282 privatesector P U B L I C P O L I C Y F O R T H E NUMBER NOTE 2005 Regulatory Reform JANUARY Fernando Salas and Institution Building: Lessons from Mexico Sunita Kikeri During the 1990s Mexico undertook some of the world's most far- Fernando Salas headed reaching reforms of business regulations. Many factors, including trade Mexico's Economic Deregulation Unit in liberalization and firm political commitment, drove this process. But 1994­2000 and is now a critical to its sustained success was the early development and then senior consultant and vice president at Soluciones legal strengthening of a regulatory reform agency dedicated to Estratégicas Consultoría. PRESIDENCY pursuing consumer welfare and ensuring public scrutiny of regulations. Sunita Kikeri (skikeri@ This Note documents the agency's role in creating an environment for VICE worldbank.org) is an adviser in the World Bank improved business regulation and greater transparency. and International Finance Corporation's Private business in Mexico had been heavily ized agency dedicated to advocating regulatory Investment Climate regulated since the 1930s, with serious effects efficiency and improvement. Political support DEVELOPMENT Department. on the economy. A turning point came in for this agency proved crucial: the Economic 1986, when Mexico joined the General Deregulation Unit (UDE) was created only with This Note is one in a SECTOR Agreement on Tariffs and Trade (GATT) and the backing of a newly elected president and the series of case studies analyzing the unilaterally started to open its economy. Many support of a disciplined incumbent party in con- management of regulatory factors moved the regulatory reform process trol of Congress. It was established by presiden- PRIVATE improvement and drawing along. Top officials were strongly committed tial decree within the Secretariat of Trade (now lessons for developing to revamping the legal and regulatory frame- Economy), but with broader powers than the countries. It is based on work. Entry into international trade agree- secretariat itself. ments imposed policy discipline and made it The agency started out using a top-down GROUP a background report prepared for the harder to reverse reforms. Greater interna- approach. But as a more contested political sys- World Bank's World tional competition demanded measures to tem evolved and an economic crisis developed, BANK Development Report lower the cost of doing business. And the the agency built more consensus through wide 2005. atmosphere of financial crisis in the mid-1990s stakeholder participation. As the political outlook maintained fiscal discipline and rallied private for reform became more uncertain, the agency sector support. was transformed into a body backed by law, with WORLD But another key factor in sustaining the greater autonomy and transparent, institutional- reforms over a long period and multiple gov- ized regulatory reviews--a big change within a THE ernments was the creation in 1989 of a central- culture of opacity and bureaucratic discretion. R E G U L A T O R Y R E F O R M I N S T I T U T I O N B U I L D I N G : L E S S O N S F R O M M E X I C O The agency enjoyed some early successes. It and procedures as well as proposals for reform, helped to dismantle price controls, repealed using a standard template. In 1996 UDE and the legal barriers to the entry of new firms, and sim- councilintroducedthemoresystematicregulatory plified cumbersome commercial court proce- impactassessment,basedoncost-benefitconcepts, dures. It also simplified federal procedures for as a tool to evaluate regulatory proposals. Federal starting a business, reducing the time required agencies were required to submit such an assess- from 90 days to just one. Parallel fast-track ment with any proposed regulation. UDE could schemes for business start-up have been created then publish, within 30 days, a nonbinding opin- at the municipal level. ionoftheproposalanditsassessment--abigbreak 2 from the past practice of showing proposals only Defining a strategy toselectedinterestgroups.Thesponsoringagency From the outset UDE's effectiveness depended would then redraft or withdraw its proposal, and on the scope of its mandate. Charging it with sim- Congress or the president would issue final ply reducing red tape would have been less threat- approval.In1997UDEopenedtheprocesstopub- ening to federal agencies and thus politically lic feedback through a new Web site. The reform easier. But cutting red tape without tackling the agency, in its new incarnation, continues this underlying legal and regulatory framework would process today (figure 1). not have been enough: red tape was merely the A small team of dedicated professionals car- consequence of the poor regulation, not its cause. ried out the agency's work, with regular input The challenge was to develop a mandate that from the council and from peer agencies in would be politically acceptable yet give the agency Canada, the United Kingdom, and the United sufficient authority and flexibility to exploit States. The council's support was pivotal, espe- opportunities to improve regulation as they arose. cially in pressuring laggard agencies, through the The solution was to limit its mandatory authority threat of public exposure, to improve their regu- (what it must do) to reviewing new regulations lation. The council met quarterly, with secre- proposed by federal agencies while giving it broad taries required to present their cases personally. optional authority (what it could do) to review and UDE performed its review of federal agencies propose amendments of existing regulations. strategically, to build experience and credibility over time. It started with agencies expected to be Mobilizing private sector support cooperative, then moved on to the more reluc- UDE capitalized on the 1994 "tequila crisis" to tant ones. The agency exercised its optional muster broad stakeholder support. Faced with authority with similar selectivity, proposing reg- increasing competition, private firms lobbied for ulatory amendments only if believed to be eco- government protection, but fiscal stringency, the nomically and politically feasible. crisis, and the North American Free Trade Regulatory impact assessments proved espe- Agreement (NAFTA) ruled out direct support. To cially challenging. Federal agencies often placate business, the government instead created blamed UDE for creating a bureaucratic bottle- the Deregulation Council, in 1995, to bring the neck when it issued critical reviews. A few secre- private sector and other stakeholders into the taries openly opposed the agency's active role, reform process. Chaired by the trade secretary, the as it threatened vested interests and the tradi- council comprised key government officials and tionally opaque way of creating and applying prominent representatives from labor, business, regulations. But the opposition was thwarted by academia, and sector organizations. Its role was to strong presidential support and the trade secre- advise UDE and monitor the performance of fed- tary's ability to demonstrate that the complaints eral agencies in overhauling their regulations. were a sign of the agency's effectiveness. Formalizing transparent reviews Sustaining reform As a first step toward formal regulatory reviews, a In the late 1990s UDE and the council became 1995 presidential decree ordered federal agencies concerned about the fragility of the process to compile an inventory of business regulations under a presidential decree. Success so far had FigureReview process for proposed federal regulations 1 Congress Issues regulation Council Issues advice Yes Joint Agency submission Submits proposal Cofemer Nonbinding Agency (by Cofemer and President Legislative and regulatory impact public agency) Reviews submission approval opinion Amends proposal of amended needed? assessment proposal No 3 Public Provides feedback President Issues regulation depended heavily on a few individuals--a group acquired a bigger staff and budget--and the legal of energetic technocrats with strong support backing and tools to become a powerful advocate from the president. There had been a few cases for regulatory improvement. of noncompliance by government agencies. And agency heads often pressured UDE into refrain- Recent achievements ing from criticism of impact assessments or issu- Using its optional authority, Cofemer deepened ing opinions too quickly and thus undermining transparency by drafting a 2002 law requiring fed- the credibility of the review process. Moreover, eral agencies to open their files to the public. A the fast-track business start-up program in one-year "regulatory moratorium" to discourage Mexico City was abandoned in 1998 under a new agencies from proposing new regulations unless administration, pointing to both the possibility clearly needed has cut submissions by a third. of the same occurring at the federal level and the And a powerful new law designed to reduce need for an effective process of coordination bureaucratic discretion and abuse requires auto- across different levels of government. matic cancellation of any new regulatory proce- dures not published in the federal register by Transforming the reform agency their implementing agency. UDE thus sought to put itself on a more perma- In addition, Cofemer has promoted fast-track nent footing--to strengthen incentives for com- business start-up at the subfederal level. With pliance, sustain reform through changes in regional competition creating pressure for administration, and improve coordination with change, the program has spread to more than 20 subfederal entities. Key to success here were the cities, and initial results are promising (figure 2). president's legal counsel, who supported the ini- Further progress will require tackling problems tiative out of a belief in the agency's usefulness, in the underlying legal and judicial framework. andthecouncil,whichprovidedbackingcrucialin obtaining congressional support. The proposed Remaining challenges changes also came at the end of an administration, Cofemer can exercise its full powers only if it when line secretaries felt little opposition to a law enjoys broad support and acts decisively. One that would be applied after their tenure. challenge is sustaining the support of the private In 2000 UDE was transformed by law into sector. Earlier, rallied by the domestic crisis and the Commission for Regulatory Improvement strong political support, the private sector took (Cofemer), an autonomous body established on an active role in pressuring agencies to within the Secretariat of Economy and headed by improve regulation. Today many factors con- a presidential appointee. The agency acquired tribute to a more passive role: the loss of found- new optional authority to undertake cost-benefit ing members of the council through turnover, a analysis of how federal agencies operate and how review process whose success has reduced it to they apply and enforce regulations. Cofemer also routine, and the diminished role of the council, R E G U L A T O R Y R E F O R M I N S T I T U T I O N B U I L D I N G : L E S S O N S F R O M M E X I C O new regulatory culture. Empowering institutions Initial results of fast-track business Figure start-up schemes at the municipal level such as Cofemer can promote compliance and 2 sustainability, and using technologies like the Required without the scheme Required with the scheme Internet can reduce the time and costs of institu- 0 10 20 30 tionalizing the principles. viewpoint Business days Many of the circumstances are specific to Mexico. But any country carrying out regulatory reform will face similar challenges and can learn Procedures is an open forum to from its experience. Competitive pressures aris- encourage dissemination of ing from trade liberalization, along with a public policy innovations for Visits to offices domestic crisis, provided a powerful impetus for private sector­led and reform. An institutional advocate was needed to market-based solutions for Note: Data cover nine municipalities before and after schemes were introduced. achieve fundamental change in procedures and Source: OECD 2004; authors' estimates. development. The views promote beneficial regulations. Decisive leader- published are those of the which now serves mainly as a forum for ship and strong support from political and other authors and should not be announcing successes. And new political cir- stakeholders were critical to exploiting the attributed to the World cumstances and a fragmented Congress have reform agency's full potential. And a key factor Bank or any other affiliated shifted the private sector's lobbying efforts from was proper design: organizations. Nor do any of the executive branch toward Congress. A broad legal mandate, based on advocacy of the conclusions represent Moreover, as recent events highlight, consumer welfare, to address both the root official policy of the World Cofemer's will to exert its optional authority in causes and the consequences of a flawed reg- Bank or of its Executive controversial areas has weakened. In 2003 it ulatory framework. Directors or the countries waived its right to issue an opinion on proposals An oversight body, with broad stakeholder they represent. defining the powers of the regulator for the participation, to review results and compli- underperforming telecommunications sector. ance by federal agencies while using public To order additional copies It also has failed to publicize the fact that no fed- exposure to punish noncompliance. contact Suzanne Smith, eral department has published its procedures in Active and sustained commitment of the pri- managing editor, the federal register. So the powerful new law vate sector, especially the small and medium- Room F 4K-206, that automatically repeals any unpublished pro- size firms that had been on the losing side of The World Bank, 1818 H Street, NW, cedures has not yet been enforced. the business lobby. Washington, DC 20433. Another concern is Cofemer's location in the A track record of well-publicized successes to Secretariat of Economy. Because of the secre- build credibility. Telephone: tariat's narrower scope and the lack of strong polit- Promotion of regulatory improvement pro- 001 202 458 7281 icalsupport,thatsituationhascreatedinstitutional grams across all levels and branches of gov- Fax: conflicts making it hard for Cofemer to exert its ernment. 001 202 522 3480 broad optional powers. A better location would be Email: in the Finance Secretariat, where Cofemer would ssmith7@worldbank.org enjoy a consistent oversight capacity and a better ability to assess the budgetary effect of proposed The authors thank Arturo Fernández for helpful comments Produced by Grammarians, measures. Such reform would bring Cofemer and Francisco Campos for valuable research assistance. Inc. closer to its Canadian and U.S. counterparts. References Printed on recycled paper Conclusion Cofemer (Commission for Regulatory Improvement). Mexico's experience offers a key lesson: create 2000. Commissioner's Final Report. Mexico City. institutions and procedures early in the process OECD (Organisation for Economic Co-operation and that can support reform over the long haul. As the Development). 2004. Monitoring Exercise in Mexico: Synthesis, political and administrative system slowly internal- Regulatory Capacity, Market Openness. Paris. izes the improvements, adherence to principles of transparency, accountability, and consumer wel- farebecomesvitaltosignalingthecredibilityofthe T h i s N o t e i s a v a i l a b l e o n l i n e : h t t p : / / r r u . w o r l d b a n k . o r g / P u b l i c P o l i c y J o u r n a l