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New demands, past experience, leading regulators to be more creative in how they regulate

Regulators and regulations are usually hijacked by influential industries and individuals they are meant to regulate and with damaging consequences. Now, that appears to be changing slowly

The paradox of the law is that it can be used to either extend or limit power. Like laws, regulations are subject to the same paradox. The complexity of modern technology and society requires expertise that no legislature, no lawmaker has the time to acquire. At some point the process has to be outsourced to bureaucrats, who have the responsibility of creating and enforcing regulations. How they do it has a direct impact on sustainable growth and a huge impact on investors. Whether they choose to extend their power to economic realms, or limit it to protect the people, will ultimately determine the economic efficiency of the system.
 
The first problem with regulations is the bureaucrats themselves. Like people everywhere, either for reasons of personal ambition, or for an understandable and laudable desire to protect the public, they have a tendency to expand their brief. The way they do so is to produce more regulations and hire more bureaucrats. The incentives of government encourage this jurisdiction creep. While any private business is limited by profit, bureaucrats as the preserve of patronage often are encouraged to grow.

Legislators and lawmakers don't help. Sadly, rulers everywhere believe that the solution to any problem can be found by passing a new law. These new laws are often generated by some special interest group with a particular grievance. Sometimes they are the result of a cataclysm and passed in haste. Old laws and regulations are rarely repealed. The result is an ever-increasing mass of regulations. For any new American lawyer the first introduction to an entire library wall of federal regulations can be a sobering experience.

Third, regulators and regulations are often hijacked, if not written by industries and individuals that they are meant to regulate. In Japan, the bureaucrats practiced amakudari, or descent from heaven. This is the practice of former bureaucrats dropping into high-paid private sector jobs after retirement. Toru Ishida, a powerful advocate for Japanese nuclear power and a director general of the Ministry of Economy, Trade and Industry, the agency overseeing nuclear power, was hired by TEPCO four months after he left his regulatory post. TEPCO is the owner of the crippled Fukushima Daiichi nuclear power station. The practice continued because it served the "Iron Triangle" of the Liberal Democratic Party, the civil service and Japan Inc very well.
It is not just the bureaucrats. As the great economist Mancur Olson pointed out in what is now known as the 'Free Rider' problem, small groups of interested parties have a far greater incentive to distort regulations in ways that benefit them rather than the general public at large. Often, even in the best of circumstances, the technical requirements of some forms of regulations require that bureaucrats either gain, or are closely connected to those interested parties.

Unless the regulation is not enforced, businesses and individuals will usually behave in conformity with that regulation. Conformity also will require investments. So business will view the status quo as a property interest and will fight tooth and nail to avoid any changes. A good example is broadcasting licences in the United States, which originally were supposed to be short term, but over time have become property. An even better example is the renminbi. The main beneficiary of a stronger renminbi would be ordinary Chinese citizens. But every time there is a suggestion that it should rise, there is intense lobbying to prevent it by the export industry, much of which is state owned.

The worst use of regulation has to do with attempts to manipulate markets. Frederic Neuman, an economist at HSBC, suggested four unintended consequences of attempts to use the regulations to control inflation. First and foremost, financial markets ultimately thrive on regulatory arbitrage. Second, adding more and more regulatory restrictions instead of hiking interest rates risks reducing transparency. Third, ad-hoc regulation distorts the price signals of private markets. Fourth, regulatory tightening in lieu of monetary tightening introduces uncertainties that will, over time, reduce overall investment in the economy. Of course the country that has depended most on these types of regulation to control inflation is China. The result is that the inflation problem in China will just get worse regardless of attempts to control it.

With these problems in mind, the regulators have in the past few years tried to be more creative in terms of how they regulate. One example is carbon emissions. Carbon emissions are a perfect example of the problem of the commons. Or as the English expression goes, if everyone owns it, no one owns it. Outright prohibition would encourage arbitrage, illegal activities, bribes, corruption, etc. So the European Union set up methods to buy and sell quotas to emit carbon dioxide. While far from perfect, the creation of synthetic markets, instead of regulation, holds the promise of a far more efficient regulatory environment, which not only achieves the aims of the regulations, but also cuts costs and creates more investment, not less.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected])

User

February industrial growth at 3.6% versus 3.7% in January

Industrial output slower than expected; growth in manufacturing, electricity, intermediate goods slips 

New Delhi: Industrial output in February rose a slower-than-expected 3.6% in February from a year earlier, according to government data published today. The Index of Industrial Production (IIP) growth fell by 0.1% as compared to January.

Manufacturing output , which constitutes about 80% of the industrial production, rose an annual 3.5%, the central statistics office said.

Overall, industrial output grew by 10.4% in 2009-10 (April-March), faster than the 2.8% clocked in the previous fiscal year, PTI reports.

The economy has expanded at more than 8% in the last three quarters, on strong manufacturing which contributes about 80% of industrial output.

The electricity sector grew by 6.7% versus 7.3% y-o-y, and intermediate goods grew by 8.4% versus 15.9% y-o-y.

Growth of consumer non-durable goods in February was at 6.1% versus -0.8% y-o-y and the capital goods sector grew by 18.1% versus 46.7% y-o-y.

User

Anti-corruption crusade: Some adorable actors, erudite writers, chatty politicians and otherwise outspoken business leaders preferred to stay silent

It’s intriguing that some very public figures chose to keep silent during the weeklong protest which galvanized people against the scourge of corruption

Alert readers who have been following the massive television reportage on Anna Hazare's campaign against corruption in India would have noticed some specific and important absentees in the entire episode-largely people, and even entities, who usually have an opinion or a long comment about anything and everything. Remember, one of the earlier essays on this subject on Moneylife did say that many business people would prefer NOT to have a strong anti-corruption law because it would impact them in a detrimental way?

So, here's our list of some who could have said what they felt like, but did not. Or if they did, then maybe they were like the astrological magazines that get printed and published after the event, pretending to have made predictions. We would also like to hear from you about some names you think were missing, with your comments.

The first notable absentee has to be the FM radio industry, nearly all over the country. Not one radio jockey could be heard giving their views, or if they did, it wasn't loud enough. Guess we all need Aamir Khan and friends to break into a radio studio first?

The next notable absentees were various trade bodies, like CII (Confederation of Indian Industry) which was having its National Conference on the same days and made no official statement, though the Bajajs and Munjals did say something. And FICCI (Federation of Indian Chambers of Commerce and Industry) who did come up with one, but it was after the protest. (Read it at http://www.ficci.com/industry-watch.asp?rid=20127.) The rest have, ironically, be silent about matters pertaining to corruption. However, almost all of them have held seminars and conferences on corruption, so maybe they don't really want it removed. A bit like the UPA government?

Among erudite writers and actors on the subject, one noteworthy name missing was Shobhaa De, who tweeted a bit and then withdrew to Singapore. And Amitabh Bachchan, who apparently said that he does not have to proclaim his views on corruption to the whole world, though he has done it often enough in movies. I guess in both cases, real life is different from reel life, and they could probably have Shah Rukh Khan explain things? Arundhati Roy could have done a 33-page essay, but she is probably trying to save the house she built on forest land in Madhya Pradesh.

Mohandas Pai of Infosys exclaimed on television that his employees were free to do what they wanted in their own time but as a company they stayed away from politics. Fair enough. But where is NASSCOM when you need them the most. Some of us may remember the late Dewang Mehta; he would not have let such an event go past him without giving us a percentile number on the growth of corruption.

Sharad Pawar did say something, which probably resulted in a lot of other politicians NOT saying anything, after they saw what happened to him. And we also missed Mani Shankar Aiyar, who is always good for a laugh, and more. Amar Singh has not been seen or heard for a long time, either; or the parking spots around Jantar Mantar were not big enough for Bentleys.

Cricketers have all turned bowlers, it seems, and were afraid of getting out LBW to their own googlies. Other sportsmen, too, were not forthcoming. One of the cola companies had a line that said "BE THE CHANGE", but were probably shocked to see how far things had gone; real change could see them out of business.

There must be others who did not have a view either way. If you have some names, do write in on the comments section below, so we know.

User

COMMENTS

RAJESH B SHAH

6 years ago

MAHESH BHATT, JAVED AKHTAR, SHABAN AZAMI, KAPIL DEV ALSO DID NOT SAY ANYTHING FOR A VERY OBVIOUS REASON AS THEY ALL ARE SMART ENOUGH TO REALISE THAT THEY ALL ARE IN GLASS HOUSE AND IF THEY DARE TO SAY SOMETHING, EVEN BY MISTAKE, AGAINST VESTED INTEREST THEIR GLASS HOUSES WILL COME DOWN IMMEDIATELY. SIMILARLY ALL THOSE, WHOM YOU HAVE MENTIONED, ARE ALSO VERY SMART AND SELFISH PEOPLE WHO KNOW WHAT THEY HAVE DONE IN PAST AND WHAT THEY ARE DOING AT PRESENT. NO TRADE BODY WILL SAY ANYTHING AGAINST CORRUPTION AS THEY ALL ARE HEADED BY SPINELESS AND SO CALLED BIG PEOPLE WHO ALL RESORT TO CORRUPT PRACTICE WHENEVER THEIR INTEREST IS IN DANGER. SOME YEARS BACK, SAY ABOUT 40 HEARS OR MORE, ALL SUCH INSTITUTIONS WERE HEADED BY STALWARTS WHO HAD, WHAT IS CALLED "MAHAJAN VRUTI" IN GUJARATI, AND WHO COULD SEE OVERALL INTEREST OF THE SOCIETY AT LARGE. THEY WERE THRE IN ALL SUCH TRADE BODIES TO HELP THEIR RESPECTIVE TRADE COMMUNITY TO PROSPER WITHOUT RESORTING TO CORRUPT PRACTICES AND TO CONTRIBUTE SOMETHING TO THE SOCIETY. AT PRESENT ALL SUCH BODIES ARE FULL OF "VAMAN PEOPLE". THEY CAN NOT LOOK BEYOND THEIR PETTY INTEREST. IT WILL NOT BE OUT OF PLACE TO MENTION HERE THAT SO FAR TRADERS HAVE NOT BEEN ABLE TO PURSUE OR FORCE THE MAHARASHTRA GOVERNMENT TO ABOLISH OCROI FROM MUMBAI BECAUSE ANY AGITATION OF TRADERS AND INDUSTRIALISTS HAS NEVER BEEN LED BY ANY HONEST AND SINCERE TRADE ORGANISATION. WHENEVER A CALL WAS GIVEN FOR STRIKE FOR TRADERS ALL THOSE BIG PEOPLE WERE THE FIRST TO CARRY ON THEIR BUSINESS ACTIVITIES SECRETELY. THEY ARE LEAST INTERESTED IN ABOLITION OF OCTROI AS THEY ARE MASTERS IN EVADING OCTORI AND THEY ARE NOT AT ALL INTERESTED TO SEE THAT SMALL TRADERS ARE BENEFITED.

H N Nagaraj

6 years ago

Well it is now clear who needs a strong anti corruption law and also effective implementation. When RTI was enacted, it is the bureacrats who first resisted. Now most of the prominent public figure is absent indicating their option for continuum of status quo. But I feel the time has come for change and to force the change for better.

Yash Verma

6 years ago

Well written & interesting, mostly correct. Writer seems to have forgotten Mulayam Singh Yadav and Mayawati, two great politicians keeping silent during Anna Hazare's crusade. Victory, of course, belongs to the aam aadmi.

K B Patil

6 years ago

Raghuram Rajan had writtent a book titled: "Saving Capitalism from the Capitalists". I havent read the book but heard about it. In it he says that the present day capitalists are those, who, after benefitting from capitalist policies, do their best to keep others from benefitting likewise. So, it is no surprise that India's top industrialists are keeping quiet. Probably, if they had come out in support of Anna Hazare, they would have been accused of hypocrisy. However, they should realise that it is a more open society now and the sooner they change their style of functioning, the better. However, it is not right for bodies like CII, FICCI and ASSOCHAM to keep quiet. It gives out a signal that they are not for fairness and transparency. Corporates have been demanding tax and other concessions far in excess of what our poor farmers have been getting. The 2G scam has shown how what some of our big corporates have been upto. The result is all stink and not a whiff of perfume.

REPLY

shadi katyal

In Reply to K B Patil 6 years ago

One is surprised to read comments by educated people like you who has not red the book but have given opinion on hearsay.How can anyone make such comments or is it the nature of the world capitalism which we in India has allergy too.
For your guidance Capitalism doenot mean only money or investment but our labour and innovation etc. is part of that capitalism. Do you think if we give you investment funds you can run any project without the other parts anything.
It is a pity that we had been so brain washed with socialistic and Communistic ideas,thanks to KGB 5,000 misinformation articles in Indian
press that we are confused with the word.
Look at the Eastern European nations development compared to even India after mother Russia imploded.
The industrialist might have their own reasons which they may explain and good reason.

K B Patil

In Reply to shadi katyal 6 years ago

I have only commented on the tendencies of most of our corporates. No comments have been made on the superiority of any system, socialist or capitalist. If you are so confident of the capitalist, just read these lines taken from a regular column by an American: The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous - 12 percent in the last quarter-century alone. All the growth in recent decades - and more - has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

You have defended the industrialists saying that they might have their own reasons. We all know how successful the Bombay Club was at promoting crony capitalism.

pravin

In Reply to K B Patil 6 years ago

there you go again.quoting stiglitz's speech about 1% income and similar nonsense.read cafehayek's takedown on such economic illiteracy/innumeracy. it is like saying that my 50 yr old self(wealthy) is the cause of the lack of income of my 20yr old self (struggling).
the only way to make pronouncements on such things is to track a set of people thru their lives and observe if they move up in income.

Rajan Manchanda

6 years ago

Many business magnates survive / Thrive because of corruption. They cannot be expected to join the anti corruption brigade.

We do hope the Lokpal Bill is very stringent and takes care of corruption may it be in the form of cash / kind / services.

Various trade associations should have gathered and passed resolutions supporting Anna Hazare if they believe corruption should be eradicated.

nagesh kini

6 years ago

Other Rahul Bajaj who has always been vocal on corrupt practices begining with corporate lobbyists FICCI, CII, NASSCOM and the big wigs were absent.

What happened to our Bollywood like Anil Kapoor who acted in a full movie as CM for a day. Arundati Roy who goes to jail, Chetan Bhagat?

All the middle class , students, elders coming out in full strength made a lot of difference - giving it full Peoples' Power punch.

Shadi Katyal

6 years ago

What is the reason of this jubilation, nothing has been presented and nothing will be achieved. Yes I am sorry to be party spoiler but we failed to understand what have we achieved and why was this needed at this juncture?Was this revival of Gandhi's old trick to go on fast.
The question is being aske4d that since Mr. Hazare has been on this anti corruption movement for decades in his area do we have any proof of anything he has achieved. The writer should give us some views.
His getting Bihar and Gujrat politicians show more or less a game plan architected by some one else.
Why should any business house or other person of some name from any area of life be active when there is nothing to achieve.
Does anyone knows what is LOK PAL BILL and what it covers. We are talking of a nation who has not yet signed the Anti Corruption Bill of United Nations since 2005. A nation seeking seat at UN is shwoing the 140 members who have signed that how we protect our corrupted officers as they are the source of our undeclared income.
Does the AAM AADMI knows that these officers are protected by the Constitution of India and Mr. Mukerjee yesterday declared that those Laws will remain on the books.
This is India and motto will never change
CHALTA HAI BHAI

Praveen kalra

6 years ago

I understand all the people mentioned by you need politicians/bureaucrats for survival. Businessmen for obvious reasons, most of the filmstars dependent on IT department, we know the level of corruption in sports.
Just wanted to know whether proposed Lokpal Bill will also bring local bodies under it like local municipal corporations. Also how to tackle corruption in private sector.

ramchandran

6 years ago

Industrialists Rahul Bajaj, Ratan Tata , KumarMangalam Birla speak only when their line of business gets affected!! (Tata on privacy, Birla on Idea still holding on to licenses of Spice).
Less said the better about our actors (Rajnikant included)
Cricket: Sachin Tendulkar, Dhoni couls have batted for the poor aam aadmi
What about our beauty queens who repond to the tiltle questions with answers like they would save the world etc!!!!(Ash,Sush!!!)

REPLY

malq

In Reply to ramchandran 6 years ago

Thank you for writing in. Maybe more of us do not let them know what we should be letting them know?

pravin

6 years ago

i dont want to speak on behalf of the "erudite" people missing in action.
however,public choice theory tell us the following:
a)big businesses love regulation because they have captured the regulator and use the regulator to raise economic entry barriers.no wonder CII etc kept quiet.they are part of the system and not victims
b)some people might have actually perused the lokpal bill proposal and found it naive and painfully oblivious of the concentration of powers it proposes.it is like a beneficient dictator that these folks are in search of.dream on!
c)the only solution to corruption is to reduce the size of the govt -drastically.if they cannot make economic decisions,there are no avenues of corruption.have you ever heard colgate bribing its buyers? in theabsence of market control exercised via connections/power over regulators and property theft,companies will have no choice but to serve consumers and live or die by their choices.
d)how come nobody wants to speak of the abrogation of the fundamental right to property in this country? is eminent domain and "public good" as defined by politicians acceptable? arent all the tribal /rural agitations about land/property grab by the govt for the benefit of their cronies in business?
property rights at the mercy of the power elite -that is the biggest scandal.
bribing the pandu because of some moronic traffic signal rule is not on the same plane and those circulating silly SMSs need to wake up and think a little deeper.

REPLY

Malq

In Reply to pravin 6 years ago

Thank you for a very informative response.

Someone Sensible

6 years ago

Awesome article! This needs to spread around as a reminder of how sometimes silence is louder than words....

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