BUREACRATIC BARRIERS hampering operation development of the SMEs

BUREACRATIC BARRIERS hampering operation & development of the SMEs in Poland z prepared for the SOCRATES TS lecture series at the Universidad Politecnica de Cartagena (UPCT), Spain; February 8 -10, 2001 z Andrzej Kondratowicz: Deptartment of Economics, University of Warsaw, Poland; z Original research commissioned by Polish Ministry of the Economy 1

Research goals z Ministry’s Goals (Parliamentary Commission) z Defining the ultimate research goal: x Defining the concept of a bureaucratic barrier; x Identifying BB hampering operation and development of the SMEs in Poland; x Evaluation of the scope and dynamics of the problem (are the barriers high or low? ; are they growing or diminishing? ); x Evaluation of BB’s degree of negative impact (at various stages of an enterprise’s life-cycle); x Evaluation of (mostly economic) consequences of the existence of the BBs – for various types of firms; x Pinpointing priorities in fighting the BBs. 2

Defining bureaucratic barriers: z How is a Bureaucratic Barrier built? 3

A „dictionary” definition: BBs are those that stem from: „inefficient and ineffective operation of the state administration (at its various levels), excessive formalization and slowliness in dealing with issues". insufficent! why? ==> 4

z 1. This definition is not precise (sharp) enough and is not suitable as a criterion to be applied in practice z 2. It is too narrow (even though not precise enough) 3. It is confusing [because it shifts the stress onto the effectiveness of the administration’s operation, thus producing an illusion that if the administration were efficiently implementing/carrying out the existing laws, regulations and procedures, the problem of bureaucracy would vanish. In reality, the major problem lies in the very existence of the superfluous (excessive) laws, regulations, procedures, and requirements. ] 5

In order to produce a working definition of the BBs we have to define some auxiliary concepts: z the concept of a barrier (to operation or development); z the concept of bureaucratic operations; z and the title concept of a bureaucratic barrier. 6

Formal versus actual barriers z Formal Barriers are those whose existence stems from the applicable laws and regulations (thus they exist de iure). z Actual Barriers are those that exist in reality (thus they exist de facto). Actual Barriers may – although don’t have to) be a consequence of the Formal Barriers [eg: slowliness in dealing with matters, etc. ] 7

Non-burdensome vs burdensome barriers z Non-burdensome barriers are those that exist only de iure and at the same time do not call for any expenses in order to prevent them from changing into actual barriers or those that exist de facto but do not cause any expenses. [they are just „unesthetical”, but no more than that] z Burdensome barriers are those that exist actually and cause additional costs or those that exist solely de iure but call for some expenses in order to prevent them from changing into actual barriers (that would cause additional expenses). [this latter type will be important in our research] 8

External vs internal barriers: z A barrier is a phenomenon or a requirement which either will cause an increase in the cost of an undertaking or will prevent an economic undertaking at all. If such a phenomenon or a requirement originates in the institutional environment of an economic unit, then we say that the barrier is external. z Further in this research we will concentrate solely on the external barriers (assuming that the internal ones are less important for the SMEs). 9

Bureaucratic processes (or operations) : z If one assumes a microeconomic point of view or more precisely a perspective of a single economic unit -- „a stylized SME” -- then the bureacratic processes or operations are those whose removal (or non-performance) would cause no harm or loss of any kind to this economic unit; economic performance of the unit would not be adversely affected. 10

A definition: z Our BB definition combines the elements of the notion of a barrier and the notion of a bureaucratic process. z Thus, it must relate to the economic interest of an economic unit and to the economic interests of its partners (in the extreme case: of all its partners) – but excluding the vested interests of the public (state) administration of all levels. 11

A definition: z If we come back now to the notion of a burdensome external barrier and reformulate it slightly substituting utility for costs, we could then say that bureaucratic barriers are those burdensome external barriers whose removal would cause a Pareto-improvement. z [this must be considered a weak version – a stronger one could be based on the Kaldor-Hicks criterion] 12

a definition: z Thus, a removal of a given (bureaucratic) procedure would yield an increase in welfare of at least one private participant (party) of the economic process without a simultaneous decrease in welfare of any of the remaining private participants/parties. z Bureaucratic procedures are simply superfluous or excessive ones. 13

A re-defined for applied work purposes: z Bureaucratic barriers are those that stem from: z 1. an excess of laws that regulate in detail numerous aspects of firm’s operation (thus the firm must incur costs connected with acquiring [or lacking the] knowledge of those regulations); z 2. compelling the firm do things that increase its costs of operation without bringing any tangible profits to the party that compels or introduces the requirements [the latter party being either a public administration unit of any level or a large enterprise, eg. a bank]; z 3. inefficient and ineffective operation of the state (public) administration (at its various levels), excessive formalization and slowliness in dealing with issues. 14

The scope of research A. B. C. D. Analysis of the legal framework. . . The SMEs survey. . . Generalizations based on a Case study. . . Synthesis and conclusions. . . 15

A. Analysis of the legal framework. . . z Analysis of the legal framework included the contents of all legal acts pertaining the SMEs at the moment of conducting the research, as well as the changes that occurred in this area during five years preceding the research project (i. e. since April 1996) and the changes under implementation at that time. This analysis has a direct bearance on the first and second element of the BB definition. The analysis has been done by a legal expert and practitioner, Jan Stefanowicz and a team from his Warsaw legal firm Juris. z [changes in the legal framework in the period 1988 -1996 and even earlier were analyzed in: A. Kondratowicz, Maciejewski, W. (eds), Małe i średnie przedsiębiorstwa w Polsce. Badania empiryczne 1992 -1996 (SMEs in Poland. Empirical Reserach 1992 -1996), CAS, Warszawa 1996. ] 16

B. SMEs survey. . . z An questionnaire-based survey aiming at getting to know BBs as subjectively-felt by the owners/managers of SMEs, as well as at verification of some theoretical concepts pertaining the essential characteristics of the BBs. It was done in relation to all three segments of the BB’s definition. z It has been carried out by dr Andrzej Kondratowicz and the Estymator Lab led by Jacek Chołoniewski. z Full access to documentation of the survey including description of procedures followed, full text of the questionnaire and the results obtained can be given to all parties having a legitimate interest in this type of information. 17

C. Generalizations based on a case study. . . z Ennumeration and evaluation of BBs done by a „real-life” small-scale Polish entrepreneur: z - first, it has decriptive elements, although at the same time it preserves a subjective, microeconomic character z - further generalizations are made by an actual practitioner (entrepreneur) on the basis of his experience in running his own business (case study) and by observing other SMEs functionning in his immediate vicinity. z - it serves the purpose of verifying and exemplifying BBs indicated elsewhere in the research project z - it concentrates on a number of specific BBs in the area of employing labor and thus having to do with BBs’ impact on the labor costs, as well as on negative consequences of tax burden for the small and very small enterprises coping with relative scarcity of capital and relative abundance of labor z - done by Mr. Krzysztof Dzierżawski, an entrepreneur cooperating with the Adam Smith Research Centre, Warsaw. 18

D. Synthesis. . . z Summing up of the above elements. The major theme is to indicate those BBs that: z have bureaucratic character (according to the accepted definition) and z are considered important by the small entrepreneurs themselves (as shown in the survey done by the Estymator Lab), by academics analysing the SME sector – lawyers and economists, and by the subjective opinion of one specific entrepreneur (Case Study by Dzierżawski). z Synthesis made by Andrzej Kondratowicz 19

Types of barriers z The respondents (entrepreneurs) to a large degree acept the definition of the BBs as proposed by Kondratowicz. It pertains to all three types of BBs z excess of detailed regulations (1) z compelling firms to do superfluous things or perform such practices/actions (2) and z ineffectiveness and slowliness of the state administration (3). 20

4. 1. Types of barriers: to what extent the respondents agree with the BB’s definition suggested by A. Kondratowicz 21

4. 2. - barriers of type I (excess of regulations): most frequent (according to Stefanowicz); - barriers of type II (superfluous actions): most important (according to respondents) 22

4. 3. Degree of uselessness of compulsory practices 23

4. 4. Degree of negative impact (for EACH of the categories of the compulsory practices more than 50% of respondents considered them as burdensome (i. e. having a felt negative impact; below we show the most burdensome) 24

4. 5 Degree of negative impact of all BBs taken together z Since all of the compulsory/required practices are considered by respondents as superfluous (bureaucratic) and at the same time burdensome, what would happen if they all were removed at once? Would it only boost the entrepreneur’s spirit or would it have an impact on the firm’s condition/situation? In other words, would removing (fighting with) bureaucratic barriers pay? z Almost 20% of respondents declared that nothing would change! [To a larger degree it pertained the VSEs (micro-firms employing 0 -5 workers) that pay a flat rate income tax; those that were established before 1989 and those from less urbanized areas (township of Lublin). ] z At the same time almost 20% of respondents declared that their situation would greatly improve. [It pertained somewhat larger firms, paying regular business tax, those which are limited liability, and those operating in Warsaw (the capital). ] 25

4. 5 Degree of negative impact of all BBs together: z Taking into consideration that we talked about hypothetical removal of all barriers at once, we may conclude from the answers’ distribution that would be difficult to purport: -- that bureaucratic barriers are the most important barriers faced by SMEs, and that -- their removal would bring about a revolutionary change in economic condition of the enterprises. 26

4. 6 BBs versus other barriers z Bureaucratic barriers were perceived as ones of the most burdensome for the firm’s operations! z Average numerical value of the answers was the highest for barriers of „too high taxes" (3, 26), bureaucratic barriers (3, 18) competitors’ actions (2, 93), insufficient demand (2, 88), dear and difficult to obtain credit (2, 68) and finally corruption among civil servants („only" 2, 45). z [ scale : 1, 2, 3, 4 ] 27

4. 7 How do entrepreneurs perceive (the impact of) the BBs? z „excessive irritation/nervousness” (3, 19) [i. e. psychological discomfort and irritation caused by encountering the bureaucratic barriers] z „loss of time and money" (3, 03) z being subject to penalties for non-compliance with regulations (2, 53) z being forced to bribe (2, 09) 28

4. 7 perception of the z The above means that barriers of type I [excess of regulations] play a relatively less important role, z while barriers of type II [compulsory superfluous actions] and of type III [ineffective operation of state administration] are more important. z Barriers that occur actually, i. e. not only de iure are felt to have a stronger adverse effect – both in terms of costs and of psychological discomfort. 29

4. 8. Dynamics of the bureaucratic processes z Stefanowicz showed a total absence of any tendency to deregulate on the part of the legislature (and to a degree also on the part of the central executive authorities/the government). z This view is supported by the respondents: only 11% of them are of the opinion that as compared with 1990 bureaucracy is now less burdensome; for 32, 8% it is the same; for 56, 2% is more burdensome. z What has been done by the Government and the Parliament to remove the bureaucratic barriers during last two years? 54, 7% thinks that NOTHING, and another 35, 8%, that NOT TOO MUCH 30

4. 9 Excess of regulation z During the period under consideration (1996 -2000) there have been changes introduced into 106 pieces of legislation (out of 162 pieces under scrutiny) – there were alltogether 522 instances of changes or ammendements. z In the same period 33 pieces were nullified and 36 completely new pieces of legislation were introduced. z Thus, on average, each piece of legislation was changed five times. z In some areas instability was particularly high. In the area of tax law each of the 19 legal acts was changed. There were 131 changes and ammendments; 10 new acts were issued. This means that on average each act was changed seven times during the span of 4 years and 3 months. 31

4. 10. Lack of deregulation vs. requirements and recommendations of the European Union (EU) The above perception of the parliament’s (and government’s) „achievemnets” in the area of deregulation can only be amplified if one looks into the requirements or only the recommendations issued in this area by the European Union – especially in relation to the SMEs. It foremostly pertains to the Commission’s Recommendations in the area of amelioration and simplification of economic environment for the entities starting economic activity . In fact, none of the postulates of the Commission is being implemented, nor is it going to be implemented in Poland in the foreseeable future! *) Document of the European Commission of April 22, 1997, C(97) 1161, ultimate version, Brussels 1997 32

4. 10. Recommendations of the EU – cont’d This pertains the general framework and rules for the simplification of policy ("administration should consider the ways in which the entrepreneurs could be helped rather than controlled", introduction of the principle „first think about the small one", introduction of legal derogations for SMEs in the area of health, safety and environm, ental regulations, lowering the requirements in the area of reporting for statistical and other purposes, etc), as well as concrete tangible actions vis-a-vis SMEs (single contact points, a unified registration form, a unified ID number, the principle of implicit acceptance, simplification of procedures pertaining to small corporations, introduction of yearly VAT declarations/tax returns, dimisnishing the degree and scope of licencing of particular professions and types of activities [maintaining a reasonable equilibrium between protection of the consumer and a necessary degree of competition), simplifications in the area of accounting/bookkeeping for very small and small firms). 33

What to do? ! ______________________ 1. When compared with other kinds of barriers the bureaucratic barriers connected with starting a business and converting it into another legal form are not perceived as excessively burdensome, and their total removal would not imporove economic conditions of the enterprises in any dramatic way. 34

Priorities, cont’d 2. Stress should be put onto removing the existing BBs (or not letting new ones appear) in those areas where they hit the already existing firms and where they stem from excessive regulatory burden. Above all, it is important to the firms that reach this key point of either entering onto the fast growth path connected with technical modernization and changing style of management (they move over to the medium-size category with the employment of more than 50 persons), or else plummenting into stagnation on the level of a family business, which performs a positive role in the economy (creating employment) but cannot become any major source of progress and development in the 21 st century. 35

Priorities, cont’d 3. Bureaucratic barriers foremostly cause a loss of time and „nerves” and raise firm’s operating costs, but they do not seem to be a decisive factor in determining whether a small dynamic firm succeeds in transforming into a madium-sized one. On the other hand, the BBs may be an unsurpassable stumbling block for small and very small firms – especially those showing traits of stagnation (cf: Dzierżawski’s Case Study). For the latter the excessive burden of BBs may be often enough to eliminate them from the market. 36

Priorities, concl’d. 4. It seems, therefore, that deregulation and removal of BBs is the most important for the existence of the weakest firms – which, as it is known, are the most numerous among the SMEs. Forgetting this subsector of SMEs is not a good idea, especially that deregulation and removal of the BBs is not very costly in itself (though it is frequently difficult politically), while it carries a positive externality by positively influencing all the remaining sub-segments of the SMEs sector, and even the Large Enterprises. 37

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