Regulating for development

Developing countries are now being asked to follow developed countries in the privatisation of goods and services previously provided by the state. It is argued that these countries will gain from the creation of efficient markets which offer their best chance to establish competitiveness, leading to economic growth. But critics claim that privatisation damages the quality of public services and undermines public accountability. Conventional forms of regulation address these two issues; but is it also possible to regulate for development that reduces poverty?

In developed countries, post-privatisation reforms in regulation were often intended to promote or mimic competition. With the move to the market, there was a loss of public accountability and the role of regulatory institutions here was to protect residual ‘public interest’, not least in terms of monitoring any market abuse and giving some protection to consumers.

In developing countries, however, regulation needs to do more than simply promote competitiveness and consumer interest: regulation needs to ensure that the market nurtures development. Contributors to this issue of Insights acknowledge that economic development and poverty reduction are dependent upon the creation of efficient market mechanisms and effective institutions of governance. But they also tackle the problem of how to make regulation go beyond competition to the more inclusive set of social objectives involved in regulating for development.

Not just efficiency and competition

If regulation restricts itself to ensuring only efficiency and competition in the private sector, it is unlikely to have a direct positive impact on the poor through employment creation, as economic growth tends to benefit mainly higher skilled workers. Regulation will have a more positive impact on the poor if it commits itself also to ensuring access to basic services, or protecting access to services that prior to privatisation had benefited the poorest. Regulation does not need to forsake efficiency objectives, but if it is to regulate for development it must be deployed in such a way as to offer a ‘bridge’ between efficiency and poverty reduction.

Bridging efficiency and welfare

It is useful to think of regulatory policies as bridges across divides, both in the sense of linking economic and social objectives and in terms of defining the connections between the political and economic systems. Regulatory institutions constitute the framework of the bridge, and the regulators are the gatekeepers. This could be described in different ways to reflect weaker or stronger systems of regulation, or their relative flexibility or inflexibility. Highly formal systems of regulation constitute a ’fixed’ bridge and require the existence of rules-based procedures and institutions amenable to sound legal jurisdiction. They also incorporate the notion of some degree of independence from government for the regulator and an institutionalised voice for the consumer.

These conditions are likely to be found in developed economies, where regulatory institutions often operate outside and independent of government. However, as the articles by Minogue and Ogus explain, these fundamental conditions are often absent in developing countries. For developing countries effective regulation might best be achieved through a more flexible ‘swing’ bridge model, which allows for varied responses to political interventions and social influences. While under the fixed bridge model such intervention and influence would be seen as undesirable regulatory ‘capture’, an alternative view is that the public interest requires such a flexible response where there are conflicts of interest between economic and social objectives; as there are likely to be in any country with a poverty reduction agenda.

In the swing bridge model, the gatekeepers may be either regulatory officials or politicians. How will they operate to resolve conflicting objectives? While pursuing conventional economic regulation, they may also respond to domestic and international pressures to slant policies towards the needs of the poor, through improved access to, or reduced prices for, goods and services consumed by the poor, or through attention to enhanced quality of service, in health and water provision for example. They may choose to achieve this, as Mitlin suggests, through the constructive use of subsidies to support both private investment and the needs of the poor simultaneously, an approach that would not be possible under the fixed bridge model of regulation.

Effective regulation

The fixed bridge model of regulation is doubtless, in principle, the ideal type of regulatory structure and it is perhaps unsurprising that it should be presented as the model of ‘best practice’ recommended to developing economies. However, this model is based on the established economic policies of highly developed economies, and is rooted in sophisticated levels of economic, social, legal, administrative and political institutionalisation. By definition, developing countries have serious deficits in most of these areas, and in addition have relatively low capacity in human and financial resources.

For the fixed bridge model of regulatory best practice to work, a country needs to have:

• a stable macroeconomic environment, to reduce uncertainty in economic decision-making
• a redistributive tax base, to fund strong social protection arrangements through a well developed social security system
• a rules based system supported by an effective legal infrastructure and the rule of law
• a transparent and accountable public policy process
• a clear separation of administrative and political roles within a democratic constitutional framework
• appropriate financial and skilled human resources so that regulatory agencies can work efficiently.

It might be argued that the best practice fixed bridge model of regulation is the outcome of this broad framework of economic, political and institutional development. But even in developed economies it is by no means certain to succeed, as Parker and Kirkpatrick show. It is therefore doubtful that a model of this type could work in the characteristic conditions of underdeveloped countries. One or more of these elements may be present, but not all, by definition.

If donors wish to improve regulation in developing countries, promoting the fixed bridge model is not the best approach. Research featured here points to some of the economic, administrative and political realities in which economic reforms must be grounded: regulation inside government will be the norm rather than the exception, whilst independent regulation will be rare. A variety of adaptations designed to fit local realities should also be expected, such as corporatisation, as analysed by Cook and Fabella, and experiments with self-regulation of the type presented by Heeks. An additional dimension is the relationship between global and national regulation: Holmes addresses the claims of anti-globalisation protestors that the World Trade Organisation (WTO) offers a bad deal for developing countries, whilst May gives a case study illustrating the impact WTO rules can have on national legislation and development strategies.

Those that propose the transfer of the fixed bridge model of regulation to developing countries assume that government failure is worse than market failure, but this assumption is too crude to fit the economic and political realities of developing countries. These realities are likely to ensure substantial modification of the model, in ways which would turn around the basic assumption about the relative merits of the state and the market. In these terms, regulating for development is likely to be the primary theme in future economic reforms.

Paul Cook and Martin Minogue
Centre on Regulation and Competition
Institute for Development Policy Management (IDPM)
University of Manchester
M13 9GH
UK

Paul.cook@man.ac.uk
Martin.minogue@man.ac.uk

http://Idpm.man.ac.uk/crc

Paul Cook is the Director of the DFID-funded Centre for Regulation and Competition (CRC) at the University of Manchester. Martin Minogue is the Director of the Research Programme in Regulatory Governance at the CRC.

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