towards more regulation
July 12, 2011
Mainstream thinking on economic regulation has
gone through a cycle. In the 1950s and 1960s, in
almost all developing economies, the dominant
paradigm for economic development was
nationalisation, state planning and regulation of
Then, starting from
the 70s and specially from the 80s (after Communist China switched
towards ‘market socialism'), deregulation and economic
liberalisation (popularly known as ‘Thatcher-Reaganomics' in the
West and ‘Washington Consensus' in the developing world) started
replacing controls and regulations.
Now, after the
financial crisis and economic recession hitting the western
economies and greater public concern over inequality and
environmental degradation, the pendulum is swinging everywhere
towards more regulation.
But what are the
experiences of different countries with regulation? CUTS
International (a Jaipur-based think-tank), in collaboration with
the Norwegian Government, recently organised an international
conference in New Delhi.
It was a rare meet
where theorists, actual regulators and civil society groups from a
wide cross-section of countries (including the US, Canada,
Australia, the UK, France, Norway, Greece, Mexico, Brazil, Egypt,
Kenya, South Africa, China, Thailand, Pakistan, Bangladesh and, of
course, India) exchanged notes on their respective experiences
Good vs bad regulation
recognise that regulation is needed for markets to function
properly. Otherwise, markets could be rigged by big and
influential players. Efficiency in resource allocation, equity and
macro-economic stability would suffer.
good from bad regulation? It is generally agreed that for a good
regulatory framework the regulators should be independent (this
would require, among other things, open selection, fixed tenure
and independent funding), accountable and must have legal power
(‘teeth') to enforce their decisions. The decision-making process
as well as the deliberations should be transparent. Keeping video
records of discussions may be a good idea. Penalties imposed by
regulators for violation of rules should be proportional to
crimes. There should be appellate review of regulatory decisions.
The number of sectoral
regulators should be small, with minimum overlap of jurisdictions.
Regulatory bodies should comprise knowledgeable people with
technical expertise in the respective fields but should avoid
retired bureaucrats from the ministries.
Keep it simple, clear
One problem is that
the regulatory laws are written in such a manner that industry
organisations understand laws and regulations much better than
consumers (and small enterprises) and hence big players can
manipulate them in their favour. Consequently, there is a need to
present regulations in simple language and all necessary
clearances obtained from the regulator need to be displayed
publicly, as a mandatory requirement.
For example, some
builders construct buildings on unauthorised land or raise
additional floors beyond official sanction. In the absence of
mandatory public display of clearances from the municipal
authorities, unsuspecting buyers suffer as the promoter flees
after getting the money and the buyer ends up holding the illegal
baby. Such practices are prevalent in many developing countries.
Though it is easy to
suggest the broad contours of a good regulatory framework,
politicians and bureaucrats are not usually interested in setting
up truly independent regulatory bodies with enforcement (instead
of advisory) power.
They know that it
would undermine their authority to take the final decision —
sometimes by bending rules to favour their chosen players —
specially when huge monetary gains (for instance, in allocating
licences to use scarce natural resources such as minerals,
forests, water, spectrum) are involved.
Sometimes, there could
be conflicts between competing objectives. For instance,
allocation of spectrum to the highest bidder may maximise
government revenue but may imply high prices for the final users
of telecom services. One way out could be that the licence should
go to the highest bidder offering the lowest price to the
consumers. Another is that all scarce resources should be
auctioned to the highest bidder and then the government should use
part of the (maximised) revenue to subsidise the price charged to
If necessary, the
government can selectively subsidise use of services in specific
rural or under-served areas.
The experience from
most countries suggests that regulators in many cases have not
been independent. There has been a heavy hand of the government in
bending rules, especially when state-owned enterprises compete
with private players. In China, the concept of ‘administrative
monopoly' is often used to limit competition to protect state
monopolies (in areas such as telecom, power) and regional
companies from outside competition.
How to regulate the
regulator? While rejecting an application, the regulators should
give clear reasons behind their decision as well as the remedial
steps (for example, to comply with environment regulations) that
need to be followed in order to get the clearance from the
It is felt that the
idea of an Ombudsman (proposed Lok Pal in the Indian context) or
super-regulator is fraught with danger. It is not prudent to have
a single authority with the power to investigate, prosecute and
judge. Better to have an appellate authority and use the standard
judicial mechanism to redress grievances against the regulators.
fast-track courts can be set up to handle cases against the
regulators (including ministers) since in many developing
countries (such as India), the courts take an inordinately long
time to dispose of cases. There is also a big role for civil
society organisations and media to highlight cases of wrong-doing
by regulators and build public pressure to punish the culprits.
The basic objective
behind most regulations is to preserve competition and maintain a
level playing field for all players. But even perfect competition
cannot protect the natural environment nor ensure optimal use of
non-renewable resources (such as minerals) keeping in
consideration the interests of unborn future generations. So,
society would need regulations, even when a high degree of
competition exists in the market place.
But, just as holding
elections does not ensure democracy, existence of regulations does
not ensure competition or protection of environment and natural
resources. Effective enforcement of regulation is a must and is
For instance, a very
stringent regulatory law on preservation of forest was put into
place during British rule but in the course of the next 150 years,
nearly half of Indian forests have disappeared due to enforcement
Similarly, we have all
kinds of regulations on mining. Yet, in addition to allocating
mining rights to favoured parties (the big-ticket scam of Madhu
Koda is all too well-known), rampant illegal mining takes place in
all parts of India, often in connivance with the local
politicians, officials and the police.
activists and media sometimes focus on illegal mining by big
companies, routine illegal mining of coal and other minerals by
thousands of small operators (headed by a mafia) are brushed aside
as poor people's means of livelihood. This, again, is a problem
common to many developing countries
This news item can also be viewed at: http://www.thehindubusinessline.com/