Costa Rica has a tradition of passing laws that are both democratic and adhere strictly to the Constitution, which has led to many success stories. However, Costa Rica often passes laws and regulations without first conducting an Economic Analysis of the Law ("EAL"), which has led to some negative results.
Instead of issuing a regulation based only on a cost-benefit analysis of introducing the new or revised law, the "EAL Method," should be applied. It could provide more successful outcomes for the economy and society. The "EAL Method" analyzes both the legal rule's intended effects and unintended consequences on the conduct of those affected by it. The "EAL Method" seeks to analyze whether or not the standard is needed and contributes to defining an approach to determine the optimal level of social welfare or whether the standard is an unnecessary regulation that does not provide economic or social value.
This methodology is different from the cost-benefit analysis that the Public Administration currently performs before issuing any new regulation, and which the Ministry of Economy, Industry, and Commerce reviews.
The EAL method is based on studying the consequences that a regulation may have on society. Unlike a cost-benefit analysis, which is limited to showing whether the benefits of a law outweigh its costs, the EAL Method measures whether a regulation's promulgation would generate greater social welfare and considers how a given regulation affects the behavior of the individuals it regulates.
The fact that no one carries out this type of analysis is an issue of national importance. The rules that have been issued, and that continue to be issued, often have laudable purposes; however, these rules may adversely affect the economy without solving the problems they are meant to address.
There are many examples of this, but one in particular illustrates the point. A report from the Organization for Economic Cooperation and Development ("OECD") shows that a large informal labor sector, results in high social costs. One effect of a regulation increasing the cost of social security contributions would be that fewer people would decide to pay them, which would lead to a further increase in the informal labor sector and less money for the Costa Rica Social Security Department.
If the EAL Method were applied, an analysis on whether the regulation would either increase or diminish social welfare would first be conducted, and these unintended consequences could be understood and evaluated, preventing and avoiding any adverse impact.
This method should be applied not only by legislators when considering a bill, but also by the executive branch and the Public Administration, before formulating or amending public policies, technical regulations, decrees, and so on. Although we do not currently undertake this analysis, we certainly should be.