How much does it cost for a city to maintain a legal and regulatory system?

I often argue that new cities should negotiate legal autonomy to create or import legal systems more conducive to economic growth. I do so based on the assumption that the cost of creating and maintaining a legal system is less than the benefits of having such a legal system. In this post I quantify those costs.

I take Hong Kong as the prototype. As it retains legal autonomy from China, it is responsible for its own legal and regulatory system. More importantly, it has a budget that makes it reasonably easy to differentiate legal and regulatory costs from other types of costs. Hong Kong spends around 20% of her budget on her legal and regulatory system.

First, some demographic information. Hong Kong occupies about 400 square miles of land and has a population of 7.2 million with per income (PPP) of $56,000. Her annual budget is just under $50 billion. All dollar values are American where the exchange rate is 1 Hong Kong dollar to .13 United States dollars.

Hong Kong is not a perfect analogy for new cities. First, I cannot estimate the cost of the creation or importation of new legal systems. Second, Hong Kong has a far greater population and per capita income than the projection for most new city projects. Nevertheless, Hong Kong’s numbers serve as a rough approximation for the cost of a city having a separate legal and regulatory system.

Hong Kong’s budget specifies expenditures by 83 departments. To estimate the cost of maintaining her legal and regulatory system I read brief explanations of each of the departments to determine whether they had a role in maintaining the legal and regulatory system. I purposefully excluded the criminal justice system. It is extremely unlikely a host country would allow a city autonomy with regards to criminal justice.

After reading about each department I was left with 11 that contributed to Hong Kong’s legal and regulatory system. I purposefully included departments where even a small percentage of their budget related to legal and regulatory aspects. As such, the real cost of the legal and regulatory system is likely far lower than my estimate.

On the other hand, I did not include departments related to administration more generally, for example the pension. I figure these departments will exist in new cities anyway, and the cost of expanding them to cover a larger civil service is relatively low. A new city could also want to provide for disaster relief planning or other administrative tasks. This is not included in my estimate. Nor did I include departments related to architecture. While such departments implement zoning rules, because zoning is typically decided on a city level, I assume new cities will implement zoning regardless of whether they have legal autonomy or not.

The departments which contribute to Hong Kong’s legal and regulatory system are, Chief Executive Office, Census and Statistics Department, Civil Aviation Department, Department of Health, Electrical and Mechanical Services Department, Food and Environmental Hygiene Department, Government Laboratory, Government Secretariat: Financial Services and the Treasury Bureau (Financial Services Bureau), Government Secretariat: Food and Health Bureau (Food Branch), Government Secretariat: Food and Health Bureau (Health Branch), and Government Secretariat: Labour and Welfare Bureau.

The total cost of the departments is just under $10 billion, or 20% of Hon Kong’s budget. Of those, only three cost more than a $500 million annually, the Department of Health at $1 billion, the Food and Hygiene Department at $800 million, and Government Secretariat: Food and Health Bureau (Health Branch) at $6.7 billion.

Of those three departments, the amount spent on the legal and regulatory system is a fraction of their budgets. The Department of Health has seven listed functions; preventing spread of infectious diseases, ensuring the safety, quality and efficacy of pharmaceutical products through product registration and licensing control, promoting and protecting the health of radiation workers and minimising public exposure to radiation hazards, providing secretariat support to the various boards and councils responsible for the registration and regulation of healthcare professionals and healthcare institutions, licensing of healthcare institutions, providing services in forensic medicine and operating public mortuaries, and enforcing laws on tobacco control. Of those, only three relate to making and enforcing regulations.

The Food and Hygiene Department has twelve listed functions. Only two, conducting inspections and tests on live food animals at licensed slaughterhouses and providing meat inspection services at licensed slaughterhouses refer to their role as a regulatory.

Government Secretariat: Food and Health Bureau (Health Branch) is responsible for over half Hong Kong’s spending on her legal and regulatory system. However, further granularity reveals the lion’s share of the spending is not related to laws or regulations. Unlike the other departments mentioned, the brief descriptions are too short to judge whether they involve the legal and regulatory system. There is, however, a list of 24 matters which require special attention in 2016-17. Of those, eight are related to the legal and regulatory system.

To reiterate, a high estimate of Hong Kong’s annual legal and regulatory cost is $10 billion, about 20% of her annual budget. That being said, a new city could lower those costs with regulatory arbitrage. Take, for example, the regulation of pharmaceuticals. A new city could simply outsource their regulation. It could allow for the use of any pharmaceuticals which have been approved by the Food and Drug Administration or the European Medicines Agency. Of course, a new city would still have to enforce regulations even regulatory standards were outsourced.

To conclude, even on a city level, maintaining a legal and regulatory system is relatively cheap. Given the tremendous potential gains of a good legal and regulatory system, it is only a matter of time before new city projects begin focusing on laws and regulations more seriously.

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