Regulatory Impact Assessment (RIA) has become the pivotal instrument. ... our findings can contribute to the current policy discussion around RIA and better ..... More right-wing governments rather cater to business and capital owners.
THE IMPLEMENTATION OF REGULATORY IMPACT ASSESSMENT IN EUROPE Claudio M. Radaelli, Fabrizio De Francesco, Vera E. Troeger
Paper delivered to the ENBR workshop, University of Exeter, Exeter 27 and 28 March 2008
Abstract Policies to increase the capacity of governments to produce high quality regulation, also known as ‘better regulation’, have spread throughout Europe. Within ‘better regulation’, Regulatory Impact Assessment (RIA) has become the pivotal instrument. The literature on RIA is burgeoning, yet it has overlooked the comparative analysis of how RIA is implemented. We draw on implementation theory to formulate expectations about the political costs and benefits of different degrees of implementation, from formal adoption (stage 1) to the creation of central units in charge of better regulation (stage 2) and the production and publication of RIA results and methods (stage 3). We then test the hypotheses on data on RIA in European countries. We find that partisanship and political constraints matter in the early stage of implementation (together with economic openness), whilst in stage 2 we also see other variables at work - such as the type of political system, economic resources, and time. Stage 3 sheds light on the role of bureaucratic efficiency and interest groups, whilst the influence of partisanship disappears. In the conclusion we reflect on how our findings can contribute to the current policy discussion around RIA and better regulation, and suggest extensions of our analysis.
Keywords: Regulation, regulatory impact assessment, European Union, implementation
1. Introduction: Better regulation and impact assessment in Europe Over the last ten years or so, regulatory reform in Europe has entered a new territory. Whilst reform has continued to affect individual sectors, such as telecommunications, the environment, and the labour market, there has also been a more ambitious attempt to enhance the effectiveness of the regulatory state by changing the way key departments and regulatory agencies produce regulation, no matter what the specific affected sector is. This new regulatory agenda has taken the form of a myriad of initiatives to improve the capacity of governments and European institutions to produce high-quality regulation and, ultimately, to govern the regulatory state (OECD 2002). Essentially, instead of looking at reform exclusively from a ‘vertical’ perspective (that is, sector by sector), policy change has affected ‘horizontal’ functions of the regulatory state, 1
notably consultation, law-formulation, ex-post evaluation of regulatory tools and institutions, simplification, access to legislation, reduction of administrative burdens, and regulatory transparency. In consequences, new rules have been formulated on how regulations should be appraised at an early stage, produced, evaluated, and simplified. In a sense, this ‘horizontal’ regulatory reform is an important component of meta-regulation, and provides a complex infrastructure that regulates how regulators go about performing their core rule-making activities (Black 2007). In the jargon made popular by several publications of the OECD, the World Bank, the European Union and its most active member states, this set of metaregulatory, ‘horizontal’ initiatives is called ‘better regulation’. Studies promoted by the World Bank have shown that good regulatory governance matters in several ways, since this is the component of governance where there has been more dynamism over the last ten years or so (Kaufmann et al. 2003). This is a new process for some European countries, but not for all. Countries such as Germany, the Netherlands, and the UK set the agenda for ‘horizontal’ regulatory reform in the 1980s, in synchrony with other non-EU and Anglo-Saxon countries, such as Canada, Australia, and the USA (see (Radaelli 2004), (Wiener 2006) and (De Francesco 2006) for the diffusion process). Evidence produced by the OECD (2002) and the European institutions (DBR - EU Directors of Better Regulation 2004), (Mandelkern Group on Better Regulation 2001), however, shows that for the last majority of EU-15 and (even more so) EU-25 the move towards ‘horizontal’ regulatory reform has accelerated in the recent years. For the EU15, one of the major drives was the 1995 OECD ministerial declaration on regulatory quality. For the new member states of the EU-27, the process of accession to the EU has triggered the adoption of regulatory impact assessment, capacity-building exercises in core government departments, and the introduction of ‘streamlined law-making’ in different guises. No less than three partially overlapping networks seek to maintain momentum for better regulation in Europe. One is the Directors of Better Regulation of the EU, an informal body of those who drive the better regulation agenda in the countries. This network promotes exchange of best practice, training, conferences on the content and communication of better regulation, and templates for impact assessment. The second network is the high-level group advising the European Commission on impact assessment. In this network, national delegates meet with the European Commission to discuss quality assurance issues, overall trends in impact assessment across Europe and specifically in the EU, and indicators of regulatory quality. The third network is also European but it goes beyond the EU. It gathers policymakers working on the implementation of administrative burdens reduction plans across 2
Europe, including Norway. Recent surveys of the first and second network have established that they have spread a set of common governance and regulation beliefs via socialization mechanisms (Radaelli and O'Connor 2008). The institutions of the EU have also become involved in ‘better regulation’ with the adoption of new rules on consultation, the use of advice in the policy process, RIA, and simplification programmes managed by Brussels (Allio 2007; Radaelli and De Francesco 2007). The European Commission launched an ambitious plan for better regulation, a communication on impact assessment, and guidelines for consultation in 2002. In 2003, an inter-institutional agreement on better regulation was signed by the Council, the European Parliament, and the European Commission to indicate shared commitment to ‘better regulation’ across the institutional spectrum. Thus, the impact assessment produced by the European Commission is discussed by the European Parliament and the Council’s working parties. When the Parliament or the Council introduce substantive amendments – the 2003 agreement stipulates – they have to perform an impact assessment. The implementation of the agreement is patchy (Meuwese 2008) but there is no doubt that potentially this is a major change in law-making. The European Commission performs impact assessment on all the proposals (legislative and not) contained in the annual working programme, and keeps track of the progress made by member states. ‘Better regulation’ has also featured in the 2005 remodulation of the Lisbon agenda for competitiveness in Europe: it is now recognized as one of the priority for more ‘growth and jobs’ (Radaelli 2006). Although it is too early to provide a comprehensive evaluation of what has been achieved by the EU and its member states in terms of ‘better regulation’ (see the evidence in (Hahn and Litan 2004), (Lofstedt 2006), Meuwese 2008, (Renda 2005), Wiener 2006), there is no doubt that a new agenda has been set. In the ‘better regulation’ agenda of the EU, regulatory impact assessment (RIA) is the pivotal tool. The EU thus follows the USA, Canada, Australia and New Zealand in the identification of RIA as a fundamental tool for ‘good regulatory governance’ (following the OECD 2002 template) and for competitiveness in Europe. A consultant has gone as far as to argue that RIA is now a ‘global norm’ (Jacobs 2006). RIA is based on a set of rules for the definition of policy problems, the appraisal of the status quo, the identification of regulatory options (including alternatives to traditional command and control regulation), consultation of stakeholders, and the economic analysis of feasible options. As such, it is both an instrument that has the potential to change the process of preparing new rules and legislation in general, and an emerging model of governance that 3
may be able to enhance the grip of the core executive on the regulatory process, and the relationships between the executive and the stakeholders. The literature looks at RIA a tool in the hands of the principal controlling the regulator-agent ((Johnston 2002); (Posner 2001) ;(Froud et al. 1998). RIA as a process allows central units to steer regulatory institutions. As a result, institutions like the OMB in the USA or a cabinet office in the UK are empowered by RIA because they can control the regulators (Sunstein 1996): 25). To sum up then, on the one hand there are ‘normative’ ambitions in policy-making circles about RIA as a model of ‘good’, ‘open’ and ‘democratic’ governance. The normative propositions go on, with the argument that RIA increases the competitiveness of the economy by generating a better regulatory environment for business and a more robust investment climate. On the other, scholars have drawn attention to RIA as a way to stack the deck to favour interest groups that represent crucial constituencies for support. In this paper we test the latter political science explanations, as the former is more a political ambition rather than a theory, although there is work under way on the relationship between better regulation and final economic outcome (especially at the World Bank and the OECD; the topic has recently caught the attention of the European Commission’s economists as well). The two explanations are different, although they are not mutually exclusive. One can have control of the regulators and efficient regulations of course. It depends on how we model the political principal and the bureaucratic agent – a point to which we return later. Be that as it may (control tool or model of ‘open governance’), a large number of EU countries have made the choice for RIA. But what do we know about this choice? Why do some countries go for a more sophisticated approach to RIA and others prefer a leaner option? If, as Radaelli and De Francesco (2007) argue, there are at least three different clusters of implementation of better regulation and RIA across Europe, or ‘diffusion without convergence’ (Radaelli 2005), how do we explain the very different degrees of implementation of RIA in Europe? One disappointing feature of the empirical literature is that it tends to focus almost exclusively on variables situated inside the RIA programmes. Put differently, it does not consider the role of obvious independent variables (such as the features of the political systems, administrative traditions, the strength of pressure groups and so on) in the explanation of implementation. Yet it makes sense to hypothesise that ‘politics matters’ in this area. The studies produced so far examine the quality of impact assessments produced by governments by using benchmarks drawn from economic analysis (Hahn et al. 2004), 4
evaluate RIA in terms of content, outcome and function (Harrington and Morgestern 2003), discuss the quality and political implications of regulatory oversight ((Bagley and Revesz 2006), (Hahn 2006), or take RIA as independent variable and assess its political or economic outcomes (Baldwin 2005), (Coglianese 2002),(Morgan 2003), for example by describing how RIA alters the balance of power between economists and programme officers in US regulatory agencies ((McGarity 1991). We look at Europe and examine the implementation of RIA as dependent variable by employing different operationalizations based on two different data-sets. First, we derive hypotheses about the political costs and benefits along the continuum that goes from formal adoption to deep implementation (Section 2). Second, in contrast to much of the literature, we move outside the RIA box for the selection of independent variables (Section 3). We control for political variables (such as the preferences of political parties in government, institutional constraints to the executive, the political system, and, most crucially for public choice theory, the cooperativeness of interest groups), and economic variables like unemployment and government consumption. Third, we relate our findings to the theoretical expectations about implementation (Section 4). Finally, we present our conclusions in Section 5.
2. Looking for Theoretical Arguments From a theoretical standpoint, there are two major considerations. First, why would elected politicians want to adopt RIA? This research question leads to an explanation of the diffusion of RIA and its global success. Second, why do some countries adopt RIA and not implement it, whilst others do? With this question we address the adoption-implementation gap already exposed by other studies (Radaelli, 2005; (Jacob et al. 2008). The answer – we will argue – lies in the political economy of adoption, and specifically the cost-benefit analysis of implementation (following (Moynihan 2005). But let us start with adoption. One can argue that politicians want ‘better regulation’ for two reasons. Firstly, better regulation increases the legitimacy of the regulatory system, and this may have a positive impact on the popularity of the incumbent. Secondly, in open economies better regulation increases the competitiveness of a country. A good regulatory environment increases foreign direct investment and deters domestic firms from moving some high value functions abroad. Thus, in a context of regulatory competition, RIA is an important tool of economic reform. These are the two reasons provided by official documents of international organizations and governments. 5
However, they rely too much on a benign view of elected politicians. Thus, a third explanation – rooted in positive political economy – starts from the assumption that elected politicians want to please rent-seeking firms that represent the core constituency of support for the incumbent. For these pressure groups, rents generated by domestic protectionist regulation are preferred to profits ((Buchanan and Tullock 1975)). Hence, there will no pressure for better regulation. What is the role played by RIA then? The answer to this question can be made in public choice terms starting from the observation that RIA is a type of administrative procedure imposed by the core executive on regulating departments in Europe and by the President on federal executive agencies in the US. Let us focus on the US case since the theoretical argument has been elaborated in this context. Congressional delegation of rule-making power to agencies subject to Presidential control triggers the problems of bureaucratic and coalitional drifts. The former implies that political principals have to develop rules to make sure that agencies will act in the interest of the principal (McCubbins et al. 1989b). The latter arises out of the fact that agencies may over time produce rules that do not reflect the original deal made by political principals and their constituencies for support (i.e., the pressure groups that entered the original deal ((Horn and Shepsle 1989); (Macey 1992)) In consequence, administrative procedure is used by well-organized interest groups and regulators to exchange information on the demand and the supply of regulation. By requiring agencies to provide information on the costs and benefits of proposed regulation and who is mostly affected by the rules described in the notice and comment stage of the process, RIA provides an effective fire-alarm for pressure groups. The role played by RIA in the range of tools for the political control of agencies is unique. Instead of controlling agencies ex-ante (for example on the budget) or ex-post (for example, by reviewing rules in Court), RIA produces control exactly when rules are being formulated. Another political advantage of RIA is that it ‘facilitates rent-seeking while appearing open and neutral on the surface.’ (Croley 1998) note 281(McCubbins et al. 1987, 1989a); 1989) have concluded that administrative procedures such as RIA are a mechanism to exercise political control over regulatory agencies. RIA procedures ‘enfranchise important constituents in the agency’s decision-making, assuring that agencies are responsive to their interest’(McCubbins et al. 1987:244). Finally, the ‘most interesting aspect of procedural controls is that they enable political leaders to assure compliance without specifying, or even
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necessarily knowing, what substantive outcome is most in their interest.’ (McCubbins et al, 1987:244) RIA is effective in several ways. First, it allows well-organised interest groups to monitor the agency’s decision-making process (fire alarm monitoring is made possible by APA procedures such as notice and comment). Second, it ‘imposes delay, affording ample time for politicians to intervene before an agency can present them with a fait accompli’ (McCubbins, Noll, and Weingast, 1989: 481). Third, by ‘stacking the deck’ to benefit the political interests represented in the coalition supporting the principal, procedures allow regulation produced by executive agencies to satisfy the preference of the most powerful constituencies (McCubbins, Noll, and Weingast, 1987: 273-4). The positive political economy argument can be criticised by arguing that it is based on a closed model of the economy. In an open economy, regulatory competition should reduce the role played by protectionist regulation. But even if regulatory competition cuts rents and increases the demand for more efficient regulation, RIA can still be used as firealarm tool. In this case, it will be used by pressure groups open to international competition to alert the principal that bureaucracy is not creating the right conditions for an open, efficient business environment. Another qualification to the public choice argument can be drawn by the literature on party politics. Left-of-centre governments should be more interested in using regulation to protect workers’ rights and the welfare state. Right-of-centre governments should be more interested in producing an efficient regulatory environment. In consequence, they should be keener on RIA, given that this tool is based on the economic analysis of regulation (Garrett 1995, Garrett and Mitchell 2001, Garrett 1998b, Hibbs 1977/ 1992, Franzese 2002a,b, Iversen 2001, Garrett and Lange 1991). Finally, it is not entirely clear to what extent the argument can be transposed to the European context without modifications. In Europe, a substantial amount of rule-making power still lies with the government’s departments, although agencies have proliferated over the last thirty years or so (Gilardi 2008). Thus, RIA is often used by the core executive (typically the cabinet office and the Treasury) to control the regulatory activity of the department of the environment, transport, labor etc. But this is not the consequence of formal delegation of regulatory power by parliaments to agencies. At the European Union (EU) level, RIA is used as a fire-alarm to control the Commission’s regulatory activity, since the agencies created by the EU do not have as yet full regulatory power. Additionally, most European countries are RIA late-comers. For some of them at least, the case for adoption lies less in the 7
rational decision to control and more in isomorphic processes of emulation triggered by legitimacy-seeking behaviour in international domains (Radaelli 2005). With these modifications and caveats, the understanding of RIA as instrument of political control can be transposed to the European context. We can now turn to the second major theoretical question, concerning adoption. If politicians are the main characters in adoption, implementation revolves around both politicians and bureaucracies. To adopt formally RIA creates benefits to elected politicians. They can show to international organizations that they are following the bandwagon of modernization. Domestically, they send to the business community a signal that they are doing something to improve on the regulatory environment. The economic and political cost of saying YES to the OECD 1995 ministerial declaration on regulatory quality – to illustrate with an example – is negligible. Indeed, Cyprus, Luxembourg and Malta are the only EU member states that have not formally adopted RIA. Denmark, Germany, Hungary, the Netherlands, and Sweden are the pioneering countries. They adopted RIA before the OECD agreement on regulatory reform. A large number of countries adopted between 1995 and the 2002 launch of the new European Commission’s integrated impact assessment: Austria, Belgium, Czech Republic, Estonia, Finland, France, Italy, Ireland, Poland, and Slovak Republic. Finally, the laggards are Bulgaria, Lithuania, Greece, Romania, Portugal, Slovenia, and Spain. Once formally adopted, RIA goes through different degrees of implementation. The next step is to produce guidelines on RIA. This comes at moderate administrative cost (the senior civil service has to coordinate views and describe impact assessment as a process with specific steps, such as problem definition, consultation, economic analysis, choice of options, and monitoring). Politically, the core executive sends a signal to departments that their regulatory activity may be watched closely. In coalition and/or minority governments, this has political costs – some members of the coalition may object to this, especially if they have the regulating departments in their portfolios. Indeed, several governments have not drafted any guidance yet: Czech Republic, Estonia, Latvia, Slovakia, Slovenia and Spain. The scope and contents of the guidance also vary: in eleven countries RIAs are conducted drawing on guidance that covers a ‘fairly broad’ range of typologies of impacts; 6 guidelines are broader; one government has drafted ‘fairly narrow’ scope guidance; and one government has issued a narrow one. Next comes the stage of putting money on the enterprise. Guidelines do not work without proper investment. The core executive, therefore, has to invest in resources, such as 8
training, hiring specialists in the economic analysis of regulation, and staffing departments with economists. This has a clear economic cost. In departments calibrated around lawyers and generalists, the addition of economists can also create cultural friction and therefore some political costs. The benefits, of course, are all in terms of having more chances of controlling from the centre the regulatory activity. The most evident sign of financial commitment is the establishment of a central unit with its own staff and budget. Twelve governments have set up a central unit for RIA. The number of people dedicated varies across countries. To start with, in four countries (Germany, Hungary, the Netherlands and Spain) the number is unknown notwithstanding the presence of a central unit. Ireland and Italy have very light central unit with 1.5 employees respectively. In the middle range of commitment there are Czech Republic (9 employees), Poland (10), Sweden (12), and Belgium (20). Finally only the UK has a high-level of commitment with approximately 70 employees. Then, implementation reaches the stage of actually carrying out proper impact assessments. This has high economic costs – some major RIAs are quite sophisticated, they take time and require different types of models and analysis. There is also a political cost - the core executive has to exercise pressure on departments that are not so keen on RIAs. The political benefit is that only if RIAs are systematically produced, the fire-alarm mechanism described above can work. In this connection, only a third of the countries that have adopted RIA are capable to conduct in a systematic way RIA: Belgium, Finland, Ireland, the Netherlands, Portugal, Slovakia, Sweden, and UK. Other countries, such as Czech Republic, Hungary, and Italy are not able to structure their policy and going beyond the pilot stage of implementation. Finally, there is the step of publishing the RIAs widely. This increases transparency in the regulatory process. This step may not cost much in terms of economic resources – depending if publication is limited to the internet or in the official Gazette. But clearly it has a political cost, since all affected interests (not just the ones that are within the constituency for support of the incumbent) can use the RIA as fire-alarm. So the cost is about the overall uncertainty in terms of who will get what out of the RIA exercise. These high levels of political uncertainty and costs are borne only by Finland, Ireland, and the UK. The expectation, therefore, is that the chances of observing a government going all the way down the implementation process diminish as we move from one step to the next.
3. Variables and Operationalization 9
In the following we try to test the implications of the theoretical arguments put forward in the previous section with data on the implementation of RIA for 28 European countries1. We pool all available information on the implementation of RIA for these 28 countries over three years (2004, 2006, and 2007). Drawing on the theoretical arguments developed above we examine the implementation of RIA as the dependent variable. We thereby try to follow closely the multiple-stage process we identified in the previous section. In particular, we focus on the 3 most important steps in the implementation process:
1) Adoption of RIA and issuing of formal guidelines 2) Creation of a specific budget and a central unit employing personnel to oversee the RIA process, and 3) The production of RIA and publication of results, including information on process and methods used.
As mentioned, these different stages are driven by diverse factors. For example, formal adoption and issuing of guidelines does not involve major political and physical costs but mainly serves as a signal to international organizations and capital markets that the country offers a favourable regulatory environment. The second stage of implementation has real budgetary implications and therefore should not only be affected by political but also economic considerations. Finally, production and publication of RIA results is both a political and a bureaucratic issue. The timely production of RIA is contingent on the efficiency of the bureaucracy as is the publication and circulation-publication of the results of individual impact assessments. In addition, interest groups should be highly interested in RIA results in order to monitor agency's decision making processes and use it as a fire-alarm. All these different stages can be empirically tested but each stage needs careful operationalization of both the dependent and independent variables. With respect to the dependent variables of each stage we use two sources: 1. Questions from a survey originally administered in 2004 in the context of a project funded by DG Enterprise and Industry of the European Commission on Indicators of Regulatory Quality (IRQ) (Radaelli and De Francesco 2007). The same questions were repeated in 2006 and 2007. Data were collected via a selfassessed questionnaire sent to the directors of better regulation programme (2004) and 1
The 28 countries are Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and UK.
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officers in central oversight units (2006 and 2007). 2. Data from a set of 28 country fiches covering all the EU member states and the European Commission. This dataset was created by the EVIA consortium in 20072 . The set includes both information on the overall RIA process and detailed information on central units, whether a country carries out RIA on a routine basis or episodically, and the level of transparency and circulation of impact assessment results. The data were collected directly by the researchers participating in the consortium (drawing on primary documents and interviews with better regulation officers), and validated at EVIA meetings.3
The First Stage: Adoption of RIA and Formal Guidelines In order to assess the first stage of RIA implementation, the formal adoption and issuing of guidelines, we employ two dependent variables. The first endogenous variable is construed on the answer to the IRQ question whether the importance of RIA has increased over the last years. This variable is dichotomous, where 1 – signifies yes and 0 – no. Since the formal adoption stage mainly serves as signal to capital and business owners that the country provides a favourable regulatory environment we use economic variables on trade openness and foreign direct investment (all gathered from the World Development Indicators (WDI) issued by the World Bank 2007). We expect that the more open a country is and the higher the share of FDI in the domestic economy the more likely a government is to formally implement RIA. In addition, the colour of the party controlling the executive should play a role. We include this variable because the party politics hypothesis (Hibbs 1977, Beramendi and Cusack 2006) states that different parties have different preferences over policy outcomes. Thus, left-of-center and right-of-center governments should have different preferences towards better regulation and RIA. Party politics accounts within the political business cycle literature argue that right-wing parties are rather interested in efficiency and reduction of inflation whereas left-wing parties spend to stimulate demand and therefore increase employment. Although this proposition has been contested by those showing that left-ofcenter parties and governments can also reduce inflation and rein in public expenditure given 2
EVIA – Evaluating Impact Assessment, is a project funded by the European Commission under the aegis of the Framework Six Programme of the EU. The project was completed in January 2008. See http://web.fuberlin.de/ffu/evia/ 3 Both data sources suffer from missing entries. Sometimes countries answered the question only once ore twice. There are also missing data for some of the explanatory variables used. Thus from the possible 84 observations we only have between 41 and 74 observation depending on the empirical model. Even though this number seems very low for conducting inferential statistical tests, most textbooks in econometrics postulate a number of 30 observations as minimum for econometric analyses, since 30 is the minimum for the law of large numbers to be applicable.
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certain intervening factors (see accounts of the debate in Garrett 1998 and Swank 2002), we use it to test the hypothesis that right-of-center governments are the most-interested in the implementation of RIA - to enhance the efficiency of public policy and to reduce regulatory burdens on business. More right-wing governments rather cater to business and capital owners and therefore need to provide efficient regulation to increase competitiveness of the location. More left-wing governments, however, rather protect workers' rights and the welfare state. From this we derive the prediction that right-wing governments are more likely to formally adopt RIA. To operationalize this argument we employ a variable drawn from the Keefer's World Bank Dataset on Political Institutions (Beck, Keefer and Clarke 2005) measuring whether the largest government party is rather left (1), centrist (2) or right-wing (3). Governments also have to produce guidelines that regulate the process and state who does what, at what stage, using what type of consultation approach and assessment methods, reporting to whom, and publishing the results where. To measure this variable we use the EVIA question whether formal guidance for RIA does exist. This variable is again dichotomous and measured as 1 – yes, guidance exists; or 0 – no, guidance does not exist. This stage comes with moderate administrative costs but may involve substantial political costs. As already stated earlier, politically, the executive sends a signal that regulatory activity is watched closely. In coalition governments, this might be costly since some members of the coalition may object to the idea of monitoring departments and ministers of different parties, especially if some parties have regulating departments in their portfolios, others have the core executive positions (Treasury, Industry, and the PM). Hence, in addition to party politics (measured as indicated above) the agreement upon issuing guidelines strongly depends on the power of the executive. This power can be limited by different political and institutional constraints such as independent branches of government (e.g. different executive and legislative chambers) with veto power over policy change and their alignment. The more opposition the executive faces, e.g. from junior coalition partners, institutional or partisan veto players, the lower the probability that formal guidelines will be issued. To operationalize this aspect of power of the executive we use the measure for political constraints constructed by Henisz (2002). This variable ranges between 0 and 1, whereby more constraints are associated with higher values. We expect a negative effect of this variable on the dependent variables since the incentives and ability of the executive to implement RIA decreases with higher constraints. Moreover, political principals have to develop rules to ensure that agencies will comply with their initial instruction. In presidential systems, the control of the principal over 12
the bureaucracy is quite limited and guidelines are therefore more warranted to make sure that agencies act in the interest of the principle. In parliamentary systems the control is more direct and therefore we expect that guidelines on RIA are less likely to be formalized. The more power the executive authority has, the lower should be principal-agent problems. We measure this as the degree to which the president is directly elected and has executive power. The variable stems from the Keefer's World Bank Dataset on Political Institutions (Beck, Keefer and Clarke 2005) and is measured as directly elected president (0), assembly elected president (1) and parliamentary system (2).
The Second Stage: Creating and funding oversight bodies This stage goes beyond formal adoption and guidelines production. Policy makers have to establish a leading-coordinating central unit. These units employ personnel to oversee better regulation activities in the various government departments. In some countries, personnel from the oversight unit also assists the departments in carrying out the RIAs, although on balance the essential functions played by oversight units 4 are (with reference to RIA) oversight, quality control, management of targets and systems of regulatory indicators, and campaigns to secure the consensus of external stakeholders (business of course, but also the European Commission and the OECD working parties on regulatory reform). These bodies may also have budget for RIA training and pilot studies, reviews of consultation methods and economic assessment techniques. Here we start to see where the "real beef" lies, because this stage does not only trigger possible political costs but might have budgetary implications which add to the political costs. In order to capture these dimensions we employ three different dependent variables. Firstly, we use the EVIA variable measuring whether a country has established a coordinating unit for RIA and better regulation policy. This variable is again binary with 1 standing for the existence of a central unit and 0, otherwise. Secondly, EVIA provides information on the number of full time staff working at the coordinating unit. And thirdly, we use the IRQ question whether the budget dedicated to RIA has increased over the last 5 years (with 1 – yes, 0 – no). The reasoning behind the explanatory variables is similar to that of the formal adoption stage. Political constraints on the executive delay or even hinder political change and therefore should also have a negative impact on the implementation of RIA. Partisanship of the government should influence this stage even stronger than the formal adoption and 4
Examples of these units are the Better Regulation Unit in the UK, Nutek in Sweden, the Better Regulation Group in the Netherlands, and DAGL in Italy.
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guidelines production since right-wing governments would lose credibility if they only promised to provide an efficient regulatory environment but didn't put the money where the mouth is. With respect to the power of the executive and principle-agent problems, the incentive for implementation should be higher in presidential systems than in parliamentary systems for the reasons outlined above and since effective control and monitoring of the bureaucracy is only possible if RIA are indeed used as a tool and not only formally adopted. All variables are operationalized as indicated in the previous section. Since this second stage has real budget implications we have to include measures that capture the state of the domestic economy in addition to the political variables. We add to the right-hand side of the model the total unemployment rate to account for economic stress. Governments under economic pressure have less money to spend for the implementation of RIA. Unemployment also measures pressure on the welfare system. In addition to the unemployment rate, the share of elderly people (measured as percentage of people above 65 years old to the whole population) captures problems of the welfare state since the government has to finance the public pension system. GDP per capita is added to operationalize the overall state of the domestic economy. Moreover, we include government final consumption expenditure as percentage of GDP to test whether governments which increase spending also provide a higher budget for the implementation of RIA. All economic variables stem from the World Bank World Development Indicators (WDI 2007). In order to control for possible timing effects we also include a variable measuring the years since RIA was first formally adopted. The expectation would be that the longer ago the formal adoption the higher the probability that of physical implementation since the pressure on the policy maker to "stick to his guns" should increase with time.
The Third Stage: Production of RIA and Publication of Results Previous research has shown that some countries have central units in charge of better regulation, yet they carry out a very limited number of impact assessments every year, or no proper RIA at all. Both the EVIA dataset and Radaelli and De Francesco (2007) confirm that this is the case in more than one country. This makes it useful to distinguish between the second and the third stage. The third and final stage of the implementation process covers the production of RIAs in the departments or agencies and the publication of the results. As discussed in the theoretical section, this stage should be much more sensitive to political and bureaucratic factors. Timely and effective production of RIA requires at a minimum an efficient public 14
administration. Business interest groups might be highly interested in the results of RIA in order to control and monitor decision making processes. We measure the dependent variables of the final stage by two factors: 1. EVIA provides a variable that contains the answer to the question whether the number of RIAs carried out in country X is known (1) or not (0). The meaning of this question was explained originally by Radaelli and De Francesco (2007): if the total number is not known, it means that either there are only scattered examples of pilot or rudimentary RIAs in the departments, and the central unit does not even bother to compile a list of them, or there are zero RIAs (that is, symbolic adoption of RIA and creation of central units that then become atrophic as far as impact assessment activity is concerned). 2. EVIA also supplies a variable on whether documents containing the methodology, process and results of RIAs are published systematically (1) or not (0). This is a demanding hurdle for implementation. In fact, the EVIA variable is not limited to the results of RIA – in countries where RIAs are carried out, governments almost always insert in the explanatory memorandum accompanying proposed legislation information on how the RIA process has checked some costs – such as unnecessary burdens on firms. But very few countries – as the EVIA dataset shows – go as far as to publish evidence on the process (who was consulted, when, at what stage was an alternative option abandoned, etc.) and methods. The latter is an important element for fire-alarm systems: once the methods of analysis are made clear, the analysis performed by the regulators can be replicated by pressure groups outside the administration, and the conclusions can be scientifically reviewed by experts, think tanks, and academics. Thus, we have to bear in mind that the EVIA variable is deeper and more demanding than indicators such as ‘does the explanatory memorandum state that a RIA was carried out and that there are no unnecessary costs?’
We again include the years since formal adoption to the right-hand-side of the 'production of RIA' model. The idea is that the probability of producing RIAs in a specific country increases with time. Unless the intention of the government was to produce symbolic policy, in which case time should not make any difference at all. We also add the partisan politics variable as explanatory factor to both the production and publication equation since the same relationship between partisanship of the government and production/ publication of RIA as in the other two stages should hold. 15
The public choice argument holds that we can expect countries with strong and more politicised pressure groups to engage in RIA. Yet, this concept is very hard to operationalize. Specific data on pressure groups are not available for the countries in our sample. We, therefore, use a measure of the cooperativeness of interest groups provided by Hicks and Kenworthy (1998). The variable measures the degree of cooperation between government and interest groups: 1 stands for relatively cooperative interaction between cohesive government agencies and coordinated business and labour organizations, 0.5 means moderate cooperation and 0 describes a relatively combative, conflictual relationship between fragmented state agencies and interest group organizations. According to the positive political economics theoretical argument we would expect RIAs to be produced and published with a higher probability if the relationship between governments and interest groups is more conflictual since interest groups use the outcome of RIA as a signal and pressure governments to increase quality and scope of regulatory oversight and ‘quality impact assessment’. More quality RIAs, in turn, enable pressure groups to use this fire-alarm tool more efficiently in the regulatory policy-making process. Finally, operationalizing bureaucratic efficiency is hardly less challenging. We use the measure provided by Paolo Mauro (Mauro 2001) as a first approximation of how efficient public administration is. The measure ranges between 0 and 10, whereby 0 means highly inefficient and a very efficient bureaucracy is characterized with a 10. This variable seems to offer enough variation between the countries in the sample to conduct a sound empirical analysis. Table 1 shows descriptive statistics for all dependent and explanatory variables used in the empirical analysis. Note that differences in the number of observations stem from missing entries which differ across the variables.
Table 1: Descriptive Statistics for Variables employed in the Empirical Analysis Dependent Variables: Importance of RIA RIA guidelines Central Unit Employees Dedicated Budget Production of RIA Publishing of RIA Independent Variables: Openess to trade FDI net in mrd. of US$
No of obs.
Mean
SD
Min
Max
45 69 78 54 47 69 69
0.80 0.74 0.50 9.25 0.38 0.52 0.17
0. 40 0.44 0.50 19.19 0.49 0.50 0.38
0 0 0 0 0 0 0
1 1 1 70 1 1 1
80 82
106.49 -4.80
50.68 18.46
48.56 -100.05
293.87 55.27 16
Partisanship of Government Electoral system Political Constraints Years since adoption Unemployment rate Share of elderly population Government consumption GDP per capita Bureaucratic Efficiency Interest groups
84 84 81 75 84 84 80 83 45 71
1.76 1.75 0.48 8.43 8.20 15.39 19.79 17283 8.26 0.40
1.14 0.64 0.080 6.83 3.71 2.04 3.93 12270.11 1.45 0.48
1 0 0.33 -2 3.70 10. 91 9.81 1837.89 5.58 0
3 2 0.71 23 19.60 19.97 28.12 52182.86 10 1
Model Specification Depending on the model we are only dealing with 41 to 74 observations. Inferential data analysis does not seem to be the obvious choice for the analysis of the differences in the implementation of RIA because of the small sample size. Yet, the law of large number applies to samples of at least 30 observations. We will present some simple regression results which have to be interpreted cautiously in light of the small number of observations. These empirical results should be seen as a first attempt to shed light on the driving factors behind different choices in implementation. Since 6 out of our 7 dependent variables are dichotomous (yes or no) we employ for these variables probit binary choice models.5 This estimation procedure allows us to identify whether the specified explanatory variables increase or reduce the probability of formal adoption, issuing guidelines, dedicating a specific budget or publishing the results. The question of how many people are employed at the central unit leads us to a different kind of dependent variable and therefore a different model choice. The number of employees is a count variable which requires adequate modelling by either a Poisson or negative binomial estimation. Since the employed likelihood ratio test indicates over-dispersion of the dependent variable and the error term (the variance is significantly larger that the mean) we estimate a negative binomial regression in order to account for this fact. We include all explanatory and control variables with a one year lag to the right hand side of the model for two reasons: first, adoption, implementation and production of RIA are political processes. As policy implementation takes time, we accordingly expect to see a lagged impact of all independent variables on the different implementation stages. And second, by lagging the explanatory variables we attempt to avoid possible simultaneity or endogeneity bias. Take for example FDI, the causal arrow could go in both directions – on the
5
Note that using a logit specification does not alter the results.
17
one hand the inflow of FDI could increase the incentives for governments to create an efficient regulatory environment, on the other hand more efficient regulations could attract foreign capital inflows. Due to the small number of observations and following suggestions of Achen (XXX) we try to specify all models as parsimoniously as possible by only including the theoretically important variables and keeping the number of control variables to a minimum. This approach makes our models certainly vulnerable to omitted variable bias. Results, therefore, have to be interpreted with caution. Yet, conventional tests for heteroskedasticity and omitted variable bias do not point to problems with these kinds of misspecification. Moreover, including a large battery of control variables could lead to problems of multi-collinearity and make our estimation less efficient which would render our empirical results less reliable. In addition, the identification of the parameters would be increasingly difficult when including more variables, especially since the variance of our dependent variables is limited. Keeping these considerations in mind, the following regression results can give preliminary answers to the questions of what determines the different stages of implementation of RIA and which factors cause the differences across Europe.
4. Empirical Results In a first step we analyse the impacts on formal adoption of RIA and the production of RIA guidelines. Table 2 portrays the binary regression results for these two decisions:
18
Table 2: Empirical Results for Importance of RIA and Issuing of Guidelines Dependent Variable: Explanatory Variables: Openness (trade per GDP) FDI net in mrd. of US$ Partisanship of Government (1-left, 2-center, 3 -right) system (parl-2, ass_elected pres -1, presidential-0) Political constraints
Importance of RIA Probit 0.016** (0.008) 0.020* (0.011) 0.251 (0.227)
RIA Guidlines Probit
Intercept
-0.789 (0.832)
0.365** (0.171) -0.461 (0.377) -3.895* (2.049) 2.776** (1.224)
Pseudo R² Number of Observations Chi² p>Chi² % of Correct Predictions
0.186 44 8.280 0.0406 77.3
0.103 69 8.174 0.0426 78.3
*** p≤0.01, ** p≤0.05, *p≤0.1; robust standard errors in parenthesis
Overall the two models fit the data reasonable well; while the pseudo R² is relatively low with 0.19 and 0.10 the more reliable measure of percentage of correct predictions produced by the model seems more promising. For the importance of RIA – this serves as a proxy for the simple adoption of RIA – 77.3 percent of the outcome is correctly predicted by the model. Production of formal guidelines of RIA is correctly predicted in 78.3 percent of the cases. As already mentioned the findings should be interpreted with care because of the relatively low number of observations. Yet, the main predictions for the first stage of implementation seem to be supported by the empirical estimates. The question whether RIA is an important tool is mainly driven by economic factors and the question whether a country is well integrated into the world economy and open to trade. Both net FDI inflows and openness to trade increase the probability that a government sees RIA as an important tool for providing better regulation. Thus, governments appear to use formal adoption of RIA as a signal for capital owners in order to indicate that they are willing to generate an efficient regulatory environment. Moreover, this seems to be independent of the colour of the government in power. Formal adoption therefore might be seen as a cheap signal because it does not imply real implementation of RIA as a tool of agency monitoring. If we, however, look at the production of formal guidelines for RIA, political factors seem to be of much higher importance. Especially party ideology of the core executive seems to play a decisive role. Conservative 19
and right-of-centre parties have a higher probability of actually issuing RIA guidelines than left-of-centre parties because – the argument would go - they cater to a constituency of corporations and capital owners, by issuing guidelines for RIA they show their willingness to generate more efficient regulation which mostly benefits businesses. Political constraints work in the different direction since more veto points generate more resistance to policy change and it might become harder for the core executive to issue guidelines and to coordinate with smaller coalition partners or other partisan and institutional veto players. The coefficient of the political system points into the right direction, yet, does not turn out significant. The second stage goes beyond simple adoption. We examine three possible operationalizations of this stage: whether a central coordinating unit was established, the number of personnel working at the central unit and whether the dedicated budget has increased over the last five years. The three variables measure different dimensions of the physical implementation, while the number of employees seems to be the strongest indicator of how willing and able a government is to carry out RIA and increase the efficiency of regulations because hiring personnel has clear and measurable budgetary implications. Table 3 displays the estimation results. As discussed in the theoretical section of this paper, decisions about the physical implementation of RIA have financial implications and, thus, should not only hinge on political factors but also on domestic economic variables. Indeed, the empirical results support this prediction. First, partisanship has the same effect as for the issuing of guidelines supporting the expectation that right-wing governments try to implement RIA to signal to capital owners that they want to provide them with a favourable regulatory environment. More conservative policy makers not only send cheap signals, they also commit to monitoring regulation by creating a central unit and dedicating personnel to enable the central unit to coordinate the RIA process. The coefficient of the partisan variable points towards the expected direction for all three budgetary variables but remains insignificant for the question whether the RIA budget has increased over the last five years.
20
Table 3: Empirical Results for Financial Implementation of RIA Dependent Variable: Explanatory Variables: Years since adoption system (parl-2, ass_elected pres -1, presidential-0) Partisanship of Government (1-left, 2-center, 3 -right) Unemployment rate Share of elderly population Government consumption GDP per capita Political Constraints Intercept
Pseudo R² Number of Observations Chi² p>Chi² % of Correct Predictions
Budget: Central Unit Probit 0.394*** (0.121) -0.831 (0.649) 1.232*** (0.440) 0.057 (0.120) -0.243* (0.158) -0.094 (0.124) -0.000 (0.000) -1.250 (2.590) 2.328 (3.177)
Budget: Employees Negbin 0.267* (0.157) -2.455** (1.177) 2.010* (1.055) -0.072 (0.199) -0.642** (0.268) 0.748*** (0.236) -0.000 (0.000) -7.804** (3.418) -1.176 (5.616)
Dedicated Budget
0.609 74 62.339 0.000 89.2
0.124 53 30.073 0.000
0.196 46 12.058 0.179 65.2
Probit 0.012 (0.045) -1.366** (0.613) 0.013 (0.261) -0.160* (0.105) 0.065 (0.118) -0.050 (0.071) 0.000 (0.000) -2.250 (2.573) 3.361 (2.549)
*** p≤0.01, ** p≤0.05, *p≤0.1; robust standard errors in parenthesis
Moreover, the presidential variable exerts the expected impact in all three models and is also statistically significant for two of the specifications. This finding supports the notion that in presidential systems, the control of the principal over the bureaucracy is rather limited and therefore RIA are implemented as an control instrument for monitoring the agencies and avoiding principal-agent problems. Only by physical implementation and creation of a central unit that actually monitors RIA, weak leaders can make sure that the agencies act in their interest. In addition, political constraints to the core executive minimize the probability of political change and therefore also the probability of the physical implementation of RIA, the negative coefficient for this variable underlines this suggestion. Yet, the estimate only turns out to be significant for the personnel model, which is not surprising, since employing personnel has the clearest budgetary implications. However, political factors are accompanied by economic constraints. The state of the economy limits the possibilities for governments to dedicate resources to the implementation of RIA. This is especially captured by the unemployment rate and the share of elderly people 21
because these two variables measure the pressure on domestic welfare systems. If a government has to spend large amounts of the domestic budget on pensions and compensation for unemployment, it may have less money available for the implementation of RIA. High unemployment also increases the demand for protection of labour-rights and wages which works against the incentives of providing an efficient regulatory environment. Hence, the negative significant estimate for unemployment in the "dedicated budget" model supports this argument. Yet, unemployment turns out to be insignificant in the other two models. The share of elderly people has the expected negative (statistically significant) effect in the "central unit" and "number of employees" specifications which indicates that the real budgetary implications are highest for creating a coordinating unit and employing personnel. Government consumption is highly correlated with deficit but can work in two directions. Indeed, the insignificant effects for the establishment of a central unit and the increase of the dedicated budget are not surprising. The highly significant positive impact on the number of employees, however, can be interpreted in two ways: on the one hand, governments who spend more, also create higher revenue from taxes and have, thus, more leeway to spend money on employing personnel for RIA. On the other hand, this positive effect might be due to reversed causality since employing personnel can increase the overall budget (but not necessarily). Lagging the independent variable rather points to the first interpretation but lagging by no means solves endogeneity problems completely. Finally, the time span since formal adoption of RIA positively affects the probability of implementation as well. This might not just be a pure timing effect, but mirrors the fact that governments cannot only send cheap signals in the short term by formally adopting RIA and express their belief that better regulation is necessary, they also have to be committed to the production and publication of RIAs in order not to lose credibility over the long term. The probability that policy makers forfeit their trustworthiness increases with the time since the adoption of RIA. In sum: the overall results for the second stage appear to back our causal story. Both political factors and economic conditions shape the opportunity for policy makers to create a budget for RIA. The third stage examines the actual production of RIA and the publication of the results. Here two other aspects seem to be of utmost importance: the efficiency of the bureaucracy and the strength of interest groups. Efficiency of the administration directly influences the probability that RIA are carried out in a timely and efficient manner and that valid and reliable results are published. Interest groups are expected to use RIA as fire-alarm and to monitor government agencies. In case cooperation between the government and 22
organized business groups is low or weakened, the probability that these interest groups push for efficient RIAs and a timely publication of the results – which then can be used as a control instrument – should be higher. Table 4 shows the empirical findings for this last stage of RIA implementation.
Table 4: Empirical Results for Production and Publication of RIA Dependent Variable: Explanatory Variables: Years since adoption Partisanship of Government (1-left, 2-center, 3 -right) Bureaucratic Efficiency (Mauro QJE) Cooperation between government and interest groups Intercept
Pseudo R² Number of Observations Chi² p>Chi² % of Correct Predictions
Production of RIA Probit 0.006 (0.046) -0.097 (0.274) 0.545** (0.273) -1.492* (0.886)
Publishing of RIA Probit
-3.162* (1.868)
-9.905*** (3.846)
0.146 41 8.200 0.0845 68.3
0.567 41 24.481 0.000 90.2
-0.292 (0.412) 1.383*** (0.507) -3.440*** (1.266)
*** p≤0.01, ** p≤0.05, *p≤0.1; robust standard errors in parenthesis
Indeed, the political colour of the core executive does not seem to play a role anymore in this last stage. This is due to the fact that, once RIA is formally and physically implemented, it rather depends on the work of the central unit whether RIA are produced and published in an efficient and timely way. This is captured by the positive and highly significant estimate for the bureaucratic efficiency. Even though this measure is not a perfect match for our theoretical suggestion, it still seems to capture the main principle. Countries with an overall higher level of administrative efficiency also have a higher probability of actually performing RIAs in order to assess the quality of regulations and render them more efficient and also publish the results. Moreover, the higher the conflict potential between the policy makers and the specific interest group, the higher the pressure to produce impact assessments and publish their results because these results can then be used as a fire alarm by the interest groups. This argument is supported by the negative statistically significant coefficient of the interest group variable in both models. Again, the operationalization of this factor is rather far away from the original theoretical argument and the results, therefore, have to be interpreted with caution. 23
Yet, they appear to be a first hint that our theoretical arguments find at least some empirical support.
5. Conclusions European governments have embraced RIA enthusiastically, and networks for the diffusion of better regulation ideas and tools have proliferated. Yet adoption has not been followed by even implementation. Although the official discourse around better regulation tends to trumpet the virtues of RIA as win-win instrument, the reality is more complex, as shown by the difficulties, and in some cases sheer frustration, experimented by more than one government. In this paper, we have modelled implementation as a three-stage process involving political and economic costs and benefits – following Moynihan (2005). We have then specified different models and operationalized the variables by using original datasets of impact assessment and theoretically-justified independent variables. Our empirical findings are preliminary and based on a small sample. With this caveat, the analysis of the three stages shows how political constraints and opportunities play different roles when we move from formal adoption to the creation of bureaucratic capacity and deep implementation. Economic resources are also a fundamental pre-condition for undertaking complex RIA programmes. Our conclusions shed light on the different set of political and economic costs and benefits that policy-makers face in different stages of implementation. In consequence, they point to problems such as bureaucratic efficiency that are characteristic of the deep implementation stage, whilst political constraints and the ideological commitment of the incumbent are more important in early stages. This is an improvement on the guidelines and checklists produced by international organizations. Typically, these guidelines suggest a long list of necessary conditions, including political commitment, economic resources, bureaucratic modernization and so on, whilst our analysis sheds light on what is most important in a particular stage of the adoption-implementation continuum. Thinking of further research, there are two obvious extensions of this approach. Data have to be improved, possibly in the direction of panel data, so that the analysis of implementation across time and space can be made possible. In addition, our models should be tested on larger samples of countries, including for example the US and Canada, to establish whether the variables affecting implementation in Europe are peculiar to this set of highly developed countries or are more common features of RIA implementation. 24
Reference list is sill work in progress – sorry
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