Facilitating a Social Experiment on Regulatory Reform

Hideo FUKUI (Professor, National Graduate Institute for Policy Studies)

Extension to a National Measure

The recently adopted measure of "regulatory reform special zones" is a social experiment intended to deregulate legal restrictions on private activities in certain regions, monitor socio-economic impacts of such deregulation, and extend it to the national level for regulatory reform. The idea is essentially the same as "structural reform special zones" or "regulatory reform special zones" proposed by the Council of Economic and Fiscal Policy and also by the Council of Regulatory Reform.

Legal regulations may be justified only if there are market failures such as externalities, public goods or informational asymmetry. However, there are a few cases where the government sector tries to use externalities as a pretext and keeps unnecessary, excessive regulations at its own will and for its own interest. Once regulations in areas such as health and environmental protection are set they are likely to persist without validity checks, even if there may be sufficient doubt about justification for those regulations.

In the case of regulatory reform special zones, we can conduct social experiments based on certain policy needs at the local level first to be extended to the national level later, while minimizing the side effects of deregulation.

A precedent in this area is the special measure for urban revitalization, which took effect earlier this year. Its legal justifications are that external diseconomies regarding architecture are essentially confined in a local region and that land use is different from region to region. So long as these conditions are met, the special measure can be extended to other regions.

Possibility under National Laws

In the United States, the Federal Constitution allows legislative power and autonomy of individual states broadly. State laws can be set differently even for fundamental matters impacting citizens' lives, so long as those laws do not contradict federal laws.

In contrast, the scope of idiosyncratic local ordinances is quite limited in Japan. Legal matters under the Constitution are broad in scope and cannot be delegated to local ordinances.

Conversely, however, even under the Japanese Constitution national laws can allow different ordinances regionally, as long as they do not violate such basic human rights provisions as equity, economic freedom and spiritual freedom.

When we examine concrete examples in agriculture for example, we realize that whether we should lift current regulations on contractual employment, land ownership by business corporations, etc. depends eventually on provisions of elimination of the side effects associated with deregulation. If there are differential reasons such as different probabilities to realize enough restrictions on speculative land holdings, which should be regulated, and different levels of aspiration or agglomeration to undertake high value-added type of agriculture, then the aforementioned weak conditions for regionally different measures will be satisfied. The rest will be a matter of policy decisions.

In the area of medical care, regulations such as on the establishment of private hospitals, conditions for medical equipment, and prohibitions on the use of dispatched nurses and foreign doctors are intended to prevent concrete hazards to human health. Therefore, legal regulations can be reasonably lifted in certain zones if concrete hazards are eliminated by alternative measures, including adequate risk management and publicity of self-responsibility rules in those zones.

Similarly, in the field of education, the objectives of regulations on private school establishment and management, evaluation criteria, and qualifications for regular teachers are to prevent deterioration of educational quality and to ensure equality of educational opportunities, among other things. Thus, those regulations will lose ground at least in certain regions if public needs for diversified education are strong and alternative measures for elimination of educational hazards are possible in those regions.

Difference from Ad-hoc Subsidization

Given the above argument, we need to realize regulatory reform special zone measures as soon as possible in order to maintain Japan's international competitiveness, facilitate structural reform in the economy and society, and provide various options to citizens. For these purposes, the measure should be taken in the following directions.

First, local governments and the private sector must take initiative in setting up special zones, which are fundamentally different from ad-hoc subsidy measures such as pilot projects in the past. The main focus should be on positive results from regulatory reform itself in special zones instead of being dependent on subsidies or tax breaks.

Second, special zones should be supported mainly by special legal measures rather than by ordinances and interpretations. The establishment of special zones would be a policy matter at the discretion of legislature, rather than a constitutional matter, provided that risk management and alternative measures can be adopted and differential treatment for certain regions may be justified, even if there are possibilities of spillover of externalities beyond the region in question.

Third, legal regulations for special zones should be listed as widely as possible, and a comprehensive law should be enacted so that the government can recognize various applications upon request by the local government-private sector.

Fourth, special zones must be evaluated by a third party after a certain period of their implementation, and they should be extended to the national level unless there are real difficulties to do so.

In any case, the introduction of special zones should not be used as a ground to block the progress of regulatory reform in general at the national level.