Business Insight: Will going digital impact the potential of 'notice-and-comment' in developing countries

This article originally appeared on the Brookings Institution website. It was written by Markus Taussig, an associate professor of global business and management at Rutgers Business School, and Edmund Malesky, a professor of political economy at Duke University.

There is clear evidence that societies benefit when governments provide citizens with opportunities to provide feedback during the drafting of new regulations. The primary systematic means of such government consultation, known as “notice-and-comment” (N&C), involves posting draft regulations for public comment and has multiple benefits. First, such consultation taps into the wisdom of the crowd to help avoid obvious errors and unintended consequences. Second, and the focus of this discussion, it increases the legitimacy of resulting rules in the eyes of the regulated and their communities, spurring higher and more sustainable rates of compliance. These largely voluntary increases in compliance are particularly crucial in resource-constrained developing countries, where expanding regulatory responsibilities cannot keep pace with industrial growth.

Today, rich countries like the U.S. provide opportunities for N&C through digital platforms, which dramatically decrease costs and increase reach. Some developing countries have begun to follow suit. But there are justifiable concerns as to whether the mechanism that connects N&C to societal benefits such as increased compliance (which we term the procedural justice mechanism) remains viable when consultation moves fully online. Implementation of digital N&C systems in developing countries has also generally been incomplete, which itself may be undermining prospects for achieving desperately-needed societal benefits.

Within this context of dynamic change and urgent need, we advocate for greater dedication of resources towards evaluation and innovation of existing N&C systems. In particular, we call for:

• Rigorous evaluation of the social impact of digital N&C platforms in developing countries to identify whether the benefits of in-person consultation transfer to the digital realm.
• Rigorous research and development of digital N&C system innovations aimed at increasing the participant feelings of engagement and responsiveness believed to be central to achieving societal benefits.
• International commitment to supporting these activities and to basing subsequent support on the evidence that they generate.

Rapid industrialization has created jobs and income for millions in the developing world, dramatically reducing levels of abject poverty over the past half century. However, this extraordinary wealth generation and poverty alleviation comes with substantial adverse risks for society and the environment when it occurs—as it usually does—in the absence of an adequate regulatory framework. This point has been repeatedly demonstrated in dramatic fashion by large-scale industrial accidents like the 2013 Rana Plaza collapse in Bangladesh. The pain of such individual catastrophes as well as the more mundane negative externalities of weakly regulated industrial expansion such as environmental pollution inevitably falls disproportionately on the poorest of the poor.

Our exposure to the realities of these tradeoffs come from decades of researching market transition and associated institutional challenges in rapidly growing Southeast Asia. Asia’s “miracle” in industrialization and poverty alleviation has made it ground zero for these tradeoffs, with the region’s historic growth in industrial activity far outpacing parallel efforts to build regulatory capacity and resources. Two-thirds of the world’s approximately 2.8 million annual workplace deaths occur in Asia. On top of it all, public perception is that poorly paid designers and implementers of regulations in developing countries are highly prone to corrupt influence by the rich.

Our Southeast Asian experiences and research have made us strong believers in the potential of N&C systems to improve regulatory compliance in these extraordinarily challenging institutional environments. N&C systems involve government regulatory agencies posting draft versions of regulations for public comment before finalization and implementation. The public posting of drafts for N&C is a core part of the U.S. rulemaking process, and failure to adhere to it created significant headaches for the previous U.S. administration’s deregulation agenda. Similar N&C systems are in effect in most other advanced economies and a growing number of developing economies.

The argument for consulting regulated parties when drafting new rules is that doing so will not only contribute to better regulations but also greater legitimacy for the broader regulatory system and thereby higher voluntary compliance.

Consultation is understood to translate into higher regulatory legitimacy and compliance through a mechanism that scholars have alternatively termed procedural justice and deliberative democracy (from here on, we refer to it as the procedural justice mechanism)[1]. Both theories advocate authorities asking for input during the design of new rules, specifically from those people whom the rules are meant to constrain. Doing so increases subsequent compliance by making the regulated feel their hardships have been recognized and appreciate the complexities and tradeoffs that authorities face in protecting public and private interests. At its core, the assumption is that “experienced fairness matters more than expected utilities.”[2] In other words, people—ranging from the managers of multinationals to the owners of mom and pop shops—want to follow broadly legitimate social rules and norms and thereby feel confident that they are acting as good citizens of their communities. Too often, however, government in developing countries is itself not seen as entirely legitimate, and its rules are not seen as entirely in the public interest.

Building on this previous academic work, our 2019 article in the American Political Science Review reported on a randomized controlled trial indicating the positive regulatory compliance effects of a pilot N&C initiative in Vietnam—a transition economy that has experienced three decades of rapid globalization and growth but nowhere near the same evolution of its government’s capacity to regulate market activity. As in many developing countries, doubts persist about the public interest orientation of regulators and their rules. This is reflected in over a decade of annual surveys in Vietnam consistently showing half of private company owners agreeing with a statement that the primary goal of government regulations is to facilitate bribe payments to local officials.

Our study was built around a pilot initiative by the Vietnam Chamber of Commerce and Industry, a semi-governmental institution meant to intermediate between government and business interests. The initiative sought to broaden outreach to small and medium-sized enterprises (SMEs) during consultation for a draft regulation meant to protect workers with significant exposure to hazardous chemicals. In particular, a randomly assigned set of relevant private Vietnamese companies were given the chance to provide comments on the draft, which were then passed on to the government’s drafting committee. The subsequent actions of these firms were compared to a control group, which was not exposed to the regulation, and a transparency treatment group, which learned about the regulation but was not invited to provide input. While not all consulted firms took advantage of the occasion to offer feedback, firms given the opportunity to comment were 8-10 percent more likely than similar firms not given the opportunity to constructively engage with a set of friendly auditors, who visited factory floors a year later. Consulted firms were also more likely to improve their views of government’s regulatory authority and to make concrete safety improvements observable to our auditors.

Previous work on the procedural justice mechanism in psychology[3], political science[4], and economics has focused primarily on the relationship between participation and regulatory compliance by individuals. Our work indicates that the mechanism also applies to firms. We find that consultation in the regulatory design process can increase not only the ability of governments in developing countries to produce regulations of reasonable quality but also broader business community respect for government’s regulatory authority and, ultimately, regulatory compliance. Importantly, the social benefits of such consultation appear to be highly contingent on the degree to which government is seen as responsive to the feedback it solicits.

All of these findings are heightened for SMEs. SMEs make up the vast majority of firms in all countries, but this is especially true in developing countries. The impact of N&C on these “ordinary firms’” behavior in developing countries is also particularly critical because these are the firms that tend to be totally beyond the reach of high-profile global standards initiatives. Furthermore, SMEs generally start with the lowest compliance rates and lowest opinions of government’s regulatory authority. Simply put, SMEs tend to assume the worst of government (e.g. regulation as a vehicle for corruption) and seek to simply minimize all contact with regulators. Through the engagement of N&C, governments can challenge this narrative and emphasize the public interest orientation of their regulatory efforts.