Back to the state?

Following privatisation in developing countries, aid donors such as the European Union have promoted a model of regulatory ‘best practice’ based on the western European and north American example of regulatory agencies independent of government control. But there is a reality gap here between donors’ ideas of best practice and the real legal, administrative, economic and political processes which exist in developing countries.

The advantage of independent regulation, say its promoters, is that it reduces undesirable political and bureaucratic interventions by government and promotes managerial and technical efficiency. However, the realities of poverty and underdevelopment minimise the applicability of models of independent regulation to developing countries.

Firstly, the model of independent regulation for privatised industries and services runs into serious difficulties when faced with the reality that privatisation is a faltering process in many developing countries. Whatever the reasons for this - the persistence of statist values, the resistance of labour unions or the absence of necessary market conditions - the result is rarely the clear separation between public and private interests and ownership assumed in the best practice model of independent regulation.

Secondly, in many developing countries, market institutions and commercial law such as stock exchanges, property rights law and contract arrangements, are simply too underdeveloped to be entrusted with the regulatory responsibilities hitherto held by government. The primary fact then is that most regulation in these countries is carried out by and within government, at both central and local levels.

Aside from factors of economic underdevelopment, it is clear that national bureaucratic and political cultures themselves can and do hinder the release of economic functions from government control, making independent regulation unworkable.

A depressing picture?

In the worst case scenario, institutional reforms from state to private control merely offer new opportunities for patronage, clientelism and corruption. In Malaysia, for example, financial gains from privatisation in the power sector went mainly to members of the governing political parties.

In countries such as Sri Lanka and the Philippines, continued political interference in supposedly ‘independent’ regulatory bodies has resulted in an acceptance that existing mechanisms are not working and a lack of will from either side to do anything about it.

In other countries, such as South Africa, regulatory officials have complained that governments still feel free to directly intervene in regulatory bodies. In Brazil, there has even been a process of recentralisation, with government taking back powers from failing privatised industries.

At first glance this seems a depressing picture. But perhaps this is because we are looking at regulation for development in the wrong way: if the main concern is to devise economic policies and institutions that can alleviate poverty, it is essential to recognise that developing countries need to be responsive to political values that place the needs of poor above the requirements of economic efficiency or emerging markets. The choices involved here are political choices, and thus it should not be surprising that governments in developing countries so often intervene in nominally independent areas of the economy.

This all points to the crucial role governance systems play in economic development and regulation in developing countries. Improving economic efficiency and regulation to the benefit of the poor is thus a task which can only be achieved through the long-term development of ‘good governance’ reforms, rather than the blind importing of best practice models designed under wholly different economic and political realities. In the long run, independent regulation may well be best practice for both developed and developing countries alike, but in the meantime, regulators and donors need to work with, and not against the political systems and cultures actually in developing countries. In many cases, this means developing or improving regulatory systems within government.

Martin Minogue
Centre on Regulation and Competition
IDPM
University of Manchester
M13 9GH
UK

Martin.minogue@man.ac.uk

See also

Minogue (2002), ‘Public Management and Regulatory Governance’, CRC Working Paper 32
http://idpm.man.ac.uk/crc/wpdl149/wp32.pdf (PDF)

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