Regulations directed to spur robust growth in the economy
To spur robust growth in the economy, policymakers have drafted and implemented regulations directed to that objective. It is important to note the majority of the economies especially in developing nations are anchored on small-medium enterprises and few big corporations. All these are organized and facilitated under a set of indispensable regulations enforced by the governments. However, there exists astringent and a rather complex relationship between the role of regulations and economic growth. Literature reviews suggest that regulations can have both positive and negative impacts on growth. Among the positives, regulations have been credited to correct market failure and stir overall improvement of economic efficiency. Negatively it has been associated with distortion of the market through cumbersome compliance procedures that carry with them extravagant costs that have led to a decline of growth.
Depending on market structure prevailing within a given economy the government will intervene accordingly through regulations with the sole intention of promoting growth. This emphasizes on Adam Smith’s postulation about the invisible role of the government in the market operations. Economies in the developing nations are characterized by the existence of numerous small businesses and vibrant private sectors where entities make significant investments resulting in job creation and general productivity, advancing the growth and alleviating poverty among middle- and low-income people (Égert, 2016). Despite the notable progress of entrepreneurial ventures and business activities within these economies, growth has stagnated and in other instances firms exiting the market leading to no growth. This disparity is associated with the regulatory framework exercised in these economies by the government and the institution mandated to implement and enforce them. Thus this paper seeks to review how regulations are a constraint to the growth of business and economy.
There have been growing concerns by the business class elites over the increased involvement by the government in business operations via its myriad of regulations that seem to constraint business “life”. Research by the Organization for Economic Co-operation and Development(OECD) 2015 established that despite the regulations frameworks put in place for the successful functioning of the market economies they do not always meet the expectation of the public and businesses. One possible explanation of this is that the regulations are poorly designed and implemented. The consequential effect of this is that market economies suffer market failure and other detrimental market consequences. This includes stifled market innovations, minimal job creation, wasted allocation of limited resources, and undermining of sustainable development within the economies which only translates to stagnated or no growth at all.
In practice regulations come down to a lot of paperwork and rules that are burdensome and very costly to the complaints’. The compliant include not only large corporations but also small enterprises that cut through all sectors of the economy. Due to the expensive cost of complying with the regulations many players in the market end up exiting. Therefore, businesses and corporations that remain bear the heavy burden of regulations. As a result of exiting off the market by some firms and businesses, general competition in the market reduces which brings about monopolistic tendencies (Bailey & Thomas, 2017). This results in a decreased level of productivity in the economy. As a result, the general prices of commodities rises, decreased wages for the employees, lower return on investment for the investors, and the general rate of unemployment rises (Yago,2019). Thus there is slow to no growth with the economy.
Government as authorities mandated to formulate and implement regulations can come up with regulations changes that alter social behavior in a business environment. Such policy changes may include taxes and duties. Imposing taxes and duties on a particular sector of the economy more than itis necessary will scare away investors who end-up losing interest (Bailey & Thomas, 2017). This is because increased taxes discourage investments especially among entrepreneurs who take risks starting and managing the business. Moreover, a high tax rate for raw material in the economy will greatly discourage domestic production (Yago,2019). The ultimate effect of these actions is that there will be no growth of business and economy in the long run.
Rent-seeking behaviors by particular individuals take advantage of the coercive role of the government or authorities mandated to implement regulations for their gain. It is rent-seeking since they profit at the expense of the greater society (Rio & Lores, 2017). This is what Adam Smith in his infamous publication Wealth of Nations warned. He postulated that the few fortunate and powerful in the society in the pretense of acting in the interest of the public would lobby for favors and amass wealth for themselves. Unlike profit-seeking intentions that trickle down to society through job creations or other means, the rent-seeking behavior is for the sole purpose of wealth creation.
In practice, the rent-seeking behavior by the particular individuals occurs when as a result of implementing regulations an opportunity arises that can only be beneficial to them and only the government can offer. It’s only rational that rent-seekers would respond to such an opportunity and it would only be “rational” that they will be most to reap the most benefits (Égert, 2016). Consequently, rather than creating new opportunities and value for society, such behaviors lead to wasteful use of resources. In essence, it is a zero-sum game when energy and resources are directed into lobbying for favorable government treatment rather than being invested in innovative and entrepreneurial activities that would result in growth.
Alternatively, regulations can also be captured by businesses and corporations to advance their motive-for example suppressing innovation, restricting competition, or lobbying for absolute market power. Using their influence and resources they influence the legislature and other policymakers such that regulations are designed and aligned under their interest. This, therefore, alienates everyone else-taxpayers, consumers, small businesses, and so on. The small businesses find themselves on the losing end of the regulatory measures since large entities have well-established systems in place to handle the burden of regulations compliance since its distribution the costs to employees and commodities(Yago,2019). Therefore, most small businesses end-up closing other down-sizing leading to no growth.
Regulations can also cause a decline in business and economic growth. Poorly formulated and implemented regulations can be costly to the complaints’. The few that are in power can also take advantage of the regulations and the government by lobbying for favors to create wealth for themselves. The consequential effect of this is that there will be a poor business environment and the economy will not grow.