
law and changing relationships between the rules will never catch up with the capacities and
state, markets, and society. Because the incentives of governments to create regulations
culture of governance is relatively path- and controls. The issue is systemic in nature.
determined, reforms can often be reversed
or ignored. The challenge is to find ways swift ways of
changing the complex system of instruments
N Second, existing incentives strongly favor and behaviors, enabling the economic growth
the status quo. Interest groups inside and needed to achieve the ambitious poverty reduc-
outside the public sector have organized it tions promised and sought in many countries.
for their benefit. Reform often encounters There are always lags between market and legal
massive resistance, both passive and orga- changes, but the lags need to be shortened so
nized, that delays implementation or that legal systems catch up with market needs.
undermines its results.
Governments that have managed to effect
N Third, capacities and strategies for change meaningful reforms have reaped the benefits.
are often insufficient. Even if a government Countries that have succeeded in managing
decides to move forward, weak political broad reform programs over several years—even
leadership, poor coordination, fragmented over several administrations—have shown the
policy jurisdictions, low skill levels, and fastest changes and greatest gains in economic
limited accountability—within the larger development. In just 10 years, Hungary moved
context of a weak rule of law—conspire to
make successful reform extremely difficult. 2 Scott and Astrakhan (2006).


from having planned to market-led economies, less developed countries.3 But highly developed
with larger roles for the private sector than in countries can also summon the energy and
most Western European countries. This transi- support to embark on major new directions.
tion required massive deregulation and re-
regulation, complete rebuilding of the countries’ The question is, how? How can genuine, lasting
institutional frameworks, and the creation of success be achieved in a governing environment
strong transparency and accountability mea- resistant or hostile to change? Can general
sures. The success of these efforts—including lessons be learned from the countries discussed
Hungary and Poland’s rapid achievement of above? This paper analyzes the political econ-
membership in the OECD and European omy and institutional mechanisms of successful
Union—was due to the adoption of strategic reforms to help governments implement good
and systemic approaches for building regulatory practices based on international experiences—
policies, tools, and institutions, backed by not only in Hungary, Korea, and Mexico, but
external pressures and political flexibility. also in Australia, Italy, and the United Kingdom.
It focuses on how governments can speed up
But success is not limited to the extraordinary and broaden reforms to improve the business
transformations in Eastern Europe. Korea elimi- environment by building capacity to plan,
nated half of its regulations in less than a year organize, implement, and sustain a government-
through a national reform program, while Mexico wide, multi-year reform strategy. The paper also
reversed 70 years of economic controls by revising assesses the relationship between the design of
more than 90 percent of its national legislation in reforms and the constraints posed by a country’s
about six years, opening and transforming its political economy.
economy. Results from Kenya’s licensing reform
suggest that similar processes can be initiated in 3 Jacobs, Ladegaard, Musau (2007).


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Before identifying lessons of reforms to improve on a national scale, but a few countries are
the business environment, it is essential to first slowly improving their understanding of how
define and then measure what is meant by regulatory systems change over time in deliver-
effective reform. ing net benefits.

A measure of success, then, would be a steady


increase over time in net social benefits from all
Defining Effective Reform
regulatory and administrative practices. But this
Viewed as a whole, the business environment measure goes beyond the impacts of regulatory
goes far beyond the impacts of regulatory and and administrative practices on business, and
administrative practices, and includes a range of includes the wider societal benefits of regulation.
issues such as infrastructure, natural resource As a practical matter, it is not necessary to take
endowments, political risk, and macroeconomic such a wide scope to measure success for the
stability. But regulatory and administrative business environment. And methodologically, it
issues require their own policy agenda, so the is impossible to adopt a net benefit approach at
discussion here is limited to them. this time. Over time though, reformers must
increasingly balance regulatory costs and benefits,
How should success in improving the regulatory since improvements in regulatory benefits—such
and administrative environment for business be as higher health, safety, and environmental
defined? The most advanced countries working standards—are crucial even in countries with
on regulatory reform have taken a broad social terrible business environments.
welfare approach to measuring regulatory
improvements. This approach uses various Instead, a measure of success in improving the
techniques to assess the net social gain from the business environment could focus on the
government’s regulatory function. No country specific impacts that the regulatory and adminis-
has developed a way of making such assessments trative environment have on business decisions.


These impacts can be divided into two catego- administrative environment for economic
ries: costs and risks. activity, the more likely it is that aggressive rent
seeking and short-term profit taking will replace
Regulatory costs for businesses fall into three longer-term investment. This is the main reason
categories: it is difficult to attract infrastructure investments
in uncertain regulatory environments.
N Operating or transaction costs. Sometimes
called administrative costs, these include When regulatory and administrative impacts on
costs imposed by paperwork, formalities, the investment environment are discussed, it is
corruption, and operating procedures such as usually specifically in terms of how regulatory
information disclosure. Such costs usually costs and risks affect businesses themselves. The
last for the life of the company, so their net assumption is that as regulatory costs and risks
present value tends to be high. These costs rise for a company, its projected return on
also have a fairly high fixed component, and investment declines. That is not always the case,
are particularly hard on small and medium- because some regulatory costs—such as con-
size enterprises. Unless they can be passed on sumer protection—may produce higher gains
to consumers, these costs reduce profitability. than losses for companies. But if governance is
poor and public services are of low quality, this
N Capital costs. Capital costs usually refer to
relationship is indeed almost always inverse.
the costs of buying new equipment and
land. Though often high upfront, they fall
Thus a reasonable definition of success for
over time as new equipment characteristics
reform of the enabling environment, and the
are built into equipment design and invest-
one used in this paper, is: reform that increases
ment planning. In the early years of a
private returns on investment by reducing net
business, capital costs can distort basic
regulatory risks, costs, or both. The word “net”
decisions such as on the trade-off between
is critical here. Investors make aggregated
labor and capital. Regulations imposing
decisions about returns on investment. All
capital costs diminish investment in produc-
regulatory costs and risks must be combined to
tive activities and so reduce firm innovation
obtain an accurate view of future returns. This is
and productivity.
an enormous undertaking in countries that are
N Reductions in the value of business assets by highly over-regulated because few reforms will,
eliminating opportunities for higher returns. in isolation, significantly change returns on
Regulators can impose such costs by allow- investment.
ing monopolies or imposing other barriers
to market entry, slowing innovation, reduc- Prior to the 2005–07 licensing reform in
ing business flexibility (say, in labor deci- Nairobi, Kenya, for example, a taxi driver was
sions), or forcing businesses to spend required to have 12 permits to drive from the
resources on strategic behavior. These lost city center to the airport. Investors in a taxi
opportunities force investment decisions service had to consider the cumulative effects of
into lower-return activities. all 12, plus any new ones that might be added in
the future. Business environment reforms that
Regulatory risks—that the rules of the game will eliminate six low-cost permits can be negated by
change or be understood only once an invest- the addition of one high-cost permit or by
ment is sunk—reduce the amount, return, and enforcement changes in the other six. Thus, to
social value of business investments. Investments genuinely change the business environment by
will fall because their projected returns decrease. increasing projected returns on investment, it is
The more uncertain and risky the legal and necessary to have a comprehensive view of


regulatory costs and risks facing the businesses wide range of possible inputs into a good business
of interest. Reform boosts business activity only environment. These assessments typically assert
if net benefits are achieved. that certain indicators are correlated with eco-
nomic performance. The implication is that a
This definition of success has important implica- country that seeks to improve its performance
tions for the reform strategy, as discussed later in based on these indicators will improve its business
this paper. Efforts to change net costs and risks environment, encouraging investment and growth.
lead to strategies that are systemic, longer-term,
top-down, and institutionalized. Efforts to change Some of these indicators take a bottom-up
selected costs and risks, by contrast, tend to be approach, selecting regulatory and administra-
shorter-term, bottom-up, and limited in scope. tive issues considered high priorities and devel-
oping quantified measures of regulatory costs
Another possible measure of success in reforming and, increasingly, risks. The World Bank’s
the business environment is the extent to which influential annual Doing Business report is one of
economic gains are passed from businesses to several projects that uses such indicators:
consumers. Business environment reforms that
increase competition are not always beneficial “The data offer a wealth of detail on the
to business profitability. In fact, increased specific regulations and institutions that
competition—particularly after a period of high enhance or hinder business activity, the
protection—often results in more business biggest bottlenecks causing bureaucratic
turbulence and restructuring. In such cases, good delay, and the cost of complying with
reforms might lower returns on investment in regulations. Governments can identify, after
those activities. Here success could be measured reviewing their country’s Doing Business
in terms of sustained increases in consumer indicators, where they lag behind and what
welfare, not returns on investment. But the to reform”(www.doingbusiness.org).
distributional issues of business environment
reforms are not necessarily a primary concern in Here success means moving up the indicators’
countries where the top priority is increasing rankings on the things being measured. Some
overall economic growth. When setting priorities datasets generate synthetic indicators of the
for business environment reforms, it might be “overall business environment” by aggregating
preferable to focus on reforms that produce the large numbers of indicators of specific problems.
highest gains in household income, instead of Performance on these meta-level synthetic
returns on investment. That would be a reason- indicators is increasingly seen as a proxy for real
able adjustment of the definition of success. changes in the business environment.

Taking this approach, this paper measures


Measuring Effective Reform reform success as steady and sustained improve-
ment, objective or relative, in individual
How should the success of business environment indicators—or, preferably, in broad, synthetic
reforms be measured? This is a key question, indicators of inputs to the business environ-
because often the measurement technology de ment. Some of these indicators, such as those
facto defines what is meant by success. Unfortu- used in the Doing Business project, have been
nately, the ways of measuring the net effects of extremely successful in attracting political
regulatory costs and risks are not always reliable. attention to the problems of the business
environment and in drawing reform resources to
In the past few years, a flood of business environ- the problems being measured. In many
ment indicators and assessments has produced a countries business registration is likely much


more efficient and transparent today than it was decreasing. The problem with using such indica-
five years ago as a direct result of the Doing tors as a measure of success for a reform program is
Business database. The same may be true for that business perceptions are notoriously difficult
other procedures measured by this and similar to compare over time and across countries, they
databases. Such indicators would seem to have change for many reasons besides actual regulatory
an important place in any monitoring program. risks and costs, and they often suffer from a lag of
uncertain length between reforms and changes in
Yet as a means of designing a national reform perception. Moreover, such measures are often
strategy for the business environment, this viewed with suspicion by government officials, and
approach does not seem intuitively satisfying. so may not have the credibility needed to under-
Indeed, none of the case studies summarized in pin reforms. It would be difficult to use these
this paper took such an approach. Because these indicators as a measure of success for a national
indicators are based on individual inputs, they reform program, though they could be used to
risk undue attention to a few trees in the forest validate information from other sources.
rather than the health of the entire forest. This
method is also limited by the indicators chosen, Another aggregated approach to measuring
which in turn are limited by the measuring success in business environment reform programs
methods used for each indicator. Synthetic is to avoid using proxies and instead monitor
indicators are based on some implicit weighting revealed preferences—that is, actual business deci-
scheme that may or may not correspond to the sions. This approach would require a monitoring
actual importance of each indicator. Most impor- exercise aimed at sectors or activities affected by
tant, these indicators do not measure net changes. reforms, and developing indicators of changes in
Changes in the business environment outside the business profitability, investment, hiring, expan-
scope of the indicators are simply ignored—and sion, and other measures of revealed business
in the vast, complex, continually changing confidence. These indicators can be measured in
regulatory and administrative environments of real time, but have the weakness of aggregating
every country, this limitation seems significant. factors beyond the regulatory and administrative
environment. Accordingly, they will probably
Another approach is to collect general percep- measure only the most significant impacts of
tions of the business environment using inter- reforms that are visible through the noise.
views with business people and investors. Most
indicator databases collect specific information None of the reform programs in the case studies
on regulations, government administration, and summarized in this paper was followed up with
other perceptions immediately relevant to this kind of detailed monitoring. Instead, the
regulatory costs and risks. This is the approach results of the reforms were embedded in larger
taken by the World Bank’s World Business macroeconomic results, such as national invest-
Environment Survey (covering 10,000 firms in ment flows.
80 countries), A.T. Kearney’s Foreign Direct
Investment Confidence Index, and Transparency The approach used to measure the success of
International’s Corruption Perceptions Index. reforms is likely to drive their content and
strategy. If the focus is on reducing net costs and
This kind of indicator seems to better capture net risks, then aggregate measures are needed
effects, because they aggregate the perceptions of relevant to broad, systemic reforms. But such
businesses on the costs and risks they face. Such measures are not yet sufficiently developed for
perceptions drive business decisions. Strangely, widespread application. This gap between the
almost none of these surveys actually ask whether goals of reform and monitoring techniques
anticipated return on investment is increasing or merits attention.


 35--!29/&2%&/2-3
).3)8#/5.42)%3

The case studies summarized in this paper actors and steps were linked together in a
cover middle- and high-income countries that momentum for reform.
have successfully conducted broad reform
programs. Some of the findings may not be Hungary
directly applicable to low-income countries,
but the overall lessons—linking reform strate- By 2001, after more than 10 years of deter-
gies with reform drivers—seem transferable, mined reforms, Hungary had largely completed
with care, to countries with weak reform its historic social, political, and economic
institutions and environments that are hostile transition. One indicator of the scale of this
to reform. change is that, by the end of 1998, the private
sector generated 85 percent of gross domestic
This chapter does not provide detailed summa- product (one of the highest shares in the
ries of the case studies, which are available OECD), up from 16 percent in 1989. The
separately.4 Rather, brief descriptions of reforms transition involved both new regulation and
in each country are followed in Chapter 4 by deregulation, and a conceptual as well as a
analyses of the drivers of reform and in Chapter 5 technical transformation.
by the criteria deemed critical to success across
the six countries. Table 2 provides a timeline Starting in 1989, successive administrations
of significant reform events in the six countries. eliminated large swathes of laws and other
It illustrates a point made repeatedly in this regulations designed for a centrally planned
assessment: that broad, sustainable reforms did economy. In addition, every year Parliament
not occur rapidly, evolved over time (sometimes passed more than a hundred laws, the
unpredictably), and unfolded through a series government adopted twice as many decrees, and
of steps that required the efforts of many ministries promulgated many hundreds of
actors. Success was determined by how these orders. From government procurement laws to
property rights, bankruptcy, and business
4 See www.fias.net startup rules, many of the regulations and


TABLE 2

Regulatory Reform Timeline in Six Countries


Hungary Korea, Rep. of Mexico Australia Italy United Kingdom

Pre- 1960s and 1979


1980 1970s Conservative
Anxieties Party comes
develop over a to power
long-term determined
decline in to reverse
economic economic
performance. decline.

1980 Late 1980s 1980s 1980–86 1980s 1980s and early 1980s Focus on
Deteriorating Economy Economic crisis Public backs 1990s Soaring privatization;
macroeconom- becomes too leads to stagnant substantial public deficit and European Union
ics and growing large and economy and federal reform corruption scandal (EU) Single
corruption. complex for cumbersome program. prepare way for Market spurs
government-led bureaucracy. reforms. reforms.
1987–88 development.
“Reform 1988 Salinas 1988 Next Steps
communists” government initiative transfers
take power and pushes for rapid public service
support market economic delivery from
economy. reform. ministries to
tightly managed
1989 1989 High-level agencies.
Political Economic
upheaval leads Deregulation
to institutional Unit created.
and legal
reforms.

1989–90
First guillotine
review (driven
by the prime
minister).

1990 1990–94 1992 New 1991–94 1994 Success 1990 First


Reforms slow as regulatory reform NAFTA requires of earlier administrative
bureaucratic laws and structural reforms reforms leads to procedure and
support institutions have and key adoption of antitrust laws
solidifies; key little impact due privatizations. National enacted.
laws passed; to poor staffing Competition
macroeconomic and ministerial 1994 When Policy (NCP).
problems resistance to currency
continue. change. collapses, 1994–95
businesses State
1994–98 1992–96 demand reform. governments
Second Regulatory initially resist
guillotine review reform commit- because NCP
(driven by tees established seen as federal
legislature). under president power and
have little clout money grab.
and are not part
of bureaucracy.

(Continued )


TAB LE 2 ( Con t in ued )

Hungary Korea, Rep. of Mexico Australia Italy United Kingdom

1995 1998–2002 1997 Asian 1995 1995 Federal 1996–2001 1997 Labor Party
Reforms financial crisis Presidential and state “Bassanini comes into
slow; shifts politics and decree requires competition reforms”—single power and
privatization leads to key regulatory entities created minister promotes reenergizes
continues. Basic Act on impact analysis. to oversee a series of broad reforms.
Administrative reforms; regulatory reforms
Reforms. 1995–99 financial to better position 1997 Better
Guillotine review incentives Italy in EU; key Regulation Task.
1998 eliminates 45% bring states support comes Force formed to
Influential of business red onboard. from three give voice to
Regulation tape. successive prime stakeholders.
Reform 1995–99 ministers and
Committee 1997–2000 Stakeholders general public. 1999 Central
created with Congress and see urban areas regulatory quality
civilian and Judiciary block as benefiting 1999 Central office created
government reform initiatives. more than rural Regulation and regulatory
members. areas. Simplification Unit reform official
established; placed in each
1998–99 regulatory impact ministry.
President orders analysis only on Regulatory
50% reduction in an experimental impact analysis
number of basis. white paper
regulations published.

1998–2002
Regulation
Reform
Committee limits
number of new
regulations and
helps interministe-
rial coordination.

2000 2003 New 2000 Although 2000 Modest 2000 2000–03 Series
government Cofemer changes to Government of legislation
reenergizes established as NCP include allowed to use enacted to
market-oriented strong central better decrees to bypass improve business
reforms. agency, public interpretation of parliamentary environment and
backlash against “public interest bottlenecks in competitiveness.
2004 reforms test.” getting regulatory
Hungary continues. reform tools.
joins EU. 2004 Plans
made for 2001 Ministerial
second wave and bureaucratic
of reform. resistance to
reforms increases;
support among
stakeholders
wanes.

institutions needed for the smooth operation of (though this aspect should not be exaggerated,
markets were established and secured. since the country’s reform process was turbulent
and not always coherent) and of accompanying
Important lessons from Hungary include the market liberalization with governance reform.
value of consistent reforms over several years Hungary’s reforms also show that institutions


play a crucial role in economic performance and state. Domestic reforms were boosted and
good governance. underpinned by new international commitments
as Mexico joined the General Agreement on
Republic of Korea Tariffs and Trade (GATT), Asia-Pacific Eco-
nomic Cooperation (APEC) consortium, and
During 1993–2002 Korea’s growth slowed, the OECD, and signed the North American Free
performance of its chaebol (huge conglomerates) Trade Agreement (NAFTA) as well as other free
contributed to the massive financial crisis of trade agreements with Latin American countries.
1997, and the country joined the OECD,
forcing it to open its markets. In response to
these challenges, an ambitious regulatory, High-Income Countries
financial, and structural reform program was
A single case study was conducted of three
launched in the late 1990s to make the economy
high-income countries—Australia, Italy, and
more competitive and restore the foundations
the United Kingdom—that are representative
for sustainable growth.
of successful, broad, multi-year reform pro-
grams resulting in much stronger business and
The program worked, boosting the confidence of
investment environments. Though the focus of
investors both domestic and foreign. The reforms
reforms varied by country, the processes faced
moved Korea from a highly interventionist,
similar challenges: conceptualizing, organizing,
authoritarian model of economic development to
marketing, implementing, and sustaining
a market-oriented, open model based on con-
major regulatory reforms despite institutional
sumer choice, democracy, and the rule of law.
weaknesses, incentive problems, and resistance
The changes made to Korea’s public sector are
from public and private interests. While the
among the most far-reaching reforms of regula-
ways that reforms were enacted were tailored to
tion ever undertaken in an OECD country.
each country, this paper draws general lessons
about institutions, externalities, capacities, and
organization of reform energies that sustained
Mexico change in the face of vested interests.
Mexico made regulatory reform a central
element in its transformation from an Australia
inward-looking economy to an open, market-
based one. The rapid pace, broad scope, and In 1994 the heads of Australia’s federal, state, and
considerable depth of Mexico’s regulatory territory governments adopted a national compe-
reforms exceed those of most longtime OECD tition policy. The policy sought to accelerate and
countries, and are comparable to those of the broaden microeconomic reform to achieve
emerging market economies in Eastern Europe higher, sustainable economic and employment
that recently joined the OECD. growth. A unique feature of the policy is that it
was designed as an integrated strategy that would
By 1998 virtually all price controls had been apply consistent competition principles across an
eliminated. A deregulation program adopted in extremely wide range of policy areas and mul-
1995 attacked myriad forms of government tiple levels of government. It aimed to embed a
intervention in economic activity and promoted presumption in all regulatory processes that com-
better regulatory techniques throughout the petition would not be restricted, and imposed
public administration (including at state and strict public benefit tests to limit such restric-
municipal levels). These efforts were supported tions. A key goal was to ensure the existence of a
by others aimed at modernizing the Mexican single open market for goods and services across


Australia. The National Competition Policy played in economic life led to policy and
(NCP), which was implemented over six years, institutional changes. As the political landscape
represented a long-term policy commitment, was redrawn, aspects of the centralized state
building on long-term microeconomic reforms were dismantled and many statist economic
that began in the 1980s. policies were replaced with more transparent,
pro-competition policies.

Italy
Starting later than many countries, Italy devoted United Kingdom
the 1990s to catching up with leading OECD
Since the early 1980s regulatory reform has been
countries on economic and governance reforms.
a key part of successive U.K. administrations’
The scope, speed, and consistency of structural
ambitious structural reform programs, intended
reforms over multiple administrations were
to strengthen competition and private sector
remarkable. Regulatory reform was only one of
vitality. Four features of recent regulatory
many changes in Italy in the 1990s, but it was
reforms in the United Kingdom are particularly
an essential one. After the macroeconomic
relevant. First, an extensive program of privati-
stabilization program of the early 1990s, regula-
zation, deregulation, and targeted re-regulation
tory reform helped attack many of the
was conducted. Second, deregulation occurred
underlying structural problems in the economy
at the same time as extensive re-regulation
and the public administration.
through the creation of numerous new regula-
tory bodies. Third, reducing regulatory burdens
The confluence of multiple political and eco-
on small businesses was a central feature of the
nomic challenges—domestic and foreign—was
program. Fourth, public sector reforms sought
in some ways shock therapy for Italy. Rigidities
to ensure that public services were of high
and practices accumulated over decades were
quality, effective, and homogeneous.
reassessed, and many abandoned. Growing
awareness of the excessive role that the state


 $2)6%23/&#(!.'%
4(%/29!.$%80%2)%.#%3

Opportunities for genuine reform come A greater understanding of the dynamics of


rarely—often only when crises and external change is emerging primarily as a result of
pressures make clear the costs of inaction and decades of study in fields such as political
change the balance of power that previously science and new institutional economics. These
protected the status quo. In most countries efforts recognize that sustained changes in
where donors are active, the dynamic of change economic policy can be understood only in the
is controlled by public choice and captured context of wider changes, particularly in the
state interests. stock of knowledge and institutions—such as
market institutions changed by globalization
Such interests almost always run contrary to and political institutions changed by upheaval.
the role of the state as envisioned in business
environment reforms. In most developing This macro perspective drives some advocates of
countries, improving the business environment new institutional economics to pessimism
requires that governments unwind extensive because of the difficulty of bringing about broad
state involvement in the economy, discourage change. But it should not obscure the fact that
entrenched rent seeking behavior, build new reformers can influence the direction and pace
regulatory and administrative capacities, and of change. This perspective emphasizes the roles
create market-based regulatory regimes and of drivers of change, defined here as forces that
institutions that support investment, innova- expand opportunities for reform within the
tion, and vigorous competition. How can political economy of a country. This chapter
drivers of change work against drivers of the reviews the seven main drivers of change
status quo?


identified in the academic and development are proxies for relative performance. Improve-
literature: ment in the indicators is supposed to improve
economic performance. Second, a country
N Globalization or competitiveness targeted for reform is usually described as
falling behind peer countries. This message is
N Crisis intended to convey a sense of urgency to the
N Political leadership government in pushing ahead with reforms in
order to catch up—that is, capture its fair share
N Unfolding reform synergies of global wealth.

N Technocrats The competitiveness driver of reform is familiar


to donors, who often rely on it to persuade
N Changes in civil society
political elites that the costs of not reforming
N External pressure will be higher than the costs of reform. In this
case the costs of the status quo are seen as rising,
These drivers are assessed for their relevance in reducing the cost of change.
each of the six case studies discussed here
(Table 3). The studies show that, rather than a Competitiveness was important in all the case
cause-and-effect scenario in which a driver of studies. In every country reforms were an explicit
change creates and defines the success of a body response to fears of falling behind, losing na-
of reforms, what happens is an unfolding series tional markets, and seeing rising imports. These
of events in which various drivers rise and fears were especially strong in countries trying to
fall—becoming more and less important in integrate with markets where competition was
driving reforms. If this conclusion is correct, keener (Mexico with North America; Hungary,
strategic exploitation of drivers of change is key Italy, and the United Kingdom with Europe).
to sustainable reform. These fears were also strong in countries drop-
ping barriers to foreign trade and investment,
exposing domestic businesses to new interna-
Globalization or Competitiveness tional competitors (Australia, Korea).

As capital and corporations move more freely Concerns about competitiveness can lead to
across national boundaries, governments are damaging policy reforms, such as protection and
forced to engage in regulatory competition. To government intervention. But such concerns can
retain current investments and attract new also lead to market-oriented reforms. Decisions to
ones, they must lower the costs of doing respond with market-oriented reforms in the six
business in their countries (Vogel and Kagan countries were due to other drivers, such as strong
2004, 3). Thus, globalization drives regulatory external pressures to open markets and consensus
reforms intended to reduce the costs or risks of that growth depended on private sector perfor-
investment and increase expected returns on mance. Indeed, regulatory reforms were widely
investment. seen as a way to deal with competitiveness
concerns. The first round of regulatory reforms
The globalization or competitiveness driver is in Korea cut by more than half the number of
often supported by the use of comparative industries subject to strong entry barriers, while
indicators of performance that are intended to continued efforts to drive down regulatory costs
carry two messages. First, to the extent that pulled Korea up on the World Economic
such indicators can be correlated with eco- Forum’s Global Competitiveness Report from 48
nomic performance, rankings on the indicators of 53 countries in 1997 to 26 of 75 in 2002.


The nature of regulatory competition in global were probably not well understood outside the
markets has been the source of much debate in reform elite. The other three countries (Australia,
the developed world. Some feel that regulatory Italy, United Kingdom) did not face alarming
competition has led to a “race to the bottom” in short-term crises, but were beset by a sense that
which environmental and labor standards are crisis was looming unless real change was made.
undermined by companies seeking to become In these countries, competitiveness fears substi-
more competitive. Other groups, supported by tuted for a real crisis.
most academic studies, believe that regulatory
competition tends to increase efficiency and Reformers may applaud the opportunities
quality rather than laxity—and that higher afforded by crisis, but crisis is a high-risk
economic growth generally leads to higher approach to achieving reforms. Italy, and to
protection through improved regulation some extent, Korea, show that reforms launched
(Drezner 2000). For that reason the competi- on the back of a crisis can be difficult to sustain.
tiveness driver must be carefully deployed, to There is also no assurance that leaders will make
avoid the impression that competitiveness is the right decisions in the face of a crisis, rather
strictly about expanding deregulation and than making things even worse. Mexico went
reducing burdens on businesses. through a long series of peso crises in which
policy reforms followed no coherent strategy—
The globalization driver has the potential to before finally arriving at the sustained market-
drive a broad reform program. But often, oriented reforms of the 1990s.
because its starting point is the interests of large
investors, it leads to a narrow focus on their
needs. This is the inherent contradiction of the Political Leadership
globalization driver: competitiveness is a far-
reaching concept, yet reforms related to com- Even when a crisis becomes apparent, lack of
petitiveness often focus on the needs of large, political leadership can result in little or no action.
export-oriented investors. There is little question that whatever the other
drivers, political leadership is the yeast that makes
them rise. Political leadership is at its most fearless
just after elections, when promises of reform and
Crisis the forbearance of the electorate are at their
“A crisis is a terrible thing to waste,” wrote height. When crisis leads to political shakeup,
Thomas Friedman (2005). Many theories of opportunities for reform are maximized. But by
reform start with the idea of a galvanizing then, the costs of reform can be much higher.
event—some kind of crisis that upsets the
balance of power that has preserved the status Public choice theory assumes that courageous
quo. This approach has much appeal because it political leadership will not occur because
seems to be one of the few realistic ways of politicians will always maximize their well-being
loosening the grasp of powerful interests that by splitting up the economic pie in a way that
have captured the state apparatus. ensures their re-election. But even under the
public-choice paradigm, predatory states
The six subject countries in the case studies sometimes create a situation where radical
present a mixed picture of the importance of reform is a self-interested strategy. In such cases
crisis in reform. Three (Hungary, Korea, Mexico) “political leadership” simply means a political
sought reform while recovering from painful elite skilled enough to recognize that its advan-
economic and political crises. All three used the tage lies in reform. This type of skilled elite does
crisis to launch reforms whose consequences not emerge very often.


TABLE 3

Key Drivers of Regulatory Reform in Six Countries


United
Driver Hungary Korea, Rep. of Mexico Australia Italy
Kingdom

Globalization or Reform was To increase In the 1980s, Australia, a small An important U.K. reforms
competitiveness triggered by the foreign direct competition for (in population) factor for Italian were
need to create a investment, international and isolated reform was the instigated by
market-based reforms had to capital and country, was need to meet strong support
economy and remove explicit investment was deeply conscious economic for building the
join the EU. investment growing, and of the impor- conditions for Single Market,
barriers and leaders saw the tance of keeping entry into the which brought
excessive benefits of up with global Eurozone; that with it many
regulations. liberalizing trade economic trends need also EU harmoniza-
for assembly and competition. triggered fears of tion laws as
plants exporting falling behind in well as open
primarily to the Europe. trade.
U.S. market.
Crisis An unpre- The 1997 crisis In the 1980s, a Economic crisis Economic crisis Economic
cedented produced the collapse in oil was not a crucial was triggered by crisis was a
change in most painful prices and trigger, but spiraling public crucial trigger
political regime economic default on between 1960 debt and radical of reforms. The
and collapse of contraction in massive external and 1992 political country had
the economy OECD history. debt, followed Australia had changes. also faced
created new 1998 was the by five years of fallen from being economic
elites and first year since economic the 3rd richest decline relative
growing 1979 in which stagnation, OECD country to to its neighbors
expectations for Korea had triggered 15th. leading up to
real change. negative growth. privatization, the financial
trade liberaliza- crisis of the
tion, and late 1970s.
regulatory reform.
Political Successive prime The president The president Prime Minister Reform was The election of
leadership ministers actively elected in 1997 and a small Paul Keating, a driven almost Prime Minister
backed reforms supported group of advisers former finance entirely by strong Margaret
to secure reforms. The initiated extensive minister, was leadership from Thatcher in
democracy, the National reforms using a committed to one ministry and 1979 gave
rule of law, open Assembly top-down adopting the the prime the country
markets, provided support approach based National minister. a leader
and eventually by enacting on traditional Competition determined
EU membership. legislation command-and- Policy. to reverse its
needed to control economic
implement them. mechanisms. The decline and lift
resulting backlash state economic
slowed reforms. controls.
Unfolding So many reforms Initial top-down Market-opening Opening markets There was little The country
reform synergies were launched in reform produced reforms years earlier success in experienced
such a short impressive increased produced strong building reform a rolling
period that results, but lack stakeholder consensus on momentum succession of
reform could of incentives for pressures for domestic outside of reforms, each
be slowed, but regulatory reform economic reforms. General political and of which
not stopped— within the liberalization, agreement on technocratic sowed the
without disaster. government which increased National pressures. This seeds for further
slowed further public sector Competition compromised the efforts—though
reforms after a capacity for Policy reforms speed, if not the the need for
few years. good regulation. partly resulted implementation, ongoing
from the clear of further reforms negotiations
economic in those areas. impeded some
reforms.


TAB LE 3 (Con t in ued )

United
Driver Hungary Korea, Rep. of Mexico Australia Italy
Kingdom

benefits of earlier
reforms, but it took
considerable
effort to reach
bipartisan
agreement on the
structure of reform.
Technocrats The strongly The Regulatory In 2000, an Active support An academic Reform had
independent, Reform agency was from the finance minister of public many
professionally Committee— created in the ministry was administration institutional
staffed staffed partly with Ministry of important. The and his aides champions: a
Hungarian academics, Economy to National drove reforms in dedicated unit
Competition supported by civil impose quality Competition league with a at the center of
Office played a servants, and and transparency Council, a technocratic government
vigorous role in co-chaired by the on the public dedicated entity prime minister. responsible for
privatization. prime minister—is sector, and created to But a powerful overseeing
responsible for highly trained monitor reforms, new institution regulatory
examining new technocrats ensured did not quality, a
and existing (economists) had consistency and emerge—one number of task
regulations and legal authority transparency in reason the reform forces and other
maintaining and political reporting. faltered with a groups, and the
regulatory backing to drive change in National Audit
quality. reforms. administration. Office.
Changes in civil Reform was Political support Early reforms Reforms in the Identifying Italian Common law
society legally based, for reform was were not early 1980s reforms so traditions
with active built on a popular transparent, reduced closely with a against
involvement by campaign to which limited economic strong minister developing
Parliament and eliminate reformers’ ability decline. Their enabled them to systemic
extensive corruption, which to gain support success showed be implemented approaches
consultation with coincided with from private that much of the in the short term, across
stakeholders such an upsurge of stakeholders. population but efforts government
as businesses, non-governmental Later, as political accepted that dissipated when led to an ad
trade unions, organizations support painful reforms the minister left hoc approach
and disadvan- (NGOs) focused wavered, special were essential to and the to reform that
taged social on the issue. private bodies reaching administration made public
groups. NGOs grew very were created to economic goals. changed. buy-in harder,
quickly: by 2000 oversee the increased
there were up to reforms and costs, slowed
8,000, providing provide results, and
a new force for sustained contributed to
political change. support. reform fatigue.
External Close relation- OECD Mexico’s close Opposition was Ministerial and Reform was
pressure ships between membership relationship with defused by bureaucratic aided by an
government brought new the United including in the resistance to active EU
officials and demands for States—cultivated National further reforms Commission
outside think openness and through Competition and reversion to legislating for
tanks and good regulatory NAFTA—helped Policy provisions the status quo the removal of
international practices. In it recover quickly for the federal ante took hold barriers to the
organizations 1997 the from the 1995 government to after 2001. free movement
helped reforms government, in liquidity crisis. make “competi- of services,
through inflows cooperation with tion payments” to goods, and
of new ideas, the International states (contingent people.
shared Monetary Fund on successful Inconsistency
experiences, and (IMF), began completion of with European
funding. deregulating the reform obliga- competition
financial sector. tions). law caused
modernization
of U.K. law.


Political leadership was essential in the six subject “avalanche theory of reform,” where making a
countries. All six benefited from champions of small change can lead to a landslide of reforms
reform at the center of government (a prime over time.
minister or president) or a strong cabinet minister
(finance, public administration). Indeed, political Several mechanisms can be used to create a
leadership guided reforms away from damaging self-sustained and expanding reform movement.
responses to crisis into more open, market-based If consumers see tangible benefits early on, they
reforms. In two countries (Australia, United are more likely to support continued reform.
Kingdom) very strong, almost autocratic politi- New interests can increase pressures for reform
cians drove reforms forward despite strong but in other areas. Reform in one area can make
disorganized political resistance. costs of regulation in other areas more visible
and painful. Tariff reform has stimulated reform
Political orientation does not seem to matter of national product markets facing competition
much in terms of propensity to lead reforms. In from imports.
Italy, Korea, and Mexico the reform governments
were on the left or nationalist. In Australia and Four of the six countries studied here (as well as
the United Kingdom, the governments were others studied elsewhere, such as New Zealand)
strongly to the right on market economics. And were able to exploit such links between reforms.5
in Hungary, ideology had collapsed. This mixed Australia initiated competitiveness reforms
pattern seems to support theories about the “end several years after tariff reforms increased
of history” and the weakening of political pressures from foreign competition in the
ideology as a driver of reform. domestic economy. In Mexico, the integration
of the North American economy through
However, politicians on the right seem to have NAFTA strengthened technocrats and induced
been slightly more proactive in looking to the private industry associations to lobby for less
future than were politicians on the left. The best government intervention. The United Kingdom
political leadership is proactive, rather than carried out a rolling program of reforms, but
reactive, in the midst of crisis. Skillful political was less successful in linking successive reforms
leadership is needed to increase capacity for due to a need for extensive negotiations and
change in the run-up to crisis, and to design and political investment at each stage. In the two
implement reform strategies quickly to lower the countries that did not exploit such links (Italy,
cost of lost opportunities and ease the pain of Korea), reforms slowed after a few years or
transition. Sometimes political leadership simply halted when the administration changed.
watches a crisis unfold without taking action, as
in Japan during its long banking crisis. Recent World Bank research, including the six
country case studies examined here, also found
that linking reforms was a powerful driver of
Unfolding Reform Synergies change. It concluded that in virtually all in-
stances reforms were linked to or resulted from
OCED countries have long recognized impor- trade and other liberalizing reforms, and that
tant complementarities across product, labor, increased pressures from international competi-
and capital markets. These complementarities tion often led firms to demand a better business
are relevant because market-oriented reforms in
one area can increase pressures for reform in 5 New Zealand initiated labor market reforms in the early
other areas—and even change the political 1990s, but only after radical regulatory reform in product
markets in the 1980s contributed to massive unemploy-
economy downstream or upstream so that other ment because the labor market could not adapt to the new
voices for reform emerge. This can be called the environment.


environment (World Bank 2006). It also noted Technocrats such as President Carlos Salinas of
that in India trade liberalization created a need Mexico, President Lee Teng-hui of Taiwan
for infrastructure investment and supply chain (China), and Minister of Finance Manmohan
improvements, leading the government in 1996 Singh of India played significant roles in defin-
to initiate reform of the country’s inefficient ing and driving dramatic economic reforms.
ports by allowing private investment. Although Skilled technocrats at various levels of govern-
direct causality is not clear, the regions that have ment have also been crucial to regulatory
made the least progress on microeconomic reforms in many other OECD and developing
reform (such as South Asia and the Middle East economies.
and North Africa) also have the highest barriers
to trade and foreign direct investment. Similarly, technocrats were extremely important
to the success of reforms in the six subject
Links across policies lead reformers to debate countries discussed here. These technocrats were
how to sequence reforms, and how important most effective when they were highly trained
sequencing is. The optimal sequence from an and based in independent or reform-oriented
economic perspective (in terms of rapidly institutions with legal mandates to advance
reducing transition costs and achieving benefits) change.
may differ from the optimal sequence from a
political perspective (in terms of maximizing In some cases, existing technocratic institutions
political momentum for reform). There is little were given mandates for regulatory reform.
evidence that engineering the sequence of Competition offices, with independent
reforms works well. Most countries have ap- investigation and even veto authorities, were
proached sequencing pragmatically, since important in Australia and Hungary, as was an
waiting for the optimal sequence can delay independent national audit office in the United
reforms for a long time. For that reason, the Kingdom. Finance ministries were important in
OECD has advised its members to carefully only a couple of these countries, which is
consider sequencing, but not to abandon interesting given the frequent reliance on such
opportunities while waiting (OECD 1997). ministries as the counterpart for donors in
developing countries.

Technocrats Special regulatory reform institutions in Korea,


Mexico, Australia, and the United Kingdom
A popular notion in development literature is provided a central focus for technocrats to build
that reform can be driven by politicians and new, specialized regulatory expertise. The
senior civil servants with training in economics top-down reforms in Korea and Mexico were
or other fields who develop rational policies for driven almost entirely by dedicated teams of
leading their countries forward. These techno- technocrats who were either Ph.D economists
crats develop reforms based on the promotion of (Mexico) or supported by strong academic and
the general good—a goal formalized as maxi- research institutions (Korea).
mizing the social welfare function based on a
value called the “Pareto criterion.” Neoclassical These experiences suggest that technocratic
theory says that the general good will be pro- drivers of reform work better with a strategic
moted under certain conditions in competitive approach aimed at strengthening the muscle and
markets, a theory that has received considerable capacity of pro-reform technocrats relative to
empirical support over the past 20 years. Such a parts of the state governed by public-choice
theory of reform is in direct opposition to public motivations. Institutions can be built that give
choice theory. such technocrats more influence in the governing


system. This was the effect of NAFTA in Mexico and poorly understood by the general public.
and OECD accession in Korea—both events But as political support began to waver, changes
reduced the grip of politicians on policymaking to the reforms created more visible private sector
and increased the power of technocrats. In effect, advisory groups, which played a very participa-
politicians ceded power to technocrats through tory, hands-on role in the reforms. This support
legal devices in the form of international has helped sustain reforms even as political
agreements. regimes have changed.

Donors tend to choose technocrats as counter- In Italy, limited civil society participation in
parts because they are more stable in the politi- and understanding of reforms made them less
cal process and more sympathetic to the theories sustainable. Indeed, the reforms were rapidly
and goals of microeconomic reform. As a result, wound down once the administration changed.
technocrats play a larger role in donor reform
strategies than is probably warranted. Fostering an active, reform-minded civil society
is a key driver of reform—one that has been
neglected in most developing countries, where
Changes in Civil Society donors have focused on making changes to
governments. Encouraging civil society support
Reform is not a task only for governments, for reform is not just a notion, but an
even in countries with weak civil societies. operational strategy. Using civil society to help
Other stakeholders, such as firms and workers, expand opportunities for reform requires that a
can help build support for reform and share crucial stage of reform precede the actual start
information across borders. As civil society of reforms: selling reform to an often skeptical
develops, the balance of power protecting the public. Citizens need to understand why
status quo can change, and opportunities for reform is so important to their future well-
reform widen. being and that of their children. Open dialogue
with major stakeholders on the benefits and
This is clear from Korea, where a rapid jump in costs of reform can improve understanding on
the number of non-governmental organizations all sides of short- and long-term effects of
(NGOs rose from a few to more than 8,000 in action and inaction, and of the distribution of
a few years) increased the focus on issues such costs and benefits. In most countries, reform
as corruption, good governance, and capture of would benefit from wider, more informed
the state by the chaebol. This new political debates less dominated by special interests that
movement helped break the decades-long grip stand to lose the most.
on regulation held by bureaucrats and special
interests. Korean reformers included an un- The OECD has found that developing and
precedented degree of transparency in the articulating transparent policies for regulatory
reforms, and ongoing media coverage kept reform—both government-wide and for indi-
political attention on reforms longer than vidual sectors—can generate political commit-
otherwise would have occurred. It could even ment, result in more coherent and carefully
be argued that as reforms became more rou- planned reforms, mobilize constituencies for
tine, public and media attention dropped— reform, and focus public debate on benefits and
contributing to fewer and less effective reforms costs. Reforms are more credible when the path
in later years. forward is clearly defined, and credibility is vital
if the private sector is to invest and workers are
Mexico’s reforms started with little support from to accept bearing some risks in addition to
civil society. They were top-down, technocratic, reaping benefits.


Communication can strengthen the voices of quiet game of claiming credit for reforms back
those who support and stand to gain from home, while publicly giving credit to the
reform. Important allies of reform include reforming government. Yet there is skepticism
consumers and businesses who will gain from that donors are especially effective at driving
lower-cost, higher-quality goods and services, successful reforms. Recent evaluations by the
and employees in fields where job creation and World Bank have found low compliance with
wage growth are constrained by unnecessary policy conditions for Bank structural adjustment
regulatory restrictions. loans, even though these policy reforms are
leveraged, negotiated, and monitored.6

External Pressure In two of the countries studied here (Hungary


and Korea), conditionality for OECD member-
One surprising finding of the six case studies is ship was important in strengthening other
the importance of external commitments and reform drivers. Conditionality seems most
drivers, even for governments in highly developed effective when reform is already supported by
countries. In some cases external institutions other reform drivers, such as political leadership
seem to act as an escape valve, permitting a and preexisting commitment to change. A 2004
reform-minded government to shift the responsi- evaluation of the FIAS administrative barriers
bility for reform—and hence the political program found that conditionality works when it
costs—to external players. In other words, is supported by reformers in the client country
external drivers can weaken the public-choice who need support during the implementation
driver in which individual politicians are account- phase. In Croatia and Latvia, for example,
able to special interest groups. External drivers implementation of FIAS recommendations was
have included international bodies such as the part of World Bank structural adjustment loans.
OECD and International Monetary Fund (IMF), This pressure was welcomed by Croatian reform-
intergovernmental organizations such as the ers facing political fatigue. And Latvian reform-
European Commission, trade agreements such as ers actually volunteered the idea of putting the
NAFTA, and bilateral relationships with donors. most difficult FIAS recommendations into the
structural adjustment loan conditions.
The most compelling example is in Mexico,
where a trade agreement made trade liberaliza- By itself, conditionality seems insufficient to break
tion a binding national obligation that reformers the balance of power that maintains the status
used to justify further privatization and eco- quo. But when teamed with other drivers of
nomic deregulation. The trade agreement reform—especially reform-minded technocrats—
shifted discretion away from a government that donor pressure seems to expand or at least
was previously unable to quickly move away maintain opportunities for change.
from special interests and toward technocratic
and reform-minded institutions. 6 The nature of conditionality, particularly as applied by
the World Bank, is changing in response to perceived
failings in enforcement; see World Bank (2001). For a
Donors have a mixed record in terms of using recent review of the literature on policy conditionality,
external drivers strategically. Most donors play a see Mosley, Noorbakhsh, and Paloni (2003).


 #2)4)#!,&!#4/23
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The drivers of reform are the fuel that enables As noted, the six countries discussed here do not
governments to overcome pressures to maintain show a linear cause-and-effect scenario in which
the status quo. But these drivers must be chan- a single driver of change creates and defines the
neled into a reform strategy that identifies, success of reform. Crisis did not create reform;
adopts, develops, communicates, and imple- nor did political leadership. All six countries
ments beneficial changes. The design of these used a changing mix of drivers through an
changes is the real technology of reform. unfolding sequence of events. Despite country-
specific situations, there seems to be a pattern to
This chapter identifies critical success factors for how drivers were sequenced:
the reform strategies in the six subject countries.
Its sections correspond to major components of N A crisis, a sense of impending crisis, or
the reform process identified in previous studies: external obligations were always important at
exploiting drivers of reform, setting the reform the start of reforms. They redefined the
agenda, implementing reforms, monitoring political economy of launching change, and
reforms, and sustaining reforms over the me- emboldened reformers inside the government.
dium term (Table 4).
N Crisis and obligations generated market-
Exploiting Drivers of Reform oriented reforms when politicians allowed
technocrats to design the way forward,
Making strategic use of drivers of reform—even define the content and goals of reforms, and
those exogenous to the policy process—is one key spearhead their implementation.
to successful reform. Drivers of the status quo can
be overcome only with a mix of drivers of reform. N Market-oriented reforms became sustainable
How can the drivers identified in this paper be with institutionalization and mobilization of
amplified to maximize opportunities for reform? constituencies for change.


The way that these steps work together is the with special powers and responsibilities, to
reform strategy, and the effectiveness of using support implementation over several years. In
drivers to seize opportunities for reform will the United Kingdom, when political momen-
vary depending on the strategy used. Korea tum faltered, government institutions—
shows the importance of using the right including task forces and other partnerships
strategy to exploit opportunities for change: its already established in the bureaucracy—took
growing NGO population was empowered over and ensured that reforms continued. In
through the unprecedented transparency and Italy, however, a failure to separate the roles of
consultation procedures of the regulatory politicians and civil servants undermined the
reform. The transparency of Korea’s reforms sustainability of reforms.
was ideally matched to encourage and benefit
from the emergence of an NGO constituency Setting the Reform Agenda
that was proactive and ready to challenge the
government. In Mexico, the opportunities pro- These six countries exhibited remarkably similar
vided by NAFTA were realized only through reform patterns. Crisis generated market-
the creation of new institutions charged with oriented reforms when agendas were set outside
preparing the country to become more com- traditional insider-interest processes. Reform
petitive. In both cases the governments were agendas were imported from other countries, or
not satisfied with simply reacting to the drivers politicians allowed reform-minded technocrats
of reform: they also created situations where to define the goals and content of reforms. The
the drivers were amplified and sustained over a risks of getting reform wrong are highest when
long period. pressures to reform are highest, because of a
strong incentive for short-term efforts to get fast
Hungary used the imperative of transformation results. If reform is captured by insider interests
and EU membership to launch its reforms, but at this stage, it may simply paper over underly-
made extensive efforts to build new institutions— ing causes, leading to a harsher crisis later. Many
both top-down and bottom-up—throughout analyses of the 1997 Asian financial crisis
the public administration. Rapid initial concluded that this was what had happened to
economic deregulation and constitutional earlier efforts to address the growing economic
reforms, driven by the prime minister’s office, imbalances in the region. Thus initial agenda
were followed by a period of consolidation and setting is crucial.
institution building throughout the public
sector to build the mechanisms needed to In all the countries discussed here—both
oversee free markets. This pause was needed to moderately and highly developed—reform
maintain the support of an increasingly alarmed agendas were strongly influenced by interna-
public and to build new constituencies for tional practices and pressures. Whether in the
reform in the public sector itself. It was followed interest of the European single market, the
by new rounds of reforms. North American market, or OECD member-
ship, outside agendas became domestic agendas.
Although crisis and political leadership can The benefits of integration and convergence
launch reform, institutionalizing reform is came to be seen as more important political
crucial to combating resistance. In Australia, the advantages than continued deference to the
National Competition Policy reform effort insider interests that had previously enjoyed
began in 1994 with support at the highest levels. primary influence. In addition, international
But in 1995 the government realized that it had benchmarks of reform practices increased
to create the National Competition Council, transparency for reforms that had gone off track.


TAB LE 4

Critical Factors for Reform Success in Six Countries


United
Factor Hungary Korea, Rep. of Mexico Australia Italy
Kingdom

Exploiting Institutional The country’s Potential While the A failure to When political
drivers of drivers of reform expanding opportunities National separate the leadership
reform were shifted NGO arising from Competition roles of faltered,
at opportune population was NAFTA Policy was first politicians and government
times to have given more accession were adopted in civil servants institutions—
reformers be power to help amplified by 1994, the undermined the including task
the ones most reforms through creating new government saw sustainability of forces and other
adept at deliver- government government the need in reforms. partnerships—
ing needed adoption institutions 1995 to create took over and
results. of transparency charged with the National ensured that
and preparing Competition reforms
consultation Mexico to Council to continued.
procedures to compete. ensure the
advance policy’s
regulatory implementation.
reform.

Setting the High-level Political parties Current Clear Unions involved Creation of
reform agenda commitment to supported difficulties in competition with reform the Better
market-oriented reforms to furthering principles set represented Regulation Task
reforms was counter the market-oriented standards of both public and Force,
vital to securing fiscal crisis. reforms indicate accountability private workers, containing
support from The public that earlier ones for the new helping to many private
foreign investors supported were too National balance stakeholders,
and creditors reforms to top-down to Competition concerns of spread
on whom the reduce overcome Council and potential ownership of
government corruption. institutional counterpart winners with reforms. It
depended for Mutually resistance and state groups. those of recommended
economic reinforcing build outside The council was possible losers. necessary
growth. goals sustained constituencies. supported by actions and
long-term the well- The sustainabil- monitored
Though seeking support. Enacting federal respected ity of reforms success.
a dramatic shift competition and competition was undercut
to free-markets, The 1998 Basic administrative authority and because Ad hoc groups
Hungary relied Act on practice laws powerful political support with both public
on existing Administrative provided more finance ministry. did not extend and private
legal and Reforms created certainty to Clearly defined beyond the members
administrative the Regulatory businesses and, commitments prime minister initiated
frameworks to Reform Body through greater and responsibili- and a strong reforms, and
implement and mandated transparency, ties helped minister. No central ministries
change. Periods quality controls improved public increase single, powerful institutionalized
of intensive such as acceptance. stakeholder new institution the process. But
reform were regulatory Market support for emerged, and lack of an
followed by impact analysis. openness reform. the finance overarching
periods of Reformers based increased ministry did not strategy slowed
building these analyses pressures for play a major some reforms
institutions and on OECD liberalization, role. Reform and results. The
broadening guidelines and which led to momentum build-up of new
ownership of used the OECD reforms in waned when initiatives was
changes. peer review public sector the government often hard to
process as an capacity for changed. digest and
external pressure good coordinate with
to maintain the regulation. stakeholders.
quality of
reforms.


TAB LE 4 (Con t in ued )

United
Factor Hungary Korea, Rep. of Mexico Australia Italy
Kingdom

Implementing In just a couple In addition to An account- National The short-term Businesses and
and monitoring months, a legislating able, transpar- Competition goal of cutting consumers were
reforms courageous information ent, efficient Policy red tape was invited to join in
guillotine review disclosure, regulatory agreements backed up by the reform
helped Korea required framework was between the tangible, visible process through
eliminate independent enhanced by national and tools, strategies, participation in
obsolete reviews of placing draft state govern- and structures ad hoc
regulations. regulatory regulations and ments provided (self-certifica- advisory
Another led to quality, regulatory a public tion, one-stop groups.
harmonization supported by impact analyses benchmark for shops,
with EU legal consultations online for public all subsequent codification,
standards. with stake- review and review and regulatory
holders. comment. reforms. impact analysis,
e-government).

Sustaining Early market An independent Three mutually Initial bipartisan Initially, strong Strong political
reforms over openness regulatory supportive agreements central leadership was
the medium- anchored the review agency elements— meant that the leadership was important to
term restructuring of at the center of market public received complemented initiate the
government government openness, consistent by measures review effort
ministries. countered the privatization, messages about that engaged because of a
pro-regulation and regulatory the benefits of stakeholders general cultural
tendency of reforms— reform, helping and promoted hostility to the
ministries. helped build to maintain their ownership development of
constituencies public support of reform. systematic
to advance despite approaches
needed changes in across
initiatives. government. government.

Measuring the extent of problems has become a important part of the strategy, communica-
growing element of reform strategies. tion, and political engagement needed for
Governments are using an increasing range of success. The agendas in most of the six coun-
cross-country indicators to set priorities and tries were initially set by fairly narrow groups
goals for regulatory reform. This is sensible if in response to a national consensus that
the indicators are sophisticated and flexible something had to be done about a specific
enough to advance a broad program aimed at problem. This can be a risky period, because
net reductions in regulatory costs and risks— insider groups are strongest at this stage. But
changes that actually influence business behav- technocratic groups setting agendas already
ior. None of the six countries studied used existed in the governments, newly empowered
indicators of business costs to drive reforms; to implement reforms that they had already
rather, they were heavily influenced by indica- been promoting. Regulatory reform had been
tors of macroeconomic performance. The promoted for at least eight years in Korea,
narrower, bottom-up indicators increasingly with few results. Italy had already adopted
used to set reform agendas may have a very legislation for the European single market, but
different effect on results and sustainability. with little effect on its reams of domestic
regulations. Mexico had tried for years to open
Although experiences are mixed, the process its economy. Hungary had launched market-
of setting the reform agenda seems to be an oriented reforms years earlier. These various


reform-minded groups were empowered by Mexico’s difficulties in advancing further urgent
crisis, external pressures, and political direc- reforms (particularly in the energy sector) after
tion to define much bolder reform agendas. 2002 indicate that earlier reforms were too
Their experiences with reforms were extremely top-down and autocratic to overcome institu-
useful in showing which would not work and tional resistance and build outside constituen-
the way to new, innovative strategies. cies. Italy’s reforms were so closely identified
with a strong minister that reform efforts
These technocratic agendas, at different speeds,
dissipated when that champion left office.
received support from a growing circle of public
Indeed, the six case studies provide little support
and private interests—promoting further evolu-
for the “champion” model of reform. None of
tion of the agendas. In most of the six countries,
the six countries used a single strong reformer to
public-private arrangements were used to reach a
achieve sustainable results.
shared vision on the nature of problems and
desired outcomes. Mutually reinforcing goals
helped maintain support for reform.

In Hungary, high-level commitment to market-


Implementing Reforms
oriented reforms was vital to securing support Drivers, decisions, and designs are good starts,
from foreign investors and creditors, who had but the fatal weakness of many broad reforms
powerful interests in maintaining rapid eco- is failure in implementation. At the nexus of
nomic growth. Foreign investors were extremely public administrations and interest groups,
influential in maintaining the country’s focus on public choice incentives are highly protective
reform. In Korea, the main political parties of the status quo. Reforms designed by a
agreed to support reforms to fight the fiscal single technocratic group or political cham-
crisis; the public supported them to reduce pion can easily run into problems during
corruption. implementation, when the incentives and
capacities of existing institutions constrain
In the United Kingdom, the 1997 creation of
progress. Passive resistance is common, and
the Better Regulation Task Force with mem-
reforms are easily reversed. The six countries
bers of many private stakeholder groups—
studied offer several lessons about successful
large and small businesses, consumer groups,
implementation.
unions—spread ownership of reforms and
helped communicate its importance and
benefits. In Australia, at the start of reform, First, reforms must be tailored to the country’s
the national government used financial incen- institutional apparatus. The six countries
tives to bring on board stakeholders from state mostly took pragmatic approaches in this
governments, an important step given the regard, building reforms into familiar institu-
uncertain distributive effects of moving to a tional and legal structures, powers, and
competitive marketplace with the privatization incentives—and then, if needed, creating new
of many utility monopolies. In Italy, it helped institutions and regimes. Hungary knew that it
that the unions involved with reforms repre- needed to make dramatic shifts to move rapidly
sented both public and private workers—that to a free market economy (for which there were
is, the potential beneficiaries and possible many external models), yet used decades-old
losers from reform. legal and administrative frameworks (some
from the 1930s) to implement change. Korea
The six countries also show examples of the used structures in the prime minister’s office,
converse lesson: lack of public-private consensus and an influential network of research institutes
on reforms reduces the likelihood of success. attached to ministries. Only the United Kingdom


built mostly new structures, but this is probably authorities to seek a balance between strong
easier in a common law, rather than a civil law central leadership to sustain common goals, and
system. autonomy at the local level to implement local
solutions. But once top-level political support
Second, active management and resourcing weakened, local autonomy allowed a return to
of the reform process—primarily through the previous state of affairs.
dedicated leadership in the public
administration—is essential. Governments Fourth, backing administrative procedures with
that strengthened capacities for promoting, judicial action helped embed new behaviors in
monitoring, encouraging, and assisting in public administrations—an approach that was
reform across the entire government seemed to especially important in anticorruption efforts.
do better in implementation. The Office of The power of administrative procedures to
Regulation Review in Australia, the various provide new protections and rights in a regulatory
better regulation units in the United King- system is often underestimated. Mexico adopted a
dom, the Presidential Commission on Regula- new Federal Competition Law, but also amended
tory Reform in Korea, and the Economic its Federal Administrative Procedures Law to
Deregulation Unit and Cofemer in Mexico protect citizens against bad regulation. Providing
institutionalized reforms inside the machinery greater legal security for businesses and individu-
of government and began creating incentives als changed the conduct and perception of federal
for good regulation. Where such units were public administration in Mexico. In Korea, the
weaker, in Hungary and Italy, reforms were Basic Law of Administrative Regulation estab-
more variable in speed and scope. This does lished quality controls on new regulations. Italy
not suggest that reforms should not be embed- embedded a “silence is consent” approach into
ded throughout the public sector (as discussed laws affecting hundreds of formalities. These
in the next paragraph), but that centralized, procedures have become a permanent function of
accountable, expert leadership of broad reform government, internalized in the public adminis-
is closely correlated with success. tration system and protected by the public
administration and courts.
Third, reforms were more successful when
governments built progressively wider networks Fifth, implementation seemed stronger when
of reform-minded institutions through the there was continuous learning. In Australia,
public administration. Australia built a formal Korea, and Mexico, efforts to benchmark based
network of regulatory reform bodies. In the on good practices in similar countries and to
United Kingdom, networks of regulatory reform assess, pilot, innovate, and learn from past
ministers and units were established throughout experiences were especially important.
the central ministries, creating a continually
growing, expert bureaucracy. In Mexico, a Although reform agendas depended on country
network of regulatory reform units was created needs, international learning was clear: all six
in state governments, which began competing countries moved from specific, short-term
for good regulation. strategies to longer-term management strategies
such as the OECD agenda. Italy’s reform plan
Countries that failed to build allies—Hungary initially emphasized cutting red tape for citizens
and Italy—needed more political energy to keep and businesses, but expanded to improving
reforms moving, and faltered faster when broader dimensions of regulatory quality
political attention weakened. Italy initially through regulatory impact analysis. These goals
created partnership agreements with local were backed by the deployment of an array of


tools, strategies, and structures—self-certification, stakeholders to participate in the effort and
one-stop shops, codification, regulatory impact provide ongoing oversight.
analysis, e-government—to promote regulatory
quality. Hungary used a courageous guillotine In Mexico, the public was invited to participate
regulatory review that in just a couple months in rulemaking for the first time. Draft regula-
helped eliminate obsolete regulations. A second tions and regulatory impact analyses were
review focused on deregulating and simplifying posted online for public review and comment.
licenses and government authorizations, and a Reviews of each ministry’s efforts to produce
third used EU legal harmonization to modernize high-quality regulations were made public. A
regulatory oversight. In Korea, the target for a national benchmarking project allowed citizens
fast 50 percent reduction in each ministry’s to compare the quality of state regulations.
regulations was accompanied by a suite of
new disciplines and controls such as regulatory The Korean government set a public target of
impact analysis and new administrative cutting ministerial regulations by half, holding the
procedures. entire government accountable for performance.
This public accountability was largely responsible
for the success of this reform. In addition to
legislating information disclosure, Korea opened
Monitoring Reforms up its regulatory system by requiring and
The six countries studied suggest that integrating disclosing independent reviews of regulatory
results monitoring with the reform process from quality by the public-private Regulatory Reform
an early stage sustains political and bureaucratic Committee, supported by consultations with
attention to reforms. Monitoring is crucial for stakeholders in regulatory development.
two reasons. First, it helps maintain active
In Australia, agreements between the national
management and political attention to the
and state governments on the National Competi-
regulatory process during implementation.
tion Policy provided an agreed, publicly available
Second, it helps build some pro-reform drivers,
benchmark for all subsequent review and reform
such as new constituencies for reform in civil
efforts. These clear principles for promoting
society.
competition and a constant, comprehensive
approach provided explicit standards to which
Two types of monitoring were used in these six
government efforts would be held accountable.
countries. The first was ongoing monitoring by
Furthermore, the National Competition Council,
stakeholders through consultation, transparency,
working with state-level competition policy units
and participation in the reform process. The
and competitive neutrality units, was responsible
second was more traditional monitoring,
for monitoring results.
involving the measuring of results once imple-
mentation was complete. In both cases, moni-
The United Kingdom invited businesses and
toring was especially effective when it was a
consumers to join in the reform process through
public-private exercise rather than one con-
participation in ad hoc advisory groups. This
trolled entirely by government.
participation provided these stakeholders with a
sense of ownership of reforms.
Clear quality standards and goals for reforms
were powerful aides in pushing ahead. Even These experiences suggest that monitoring,
more important was monitoring progress rather than being a technical exercise of check-
in reaching standards and goals. Support ing results, should be conceived as ongoing,
for reform was strengthened by inviting


active oversight built into reform implementa- strategically, but not economically, important.
tion and post-implementation. Stakeholders The most important benefit is how well short-
should be continuously and heavily involved. term reform strategies prepare governments to
Properly designed monitoring actually improves move to more sustainable strategies. Initial
the results of reforms. reforms should lead directly to secondary
reforms aimed at institutionalizing central units
for regulatory reform, creating systematic
Sustaining Reforms over consultation procedures, and building capacities
for regulatory impact analysis. The six countries
the Medium Term
studied show how broad, evolving reform
One of the main messages of this paper is that programs can progressively change the role and
market-oriented reforms become sustainable culture of governments.
only when they are institutionalized and con-
stituencies for change are mobilized. The case Mexico did not start with public sector reforms,
studies describe how that was done in the six but adopted a comprehensive reform plan with
subject studies. mutually supportive elements—market open-
ness, privatization, and regulatory reforms.
A point worth repeating is that well-designed Each reform revealed weaknesses in the public
reform programs do not work only within sector that had to be corrected. For example,
existing limits, but work actively to expand rapid privatization showed that competition
opportunities by exploiting reform drivers, and regulatory oversight frameworks were
relying on good design, and building allies to not sufficiently developed to oversee private
weaken drivers for the status quo. Moreover, markets. Throughout the process, Mexico’s
efforts to sustain reform did not occur in fits reformers used the OECD peer review
and starts in any of these countries. The best process as an external pressure to maintain
scenario is an unfolding reform sequence that momentum.
produces its own momentum, as in Australia
Korea explicitly attacked the public choice
and Mexico.
foundations of regulation. Reforms took an
institutional approach that sought to reduce
Public sector resistance to change is one of the
incentives for capture and rent-seeking behavior.
most formidable obstacles to sustaining reforms.
Regulatory quality was ensured by an indepen-
In fact, in none of the six countries was there
dent agency at the center of government in-
significant opposition to reform by citizens or
tended to check the pro-regulation tendency of
the private sector—only in the public sector. So,
ministries.
from the start the strategies in these countries
aimed at institutionalizing new regulation Australia created entirely new incentives for
methods, with public sector reform at the center quality regulation in the public sector. A nation-
of all of them. This lesson is easily generalized. ally coordinated series of regulatory reviews,
If countries are to achieve sustainable higher with performance targets and incentive pay-
growth rates, their public sectors must adopt a ments, was essentially a wholesale assault on the
different culture of governance geared to cozy relationships between the public sector and
market-led growth. Indeed, this could even be producer groups that had developed over
the definition of sustainable reform. decades.

The imperative of public sector change must Finally, sustainable reform requires achieving
shape the reform strategy. Short-term results are growing social consensus on market-based


growth: the “liberal consensus.” All six of these In the United Kingdom, converging views in the
countries achieved such consensus partly by European Union on market freedom, privatiza-
stoking fears about national competitiveness, but tion, structural reforms, and (later) EU impetus
this seems like a fragile basis for long-term for changes to competition policy provided a
change. In the most successful of these countries, rationale and allies for change. In Korea, the
regulatory reforms sought to exploit and then most difficult of the six cases in terms of accep-
reshape social attitudes toward markets. Austra- tance of markets, the ambitious regulatory
lia’s reforms were built on bipartisan agreements, reform program was supported by messages from
and this political consensus meant that the the government that imposing market discipline
public received consistent messages about the was a tool for achieving important national goals,
benefits of reform—which helped maintain rather than a threat to social stability. The
public support across different administrations. struggle between these views continues in Korea.


 ,%33/.3&/22%&/2-%23

The ultimate goal of this type of work is to one area may be compensated for in another.
generalize operational lessons for countries other For example, a stable political context based on
than those studied. Reforms were hard enough cross-party consensus may be unattainable in
in those six countries, but are likely to be even many countries. This implies paying more
more difficult in countries with more hostile attention to building pro-reform coalitions
reform environments and weaker institutions in among a broad range of stakeholders that can
the public sector, private sector, and civil society. survive the ups and downs of political enthusi-
Still, the key question is the same: how can asm and discord. If there cannot be stable
reforms be designed to maximize their chances cross-party consensus, working to develop
for sustained success—that is, real and lasting institutions in the bureaucracy as long-lasting
benefits for businesses? reform champions is another way to develop
and sustain reform momentum.
Though there seem to be clear patterns corre-
lated with success, there is no single model for Reformers seeking to launch reforms that foster
regulatory reform. The six countries studied higher, sustainable economic growth rates
show that many institutional and design factors should consider the following actions.
are important in developing and sustaining
reform momentum. They also show that success N Identify and exploit multiple drivers of reform.
factors seem to be interrelated, with the more
successful governments investing simultaneously The reforms analyzed in this paper occurred in
in strategies such as managing the reform an unfolding sequence in which various drivers
program, promoting ongoing public-private were amplified and sustained through clever
dialogue, and monitoring results. reform strategies. Although substantial ele-
ments of reform were beyond their control,
These factors do not all have to be highly reformers were able to exploit and extend the
developed for reforms to succeed. Weakness in pro-reform pressures from those drivers. This


shows how drivers of reform changed over and “demonstration projects” that can fuel
time, and how strategies of reformers encour- further reforms. That might be accurate if they
aged and supported the emergence of new are part of a larger medium-term strategy, but
drivers of change. often they are not. Because the problem of poor
business environments is systemic, genuine
N Use a crisis if available, and lock in political solutions must be systemic as well.
leadership and bipartisan political support
through new institutions, formal agreements, Still, one-off and visible projects can certainly
implementing legislation, and international contribute to systemic change. Early results help
agreements. build credibility and momentum, and success
breeds success.
A crisis can provide an opportunity to stimulate
action, but is generally a poor basis for sustained N Start reforms with a clear, well-designed
reform. The six countries show that opportuni- medium-term strategy that has room to evolve.
ties provided by crisis should be used to lock in
reform commitments and build expectations An effective medium-term reform strategy
among enduring constituencies. International sustains reforms and provides a focus and
agreements, formal involvement by stakeholders, rallying point for them and a basis for moni-
and new public sector institutions can help toring progress. The strategy should be based
maintain reform as a crisis fades or new political on careful appraisal of linked issues that need
imperatives take over. One approach used by to be addressed. Although a piecemeal ap-
several of these countries was to create new legal proach is possible, success may be less likely
rights for citizens and businesses through because of the higher risks of derailment and
administrative procedure laws—making it poor sequencing. The strategy should synchro-
impossible to reverse the new rights later. nize regulatory reform with public sector
reform that adjusts the state’s role, functions,
Spreading ownership of reform across as many and capacities. Personnel and budget changes
stakeholders as possible ensures that reform should follow naturally as commitments and
champions emerge who will outlast the depar- responsibilities are allocated through the public
ture of any particular individual. The case administration.
studies show that sustainability is at risk if
reforms rely on narrow political bases. Momen- N Put transparency at the heart of the process and
tum for reform should be maintained by educat- reform contents.
ing citizens on its desirability, monitoring
changes, and informing the public on progress. All six of the countries studied created a public
reform process and public expectations for
N Aim for systemic change, but use one-off success. Reform programs were based on public
reforms to build momentum. participation and stakeholder involvement,
while the actual reforms aimed to institutional-
All the countries examined here tackled reform ize greater transparency in the government’s
through systemic change—in contrast to the regulatory function through tools such as regula-
tendency of most governments and donors to tory impact analyses, public consultations, and
pursue narrow, one-off reforms. Because such registries of regulations.
reforms seem to promise rapid results and
provide quick fixes to highly visible regulatory Transparency is not only a tool for strengthening
problems, pressure for “quick fixes” will likely reform drivers, it is also crucial in reducing
continue. Donors describe them as “realistic” regulatory risks—one of the main goals of reform.


Strict adherence to principles of transparency and Because political support is likely to shift to
accountability is vital to market confidence in a another crisis before long, institution building is
modern regulatory state. This is an aspect of needed to create sustained reform incentives in
systemic reform. Reforms should include develop- the machinery of government. The leading
ing new transparency habits across the public countries studied here have adapted existing
administration (for example, through administra- institutions or built new ones to create support-
tive procedures or information access laws). New ive, pro-reform networks. They established
technologies such as electronic registries can also “reform engines” at the center of government,
support openness, and at lower cost. supported by competition offices, networks
among ministries, audit offices, finance minis-
N Maintain effective, ongoing communication at tries, and other pro-reform institutions.
all levels.
N Encourage change and develop relevant skills
Communication is a key part of reform efforts. in the public administration.
In most of the countries studied here, clear and
continuous communication of reforms’ pur- Steps are needed to equip the civil service to
pose and progress—both to participants in the implement reforms—which at some stage may
reform process and the general public—was have to involve public sector reform. The
important. If poorly informed, the public is bureaucracy must be encouraged to buy in to
more likely to reject reforms. Consultation reforms, perhaps through changes in incentives
mechanisms can also ensure that key stakehold- and skills. Centrally placed structures and
ers (such as businesses) stay on board. Commu- support from finance ministries can be very
nication of reform purposes and tools can helpful in this process.
prepare civil servants for their role in reforms,
and reduce the anxiety that often accompanies N Monitor and evaluate to keep players on track,
change. and publicize results to sustain reform
momentum.
N Ensure that the implementation strategy adapts
to different stages of reform. Effective monitoring and evaluation of specific
reform targets as well as of the complete picture
There is a progressive “locking in” strategy as are essential for sustaining reform against active
different stakeholders become involved in and passive resistance. The main goal is to
reform. At the beginning, political support demonstrate credible benefits of reform to
may require pushing, commanding, and stakeholders and so disarm critics. A participa-
expending political capital to overcome resis- tory evaluation process can sustain stakeholder
tance. Political leaders are better off if they support. Evaluation also helps keep players on
build technocratic institutions early. But as track by creating feedback loops that allow
reforms are adopted, laws enacted, and imple- reform programs to be monitored, modified,
mentation starts, political leadership and and improved over time.
top-down direction may need to give way to
guidance, management, and increasingly open N Prepare for a long commitment.
and participatory approaches involving more
stakeholders. Different stages of building Effective, durable reform is a dynamic, long-
ownership and constituencies generally require term process—not a single, static program.
different leadership styles, communication Reforms can be expected to span more than one
skills, and mixes of incentives. political cycle, probably several. Gains from


reform tend to dissipate over time with countries.7 Regardless of the type of tools
economic and social changes, and losers from used—such as regulatory impact analyses or
reform may exert constant pressure to reverse regulatory guillotines—country-specific adapta-
or undermine achievements. New needs and tion is key to successful implementation.
expectations will require continuous adjust-
ments. Regulatory reform programs that began Third, although some ideal sequencing of
25 years ago can be just as dynamic as those reforms could be envisaged, no prescribed
created last year. Reform mechanisms, institu- sequence of reforms can be generalized across
tions, and processes must be robust enough to countries. For example, eliminating administra-
endure the long haul. tive burdens does not always precede making
broader attempts at systemic reform. The
The 11 lessons above carry three key, cross- imminent intertwining of reform components
cutting messages. First, sustainable reforms must and the multiplicity and shifting of its drivers
be embedded in an effective institutional require that reformers have a flexible strategy
framework. Such a framework is critical because with well-defined medium- and long-term goals.
it can guide, monitor, and sustain reform A clear strategy allows reformers to better exploit
momentum beyond what may sometimes be the shifting drivers and fine-tune efforts in line with
relatively short attention spans of policymakers changing circumstances.
and political cycles.
7 The general usefulness of most of these approaches is
widely accepted, though additional research and testing are
Second, the country context has implications for needed. FIAS, in cooperation with the U.K. Department
how reform tools and techniques can be applied. for International Development and the Netherlands
government, recently launched a two-year Regulatory
In recent years, a range of regulatory governance Governance Program intended to further develop and
tools have become available to developing adapt regulatory governance tools to developing countries.


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APEC Asia-Pacific Economic Cooperation Consortium


EU European Union
GATT General Agreement on Tariffs and Trade
IMF International Monetary Fund
NAFTA North American Free Trade Agreement
NGOs non-governmental organizations
OECD Organisation for Economic Co-Operation and Development