Alok Ray

World leans towards more regulation

ALOK RAY | Updated on July 12, 2011

Rules to the rescue: Mandatory public display of clearances from the municipal authorities protects the buyer from unscrupulous builders.

While regulation is back in favour after the financial crisis, politicians and bureaucrats are not keen on setting up truly independent regulatory bodies.

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 economic activities.

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

All economists 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.

What distinguishes 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 the customers/users.

If necessary, the government can selectively subsidise use of services in specific rural or under-served areas.

Regulating the regulator

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 regulatory authority.

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.

If necessary, 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.

Proper enforcement, a must

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 often lacking.

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 deficit.

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.

Though social 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.

(The author is a former Professor of Economics, IIM, Calcutta. >blfeedback@thehindu.co.in)

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Published on July 12, 2011
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