prepared for the SOCRATES TS lecture series at the Universidad Politecnica de Cartagena (UPCT), Spain; February 8-10, 2001

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BUREACRATIC BARRIERShampering operation
development of the SMEs in Poland

• prepared for the SOCRATES TS lecture series at
  the Universidad Politecnica de Cartagena (UPCT),
  Spain February 8-10, 2001
• Andrzej KondratowiczDeptartment of Economics,
  University of Warsaw, Poland
• Original research commissioned by Polish Ministry
  of the Economy

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Research goals

• Ministrys Goals (Parliamentary Commission)
• Defining the ultimate research goal
• Defining the concept of a bureaucratic barrier
• Identifying BB hampering operation and
  development of the SMEs in Poland
• Evaluation of the scope and dynamics of the
  problem (are the barriers high or low? are they
  growing or diminishing?)
• Evaluation of BBs degree of negative impact (at
  various stages of an enterprises life-cycle)
• Evaluation of (mostly economic) consequences of
  the existence of the BBs for various types of
  firms
• Pinpointing priorities in fighting the BBs.

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Defining bureaucratic barriers

• How is a Bureaucratic Barrier built?

BB
?
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A dictionary definition

• BBs are those that stem from inefficient and
  ineffective operation of the state administration
  (at its various levels), excessive formalization
  and slowliness in dealing with issues".
• insufficent! why? gt

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because it shifts the stress onto the
effectiveness of the administrations operation,
thus producing an illusion that if the
administration were efficiently
implementing/carrying out the existing laws,
regulations and procedures, the problem of
bureaucracy would vanish. In reality, the major
problem lies in the very existence of the
superfluous (excessive) laws, regulations,
procedures, and requirements.

• 1. This definition is not precise (sharp)
  enough and is not suitable as a criterion to be
  applied in practice
• 2. It is too narrow (even though not precise
  enough) 3. It is confusing

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In order to produce a working definition of the
BBs we have to define some auxiliary concepts

• the concept of a barrier (to operation or
  development)
• the concept of bureaucratic operations
• and the title concept of a bureaucratic barrier.

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Formal versus actual barriers

• Formal Barriers are those whose existence stems
  from the applicable laws and regulations (thus
  they exist de iure).
• Actual Barriers are those that exist in reality
  (thus they exist de facto). Actual Barriers
  may although dont have to) be a consequence of
  the Formal Barriers eg slowliness in dealing
  with matters, etc.

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Non-burdensome vs burdensome barriers

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

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External vs internal barriers

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

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Bureaucratic processes (or operations)

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

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A definition
BB

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

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A definition
BB

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

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a definition
BB

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

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A re-defined for applied work purposes
BB

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

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The scope of research

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

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A. Analysis of the legal framework...

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

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B. SMEs survey...

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

????????????
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C. Generalizations based on a case study ...

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

case study
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D. Synthesis ...

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

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Types of barriers

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

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4.1. Types of barriersto what extent the
respondents agree with the BBs definition
suggested by A. Kondratowicz
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4.2. - barriers of type I (excess of
regulations) most frequent (according to
Stefanowicz)- barriers of type II (superfluous
actions) most important (according to
respondents)
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4.3. Degree of uselessness of compulsory practices
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4.4. Degree of negative impact (for EACH of the
categories of the compulsory practices more than
50 of respondents considered them as burdensome
(i.e. having a felt negative impactbelow we
show the most burdensome)
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4.5 Degree of negative impact of all BBs taken
together

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

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4.5 Degree of negative impact of all BBs
together
a conclusion

• Taking into consideration that we talked about
  hypothetical removal of all barriers at once, we
  may conclude from the answers distribution that
  would be difficult to purport -- that
  bureaucratic barriers are the most important
  barriers faced by SMEs, and that -- their
  removal would bring about a revolutionary change
  in economic condition of the enterprises.

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4.6 BBs versus other barriers

• Bureaucratic barriers were perceived as ones of
  the most burdensome for the firms operations!
• Average numerical value of the answers was the
  highest for barriers of too high taxes" (3,26),
  bureaucratic barriers (3,18) competitors
  actions (2,93), insufficient demand (2,88),
  dear and difficult to obtain credit (2,68) and
  finally corruption among civil servants (only"
  2,45).
• scale 1, 2, 3, 4

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4.7 How do entrepreneurs perceive (the impact
of) the BBs?

• excessive irritation/nervousness (3,19) i.e.
  psychological discomfort and irritation caused by
  encountering the bureaucratic barriers
• loss of time and money" (3,03)
• being subject to penalties for non-compliance
  with regulations (2,53)
• being forced to bribe (2,09)

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4.7 perception of the
BBs
a conclusion

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

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4.8. Dynamics of the bureaucratic processes

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

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4.9 Excess of regulation

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

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The above perception of the parliaments (and
governments) achievemnets in the area of
deregulation can only be amplified if one looks
into the requirements or only the recommendations
issued in this area by the European Union
especially in relation to the SMEs. It foremostly
pertains to the Commissions Recommendations in
the area of amelioration and simplification of
economic environment for the entities starting
economic activity? .In fact, none of the
postulates of the Commission is being
implemented, nor is it going to be implemented in
Poland in the foreseeable future!
4. 10. Lack of deregulation vs. requirements and
recommendations of the European Union (EU)

• ) Document of the European Commission of April
  22, 1997, C(97) 1161, ultimate version, Brussels
  1997

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

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

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Priorities, contd

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

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Priorities, contd

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

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Priorities, concld.

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

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The END