IA06: Opinion poll shows mixed attitude to business regulation

A recent opinion poll conducted by the Professional Research Institute for Management and Economics (PRIME) shows that Cambodians draw a sharp distinction between how small and large businesses should be regulated.

A clear majority of survey participants (60%) supported deregulation for small business, where family businesses should be free to operate without needing government permission or paying for a government licence. But that result was dramatically reversed for large businesses, with 98% of survey participants insisting that large businesses should have to register with the government.

To some degree, the results reflect the reality of business in Cambodia, where many people are able to start up a new business selling products in their neighbourhood or working as a mobile salesperson without dealing with bureaucrats and government paperwork. For many people, these opportunities in the informal market offer their best opportunity for earning income and providing for their family.

However, the business opportunities that exist in the informal market are under threat by the growing move towards stricter regulation. While regulators often have the best of intentions, the impact of their meddling often falls heaviest on those small business people who are least able to bear the costs. If bureaucrats were to chase down every person selling coke cans from a bin full of ice, we would not see higher quality coke cans... we would see fewer sellers.

The instinct of Cambodians, who want to see deregulated small business but regulation for large business, can also be justified on economic grounds.

Regulation is generally good for big business. This fact sometimes surprises non-economists who assume that regulation exists to restrict big business, but the truth is that big businesses are more easily able to comply with regulations (which they often help to write in the first place) while small businesses are forced to either deal with large paperwork and compliance costs, or operate illegally and pay informal fees so that the regulators will look away.

Consider a situation where regulatory paperwork will cost $400 to complete. For a big business earning $20 million per year that amounts to 0.002% of profit, and they probably already hire some lawyers and accountants who can get the job done quickly. For a small business earning $20,000 per year that amounts to 2% of profit and they will probably have to deal with the paperwork themselves. It is easy to see how regulation is generally regressive -- hurting small business the most, while having little impact on big business.

The regulatory cost on small business creates a barrier to entry, decreasing the amount of competition and allowing the big businesses to increase prices. The best way to discipline big business is to ensure that there are always plenty of small businesses out there ready to undercut their prices. A heavily regulated industry makes it difficult (sometimes impossible) for ordinary people to enter the market, and so big businesses are able to corner the market.

One solution to this is suggested by the PRIME survey results -- small businesses should be exempt from government regulations. It is arguable whether any regulation brings a net benefit to Cambodia, but the political reality is that the government will probably want to keep some regulations so that they can look busy and please the ideological regulators from the UN and international NGOs. But even if these regulations must exist, there is no good reason to impose them on small-medium enterprises (SME), which are the backbone of any healthy economy.

By allowing small and medium sized businesses to continue unhindered by bureaucrats and paperwork, the government would be ensuring that average people always have the chance to start a business and join the market economy themselves, instead of being reliant on big business and NGOs for work. Encouraging the growth of small and medium business is the best policy for reducing poverty and building a vibrant middle class.

But small business owners aren't the only people who benefit.

Removing regulations on small businesses will create greater competition, therefore ensuring that prices stay low, which directly benefits consumers. Further, market competition drives innovation and investment, which increases productivity growth and drives up wages. This is a win-win-win outcome, since it is good for small business people, good for consumers, and good for workers.

Finally, one of the main consequences of regulation is corruption. Each regulation (and each new law) provides another opportunity for enforcers to extort a bribe from people who have failed to keep ahead of the many requirements. Anybody who has been stopped for the "crime" of riding a motorbike with their lights on during the day knows all too well that the police are eager to enforce stupid laws because they see the opportunity for easy money. Every new law provides one more opportunity for bribery. One of the best ways to reduce this sort of petty bribery is reduce the number of petty laws that are imposed on otherwise honest and ordinary people.

The majority of the Cambodian public do not want regulation on small business, and economic theory shows us that small business regulations are likely to be counter-productive. This is an example where good policy makes for good politics -- the Cambodian government should take this opportunity to relax the rules surrounding small businesses, unlock the entrepreneurship and innovation of the Cambodian people, reduce the scope for corruption, and prove to the people that they are able to achieve positive and popular reform.

John Humphreys is the Executive Director at the Professional Research Institute for Management and Economics (PRIME). The PRIME opinion poll was conducted between 12-22 August 2015, with 268 people contacted randomly by phone. It has a margin of error of +/- 6%. PRIME conducts regular opinion polls on a range of different topics and can be contacted at www.prime-cambodia.org to help with any polling or research enquiries.

* IA06 = Issue Analysis 06 - This is the 6th in our series of short articles.

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