Business Regulations and Their Influence on Economic Prosperity
Economic growth is the increase in the production of
economic goods and services, compared
from one period of time to another. Traditionally,
aggregate economic growth is measured in terms of gross national product (GNP)
or grossly domestic product (GDP), although alternative
metrics are sometimes used. On the other hand, a business
is simply a commercial enterprise carried on for profit.3 Businesses provide goods and services
that drive economic output.
The factors of Economic Growth
include natural resources, Infrastructure, Labour, human capital, technology,
and law among others. The indicators of economic growth4 include high rates of
growth per capita output and population, high rates of increase in total factor
of productivity (TFP) i.e. the output per unit of all inputs, high rates of
structural transformation of the economy, high rates of social, political and
ideological transformation and propensity to trade.
Business Regulations are all laws
considered together, that control the way that a business can5 operate.
The purposes and functions of business regulations include maintaining order,
protecting rights and liberties, establishing standards, and resolving disputes
when it comes to businesses and their interactions with individuals, government
agencies, and other businesses. In the modern world, businesses must operate
within the restrictions of laws and government regulation. Several civilized
countries have adopted Business Regulatory Laws for example; the Fair Labor Standards Act in the US, the
Companies act in Uganda and Kenya, the Sale of goods and supply of services act
in Ghana, and Tanzania among many other regulations. These laws are enforced by government agencies at
different administrative levels.
The economy functions as
an infinite tug-of-war between the forces of supply and demand.[1]
The principles of a market economy stipulate that the relationship between the
two forces balances out at a point in the future which influences the behaviour
of consumers and business owners. It is quite questionable to have business
regulations that affect such a free-flowing relationship for example regulations, which can involve price
controls, can disrupt demand and supply
in the affected industry.
Changes in business regulations
affect the way businesses operate for example businesses can suffer as a result of complex regulations
and codes. This paper analyses the nature of business regulations in their
operations and then illustrates how these regulations are a barrier to business
and problematic to economic growth as a whole.
Governments impose compulsory
levies in the form of taxes on individuals or other entities for purposes of
generating revenue to fund state developments and activities. Taxation can pose
a barrier to businesses and economic growth in various ways. Firstly, high tax
rates lead to a low level of investment, innovation and creation of businesses
especially among entrepreneurs, who take the risks of starting and managing
businesses and as such, have a dampening effect on the economic growth of a
country. Double taxation is also a form of high taxation that has scared away
investors and has hindered innovation in the business field. Uganda has been
faced with a situation of double taxation through the introduction of the OTT
social media tax of 2019 in addition to the already present internet taxes.
This has proved to be detrimental as no new investments have been seen in the
telecommunications field.
Secondly, where the business case
shows gains or net cash inflows, high taxes operate to lower overall gains
because operating income and capital gains are normally taxed hence reducing on
savings. Thirdly, increased marginal tax rates on wages and salaries, can
discourage people to work more on businesses.
The canons of a good taxation
system include equity, equality, certainty, economy, convenience, elasticity,
productivity, simplicity and diversity and expediency. These canons should be
applied to business taxes in furtherance of development. Countries that have a
good tax regime attract more investors and more companies getting incorporated
under their law, for example, Vaya and Clean city business owned by
London-based Zimbabwean Billionaire, Strive Masiyiwa operating in Zimbabwe are
incorporated in Mauritius because of its good tax regime. This greatly supports
the economy of Mauritius.
Alternatively, tax cuts can also
slow long-run economic growth by increasing budget deficits and generally
crippling the economy in that the government doesn't have enough funds for
developmental activities, hence increased cost of production which leads to an
increase in price and also a low supply.
Insurance
affiliated factors also affect businesses and economic growth. Insurance, being
part of the financial system, plays an imperative role in promoting economic
growth as it performs functions such as, facilitating trade and commerce, risk
sharing, increased savings, pooling of resources, facilitate capital
transformation, efficient pricing, risk hedging, higher investment and trade,
acting as an agent to deal with the asymmetric information issues to improve
the economic well-being. Non- life insurance
is taken as a means of providing financial protection for building, machinery, equipment, furniture, vehicle
and merchandise items against the risk of fire, earthquake, accident and theft.
States focus on life insurance
more than non-life insurance such as credit insurance that directly affects
businesses, risks and uncertainty tend to suck business income through
instances such as court cases and work man’s compensation. If the law doesn’t
provide for necessary and compulsory insurance, insurance companies run out of
businesses and the tax base is reduced hence leading to low economic growth. In
the alternative, Irrelevant and unrealistic insurance policies cause businesses
to spend a lot of income on paying insurance as opposed to developing their
businesses.
Insurance policies and
regulations might also lead to carelessness and fraud. For example, Zouhaier (2014) in
his investigation found a negative effect of aggregate and non-life insurance
on economic growth for OECD countries because of the moral hazard problem among
the insured. The insurance business itself has been affected by high minimum
financial requirements e.g, the Uganda Insurance regulations of 2019 stipulates
that a new insurance company must deposit at least 1. 6 million Dollars (USD)
as they enter the business, such regulation and policy have such a dire effect
on the growth of insurance in the country and economic growth
Unrealistic and prolonged trade
regulations on requirements for example permits or licenses have negative
effects on business. Businesses spend a lot of money and time to comply with
regulations that ultimately prove to be ineffective and unnecessary.
Researching and keeping up with those requirements can take valuable time and
resources from small businesses. Such regulations can lead to bureaucracies
that affect the operationalization of businesses. This is also coupled with
corruption which usually involves diversion, misuse and misallocation of
resources hence affecting economic growth. According to the World Bank, the
average income in countries with a high level of corruption is about a third of
that of countries with a mild level of corruption.
Favorable trade registration
policies favour the growth of businesses and the economy. In Portugal, a reform
program called Spot Firms was introduced in 2005, which led to the cutting of
the time and cost of firm registration. This increased the number of business
start-ups by 17% and created about 7 new jobs a month per 100,000 county
inhabitants in eligible industries.
High-interest rates set by
policymakers affect business by discouraging investment and[2]
production due to high costs hence affecting economic growth in the long run.
Interest rates govern crucial areas in business production and investment such
as borrowing, performance guarantees, import guarantees among others. In
Uganda, the private banks have doubled the interest rates set by the central
bank. This affects services like access to credit any many businesses have
collapsed due to failure to meet such a high standard.
The government can influence interest rates in the short
run by printing more money as a form of quantitative easing, which might
eventually lead to inflation. Quantitative easing that's not backed with
production increases inflation, hence weakening the economy. Businesses do not thrive when there is a high
level of inflation e.g. in Zimbabwe, normal business activity was closed down
and investment cut back between 2001 and 2008. Inflation has negative effects
of businesses which include rising costs, higher demand for wages by the worker
and in the long run, businesses become less competitive amongst international
competitors hence leading to less confidence to invest. In Zimbabwe, the extent
of hyperinflation and fall in output disrupted normal economic activity and saw
Zimbabwe’s GDP shrink. Some economists suggest that
7
countries with higher long term inflation rates tend to have poor
economic performance such as Zimbabwe, Greece and Sudan.
AntiTrust laws as part and
parcel to business regulations work to prohibit several business practices that
restrain trade. The goal of these laws is to
provide an equal playing field for similar
businesses that operate in a specific industry while preventing them from
gaining too much power over their competition.[3] Unfavourable or unavailability of antitrust laws
leads to economic concentration as opposed
to economic efficiency. Most African states have familiarized themselves with
AntiTrust laws. Countries with AntiTrust Laws
attract more investors hence increasing economic growth. The
antitrust laws of the United States have taken on an increasingly significant
role concerning acquisitions and investments generally.[4]
Business regulations that don’t promote and advocate for
business studies and training as part of the education syllabus or as part of
qualifications to carry out certain advanced business operations lead to low
business development. In that regard, people will not be able to properly run
businesses hence leading to low yields and low economic growth. Economists have
maintained that the major obstacle to the economic growth of poor nations is
the lack of educated entrepreneurs who can mobilize and coordinate production
inputs.[5] The entrepreneur is
the one who comes up with the ways of doing things, that is, innovations that
are responsible for the growth of technical progress. It is not the growth in
the quantity of the other inputs that fosters economic development but rather
it is the entrepreneur who takes the risk of innovation, organizes and
coordinates the inputs.
Business education programs equip people for the corporate world through
training students in topics relevant to the business world such as accounting,
management, safeguard against failure. “Nine out of ten business failures in
the United States are caused by a lack of general business management skills
and planning.”[6]
Several people in less developed countries i.e. in villages who have small
businesses are not even aware of their rights and the relevant provisions of
the law that affect their businesses. A World bank Report [7],
suggests that skilled entrepreneurship offers potential rewards across the
socio-economic spectrum and could be used to reduce graduate joblessness.
Government regulations on businesses
such as unrealistic and unprogressive employment and labour laws that concern
workers and contractors have a deleterious effect on businesses and economic
growth. Governments usually set minimum
and maximum wage levels, however, this has proven to be unrealistic as such
rules disproportionately affect particular groups, such as the low-paid or
small businesses, who may find themselves ‘priced out of employment’ by, for
example, protective norms which artificially raise employers’ hiring costs. In
such a scenario, business owners are forced to use disposable income that
should be used in the development of business. Labour laws which have proved to
be unfair for new businesses to conform to the minimum wages and in the long
run, such businesses may fail due to lack of profits.
Poor justice systems affect the business climate due to the
increased level of insecurity. Legal or justice systems characterized by
corruption increased case backlogs and delays, poor enforcement mechanisms,
disobeying court orders, and failing the justice system create chaos in the
business field. In that event, Innocent businesses will be prejudiced through
losing property and income to instances such as breach of contract, trespass,
unlawful possession of property and bankruptcy due to failed justice. Investors
look at countries’ court judgments and legal policy with a very keen interest
to understand how they treat investors. In East African countries, contract law
enforcement generally is very weak, which makes foreign businesspeople wary of
working with native small-scale entrepreneurs. [8]
Competition and policies in international
law that don’t promote equity and fairness amongst countries have affected
businesses and economic growth in the long run. The
international trade rules and regulations enforce guidelines on the
parties that should take part in international trade. The GATT, NAFTA treaties and the European Union are the
main sources of international law.[9] International organizations such as the WTO develop and
review the international standards and the legal codes of conduct that binds
the member nations. These international business policies have acted as a
barrier to local businesses. Firstly, stronger nations have used their
positions to dominate the international business scheme. The power to interrupt
the business relations with any country is a determinant of a country’s global
power position. The US government has globally used its economic and political
influences in forcing other nations to remove non-tariff barriers to the US
import of goods and services. This
greatly affects businesses operations in weaker states such as Somalia,
Mozambique, Burundi among others as such barriers are likely to discourage investors,
and ultimately hamper economic growth. Secondly, political indifference has
affected the international business laws with the government giving an outline
on business conduct to their respective nations. This has led to poor economic
growth internationally with international law stressing the strategic
decision-making processes.
There are a lot of added risks in the international
business which includes the risk of the language and cultural differences,
international hostility and mostly political influences.
Investments in
Britain, fearful of how Brexit might affect trade across the European Union Investment
laws more so foreign investment. Management of
International business transactions generally needs well-entailed strategies
and better implementation mechanisms due to the increase in trade risks.
Business operations go hand in
hand with the social and political atmosphere. Crisis presents challenges that
jeopardize the ability of the government to maintain law and order. The
policies adhered to during times of crisis tend to consider safety as a priority
and less on the fiscal and monetary interventions to safeguard the economy
hence disrupting various business sectors in the economy.
Failure by the policymakers in
setting regulations that curb political instability, proper business operations
and economic growth has been also jeopardized as investment is discouraged.
Investors' plans for expansion of the oil market in Juba, South Sudan may be
unattainable or will take a long time to implement because of tribal warfare
that has hindered stable environment for policymakers to engage in proper
business regulation. Political unrest in the area led Uchumi and Nakumatt to
suspend their plans to establish stores in Juba earlier in 2016.
The Coronavirus pandemic is currently a top world crisis
that is crippling economies. As the apex of the coronavirus (COVID-19) outbreak, businesses across the
world are faced significant challenges which they needed strategic responses.
Measures taken to contain the spread worldwide took many by surprise
particularly given how restrictive they are and the abruptness with which they
were announced. Several countries such as
South Africa and Uganda among others resorted to methods such as
lockdown and closure of borders which have affected the business field.
Inappropriate measures have affected African
economies in three waves; firstly lowering trade and investment from wealthy and
potential investors from countries such as
China, secondly, a demand slump associated with the lockdowns in the
European Union and OECD countries; and thirdly a continental supply shock
affecting domestic and intra-African trade. It is shaking commodity-driven
growth models that have hence led to lower economic growth in several
developing countries.
The business regulations adopted
in most less developed countries are superimposed in that they fail to relate
to the unique circumstances of each country. Most laws in Africa are imported
from the common law system. The 2015 Companies Act of Kenya is a replica of the
UK Companies Act of 2006. The issue with this is that the economies are
different and that the economic challenges in the UK are different from those
of any other African country. If states do not come up with their independent
and relevant laws that speak directly to its problems, then, a copy-pasted law
will harm rather than build an economy.
In conclusion, these regulatory
regimes tend to create hostile business environments, which hold back economic
development. This is because local laws
and regulations cannot keep up with the rapid pace of economic change in many
developing countries. Policymakers should aim at revising and making business
regulations more fair and applicable to each state, business and
individual. Additional research into the
various contributors to economic growth is needed in various states and
regional communities. Not only will it broaden the understanding of the
business sector in various areas and regions, but it also will shed light on
the political, economic, social, technological factors that affect the business
environment.
[1]
How Demand & Supply Affect Economic Growth, Audra Bianca. September 26,
2017
[2]
What are the effects of a rise in the inflation rate? 17 May 2019 by Tejvan
Pettinger
[3]
Understanding Antitrust Laws, By BARCLAY PALMER, Updated May 20, 2019
[4] ANTITRUST CONSIDERATIONS
IN MAKING FOREIGN INVESTMENTS IN
THE UNITED STATES Thomas L. Vankirk*
[5] Reflections on
Entrepreneurship Education in African Tertiary Institutions K Bawuah, Virginia
State University Buame & R Hinson, University of Ghana
[6]
Troy State University, 2003
[7]
Entrepreneurship Education and Training: Insights from Ghana, Kenya, and
Mozambique. f
[8] A PESTLE analysis of international retailing
in the East African Community, May 2019. Felix Adamu
[9] Impact of international
law on trade-
https://www.ukessays.com/essays/economics/impact-of-international-law-on-trade-economics-essay.php
Comments