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Copyright held by Jacobs and Associates. This material may not be reproduced without permission.

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When Institutions Fail: The Challenge of Regulatory

Coherence

Scott JacobsManaging Director, Jacobs and Associates

2nd CUTS-CIRC International Conference

REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION

– A forward looking perspective

April, 18-20, 2011



We are used to dramatic failures, but slow institutional failure is more dangerousAs the doctors say of a wasting disease, to start with, it is easy to cure but difficult to diagnose. After a time, unless it has been diagnosed and treated at the outset, it becomes easy to diagnose but difficult to cure. So it is in government.

Machiavelli in The Prince

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Government intervention in the economy is increasing… Increasing the risks of government failure.

Fred Jenny: Are we better able to predict market failure?

Government institutional failure is increasing in frequency and magnitude due to systemic problems whose effects are worse Are we better able to predict government failure? If we can predict, can governments do anything

about it?

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Slow failures of regulatory institutionsIn the regulatory area, we see many institutions increasingly unable to achieve the purposes for which they were created -- even actively destroying national wealth -- yet continuing to devour resources.* Why? 1.Capture and corruption

2.Fragmentation

3.Failure to evolve with markets

4.Tension between state regulation and private regulation

5.Incoherent mandates

6.Cumulative and interactive effects

7.Perverse incentives – control over results

Adapted from Dee Hock, “AN EPIDEMIC OF INSTITUTIONAL FAILURE” at http://hackvan.com/etext/deehock--epidemic-of-institutional-failure.html

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Capture and corruption: Greece “We built a world of bureaucracy and lust for power. A world of corruption, of small and big privileges and interests for anyone who could take advantage of other people.“

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-- Greek Prime Minister George Papandreou, 11 September 2010, announcing a deregulation program



Fragmentation: USA and financial crisis

US Financial Crisis: Nine separate and mostly ineffective financial regulators could not regulate off-balance sheet risks

Fragmentation creates incentives for dangerous behavior: Funds moved more towards the unregulated segments of the market (regulatory arbitrage)

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Failure to evolve with markets: India

In India today, there are still: Department of Fertilizers Department of Coal Department of Heavy Industry

Reflecting older ideas of industrial policy: Department of Industrial Policy and Promotion Secretariat for Industrial Assistance

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Tension between state regulation and private regulation: Food safety Food safety shows more centralized forms of

state regulation and toward decentralized forms of private self-regulation

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Globalization of markets and the creation (or strengthening) of international regimes to regulate them

The inherent difficulties of effective and efficient regulation of complex technological and economic processes



Incoherent mandates: Independent regulators in APEC Asia Conflicting public policy missions include,

simultaneously, protecting jobs and stability while promoting consumer interests, reducing prices, and attracting foreign investment.

Four regulators who are responsible for protecting jobs in the sector are also mandated to reduce consumer prices and protect consumer interests.

Almost 80 percent are responsible for protecting the financial stability of the regulated firms, and over 90 percent must also protect consumer interests.

Seven of the 14 are responsible for enforcing or monitoring competition laws and policies, but six of those seven are also responsible for protecting the financial stability of incumbent firms.

Fewer than half are responsible for “free” competition but 2/3 are responsible for “fair” competition.

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Cumulative and interactive effects: USA EPA

Source: American Forest & Paper Association, 2011



Perverse incentives such as control over results – Japan Goal: To protect people from dangerous medical devices

The following licenses are required for selling a medical device in Japan:1.License for Manufacturer (4,269 as of 2007)

2.Accreditation of Foreign Manufacturers (about 1,000)

3.License for Marketing Authorization Holder (MAH: 2,676) who is responsible for marketing medical devices and was Manufacturer or Importer of MDs under Old PAL. 3 controllers are required, Marketing Supervisor, Safety Control manager, Quality Assurance manager (quite unique compared with US, EU)

4.License for Retail and Rental Business of Class II - Class MDs and Registration for Ⅳsales of ClassⅠ5.License for Repair Business of each Technical Support Office

Result: Innovation slows. Medical devices in Japan use older technologies, more risky and more costly than good international devices. People use more dangerous medical devices.

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Successful strategies for institutional reform Institutional reform Examples

Change internal incentives by:•Changing external political economy•Changing internal culture

•Transparency and client demands, such as WB Doing Business rankings•Regulatory budgets•Regulatory impact assessment and consultation procedures

Create countervailing institutions (check and balance)

• Advocacy function of competition agencies

• New US Consumer Financial Protection Agency (CFPA)

• Central regulatory quality and coordinating bodies

• European Commission

Scrap old institutions and build new institutions

• Serbia: Built new commercial registry rather than rely on courts 12



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How RIA improves public sector performance Analysis: Calculating the

costs and benefits of government action

Consultation and responsiveness to a wider range of interests

Integrating multiple policy goals (social and economic policies)

Change of regulatory culture to reduce unneeded intervention and symbolic regulation

Faster learning, increasing benefits of government action, finding lowest cost solutions, reducing policy failures

Transparency, building trust, and reducing regulatory risks for private sector, reduce “information monopolies”

Policy coherence in a complex world; break down vertical silos and promote horizontal thinking

Accountability for actions and results (within ministries, to the public). Client-oriented, credible, and responsive government

copyright held by jacobs and associates. this material may not be reproduced without permission. 1...

Documents

market failure

risks of government

slow institutional failure

deregulation program

government intervention

regulatory area

world of corruption

market regulatory arbitrage