Good Regulatory Practices’ Role in Advancing MSME Growth Opportunities in Developing Markets
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About the Author: Bryan O’Byrne serves as a Senior International Trade Advisor at the Center for Economics and Market Development in the Bureau for Development, Democracy, and Innovation at USAID.
Micro, small, and medium enterprises (MSMEs) thrive in an open, transparent, and predictable regulatory environment that offers certainty and confidence to investors. In the international community, there is growing consensus around key policies and practices that form a common foundation for effective regulatory governance. Implementation of these good regulatory practices (or GRPs) promotes the development of better regulations, prevents unnecessary regulatory burdens, and supports compliance with international trade obligations. GRPs facilitate easy access to regulatory information and engage entrepreneurs, established businesses, and all interested persons in structured public consultations to review and improve regulations under development. GRPs thereby allow businesses of various sizes to innovate, grow, and expand into global digital markets.
USAID recently released the Capacity Building Guide for Good Regulatory Practices: Considerations for Development Practitioners (September 2022) to help governments regulate more effectively at home, and help businesses trade more effectively abroad, thereby encouraging innovation, small business development, inclusive economic growth, and higher living standards. Recognizing that GRP capacity building should be tailored to each country’s context, and include public and private sector participation, the GRP Guide includes case studies (from El Salvador, Brazil, Thailand, and Zambia) highlighting the similarities and differences in each country’s approach to GRP capacity building which can help inform USAID partner countries, Missions, and implementing partners in the design and implementation of future GRP activities.
GRPs take into account the value of MSMEs in the economy: Among the most prominent impediments to MSMEs are opaque, difficult-to-find, complex, and overly burdensome regulations. Given that MSMEs normally represent over 95 percent of business activity in a developing country https://www.oecd.org/cfe/smes/ministerial/documents/2018-SME-Ministerial-Conference-Plenary-Session-3.pdf, unnecessary and incoherent government actions impose substantial costs across an economy and effectively lower standards of living. Initiating GRP reforms can help lift this burden and support MSME growth.
A successful regulatory policy requires assessing whether proposed regulations will negatively affect a substantial number of small enterprises, and potentially damage the national economy. It requires that governments work with all stakeholders to minimize those adverse economic impacts as far as possible. Institutionalization of more predictable, accessible, and responsive administrative procedures stimulates discussions that can lead to more adaptable and flexible regulatory approaches. Government-wide transparency and other GRPs serve to guard against unnecessary and burdensome regulations that may inadvertently smother the very innovative MSMEs that developing economies need most!
“A genuine appreciation of the value of MSMEs for generating jobs and economic growth is demonstrated when governments routinely assess whether their proposed regulations impose significant economic effects on MSMEs.”https://pdf.usaid.gov/pdf_docs/PA00ZKCT.pdf, p.6.
GRPs complement anti corruption programming: In many developing countries, the absence of a viable framework for organizing public participation in government decision-making breeds all sorts of kleptocratic practices that inhibit economic development. Incoherent approaches to regulatory development result in poorly designed regulations that are more easily leveraged by officials for inappropriate purposes, such as rent seeking and/or regulatory capture. MSMEs navigating these administrative procedures and their resulting regulations, fraught with opportunities for graft and coercion, face increased business costs, disruption of supply chains, and significant impediments to trade and investment.
Though GRPs are neither intended, nor designed, to prevent or combat misconduct of government officials, establishing internal (government) and external (public) reviews and consultations or GRP procedures helps ensure regulations serve broader, whole-of-government objectives. The GRP framework makes it easier for interested persons to lawfully participate in government policy-making processes dampening the impetus for bribes, while providing legitimate paths for ministries and agencies to achieve their aims without reliance on intimidation. The GRPs serve to check the discretionary powers of government officials throughout the lifecycle of regulatory development, and thereby prevent maladministration. GRP programing, when combined with anti corruption efforts, can offer a two-pronged and more nuanced approach that can increasingly integrate public engagement in decision-making and build-up public trust in governmental institutions in the developing world.
“Opaque and inconsistent regulatory environments can undermine business competitiveness, especially for micro, small, and medium enterprises (MSMEs), erode citizens’ trust in government, breed corruption in public governance, and elevate risks that drive trading partners elsewhere.” https://pdf.usaid.gov/pdf_docs/PA00ZKCT.pdf, p.8.
GRPs foster international trade and investment: Many trade agreements — such as the WTO Trade Facilitation Agreement, U.S.-Mexico-Canada Agreement (USMCA), MERCOSUR, the Pacific Alliance, and other bilateral arrangements — contain provisions on GRP. In the USMCA, 33 of the 34 chapters feature specific transparency and/or publication obligations, which apply to a wide range of domestic regulations pertaining to customs, intellectual property, government procurement, digital trade, and many more. One of the key innovations of the USMCA is its new GRP Chapter which furnishes our trading partners with mutually agreed “directions” and key practices for how to implement all those obligations. The GRP Chapter outlines internationally-recognized methods for developing, for example, a new e-commerce regulation for public comment by providing 60-days to receive stakeholder input on the draft and associated analyses, and taking those received comments into account in the final measure. GRPs offer an open, inclusive, and accountable framework in which unnecessary obstacles to trade and investment may be identified, assessed, and effectively "weeded-out" before they become the topic of international concern.
Of course, relatively few developing country trading partners have a free trade agreement (FTA) with the United States. But that does not make GRP any less relevant to trade and development. The GRP Guide offers guidance on how to initiate GRP reforms that can have broad positive impacts in a developing country. With or without an FTA, interagency coordination and advisory bodies allow disparate voices to be heard, channel the input, and take information received into account in final decision-making. These procedures, when institutionalized in law, serve to bolster public confidence in governance, attract foreign investors, and keep them engaged, knowing that open, predictable, and legitimate processes help guarantee that all views may be heard.
Utilizing the Guide: The GRP Guide addresses the key challenges of any well-functioning regulatory system for ensuring that regulations are appropriate, necessary, and cost-effective and that they serve the best interests of society. The GRP Guide highlights how the effective use of key regulatory management tools and practices, such as internal coordination of rulemaking activity, the use of regulatory analysis, and public consultation, can help governments meet these important developmental goals.
The GRP Guide explains how GRP reforms in developing markets can:
- promote MSME innovation and growth;
- enhancing public trust in government; and
- foster international trade and investment.
Of course, building understanding and buy-in for GRPs represent only the first step, as capacity building to adopt GRPs can often require an iterative process. With the assistance of the new GRP Guide, USAID presence countries and our partners are enabled to build a plan and implement programs integrating GRPs into regulatory design processes.
For more information on how to work with EMD on GRP or any of its trade-related portfolios of projects or resources, please contact the Center for Economics and Market Development at trade@usaid.gov.