Domestic Regulatory Activity
“Governments regulate economic activity to promote a variety of overlapping social objectives, including:
- the promotion of health, safety, environment, consumer protection and other social objectives;
- the establishment of standard sizes and weights of various products to facilitate commerce;
- the establishment of conditions for the operation of interconnected networks, including distribution systems, communication systems, transportation systems, and public information systems networks;
- the protection of consumers and downstream suppliers against exploitation by firms with excessive market power;
- the establishment of condition for the operation of a market economy.
Governments pursue these objectives through various modes of regulation, including 1) the establishment and enforcement of standards for products, services, production processes, employers, and service providers, 2) the regulation of economic activity in particular sectors, industries, or professions; 3) the use of fiscal incentives, subsidies and taxes for the promotion of desired social goals, 4) the establishment of laws for he conduct of business, including the legal establishment, financing, governance and conduct of corporations; 5) the establishment of property laws, including laws governing commercial contracts.
The principal focus of the debate over regulatory reform, and therefore the principal focus of this paper is the regulation of economic activity in specific industries. Nevertheless much can be learned from the extensive experience in establishing international cooperation on standard-setting activities of governments, and they are therefore included in the analysis.
The use of fiscal incentives and taxes often represents a superior method of achieving a desired social goal than direct regulatory control by the government, and are therefore covered in the analysis indirectly. The issue of what might or might not be considered an appropriate incentive or tax is not covered by the paper. Laws governing the conduct of business and the ownership and transfer of property are essential to the openness of national markets to global markets, but are an issue today largely with respect to transition economies and are therefore not considered (here).” (1)
“The are four major reasons why regulatory reform is timely. First, major technological advances in computer technology have fundamentally changed the possibilities for economically efficient competition in a number of sectors that were thought to be natural monopolies, subject to close government control or regulation for the protection of consumers. Second, the development of new products and services has made many regulations both more distortive for regulated activities and more ineffective in terms of the objectives they were designed to achieve. Third, much has been learned in recent years about the economics of regulation, offering new insights into the design of economically efficient regulation. Fourth, the globalization of production and markets has made it increasingly difficult to make distinctions based on national origin, while increasing the cost of large national differences in regulatory standards.
Many infrastructure services have traditionally been thought of as natural monopolies, because the major cost in providing the service was in the construction and maintenance of infrastructure facilities rather than in the marginal inputs required to serve individual customers. Modern computer technology has fundamentally changed the economics underlying the provision of such services by reducing the cost of the infrastructure facilities relative to variable costs, by significantly enhancing the possibility of interconnecting independently provided services through computer intermediate systems, and by enhancing the possibility of tracking, monitoring, and pricing services supplied over a single network by different producers to different customers at different times of the day/year. The net result is that competition has not only become more viable, but has become essential for the introduction of more efficient and innovative products and services. Regulations that stifle and limit competition have become obstacles to economic adjustment and growth. This has led to regulatory reforms leading to increased competition in infrastructure services such as telecommunications, air transportation, electric power and gas.
Second, technological advances have led to an explosion of new products or services. Regulations that are product or service specific tend to become increasingly distortive as such regulations prevent the introduction of new services, or as new unregulated products and services substitute for regulated products and services. Such product or service specific regulations also become increasingly ineffective as markets substitute unregulated products and services for the regulated products and services. These pressures have had a particularly strong impact on the regulation of financial services.
Third, much has been learned about the incentive structures created by various kinds of regulations, and their relative effectiveness in achieving desired social objectives. At the same time, much has been learned in more closely focusing on the critical aspect of an activity that needs to be regulated in order to achieve the desired objective, making it unnecessary to regulate all the related activities carried out by an enterprise. These insights have been derived from initial regulatory reforms in fields as diverse as telecommunications, air transport and environmental protection, and could lead to improvements in the design of a much broader range of regulations.
The advances in computer, telecommunication and transportation technologies has made it possible for firms to locate closely linked production activities in different countries to take advantage of the specific resources and conditions found in such countries. Such globalized production systems make economic sense only where national regulations allow the adoption of the same production and product technologies, information systems, and standards across the national frontiers. Large differences in national regulations that have a direct bearing on the production systems themselves or on the products supplied through such integrated production systems either add to the cost of globalized systems, or establish artificial barriers to the introduction of globalized production.” (2)
Cooperation on Regulatory Reform
“A clear view of the full range of objectives served by international cooperation on regulatory issues is necessary to devise appropriate forms of cooperation.
Regulatory Reform Lifts Standard of Living and Economic Growth. Any international discussion of regulatory reform needs to be firmly anchored in a recognition that regulatory reform in the first instance is in the economic interest of the country itself. Regulations which are more costly or more restrictive than necessary to achieve the desired social objectives are a dead loss to a country’s citizens. They raise the cost of living, reduce choices, limit economic growth, and restrict employment opportunities in the most highly productive and therefore most highly paid jobs.
International cooperation can help countries attain these purely domestic gains in two ways – by expanding information and by helping to overcome internal political resistance. International cooperation can serve a useful educational function by allowing officials responsible for administering regulations to learn from the experiences of officials in other countries, and to benefit from studies carried out by highly qualified professionals employed by international organizations. International cooperation can also help educate a country’s voters about the potential economic gains from reform through the wide dissemination of information about such gains. Findings by international bodies that convey broad international consensus on a subject often carry considerable weight in domestic consensus building efforts. Finally, international cooperation can help overcome domestic political resistance to reforms that might benefit the country as a whole but disadvantage stakeholders in protected industries.
Regulatory Reform Liberalizes International Trade. International cooperation on regulatory reform also facilitates the removal of regulatory barriers to international trade, and promotes the openness of national markets to global competition. The reduction or removal of regulatory barriers will yield the economic benefits associated with trade liberalization. It will also contribute to the smoother functioning of the global trading system by helping to moderate and to resolve trade conflicts over regulations perceived as protectionist. The absence of adequate international norms has made the resolution of conflicts in this area particularly difficult, both as a matter of substance and as a matter of politics. The development of norms would establish reference points for the development of mutually acceptable agreements and would establish the legitimacy necessary for the political acceptance of such agreements.
Countries around the world are struggling to overcome constraints on their economic growth, and most of them recognize that regulatory reforms have a role to play. There is therefore a built-in constituency for reforms that can expand the openness of national markets. One of the crucial questions is how that constituency can be energized to support trade liberalization.
Cooperation on Regulatory Issues Strengthens International Bonds. Cooperation on regulatory issues can also serve foreign policy and security objectives by strengthening bonds among the participating countries. Such cooperation reinforces and helps secure the economic interdependence that has come from the explosive growth in trade and investment, and serves to remind governments that disputes that go out of control could entail severe costs. At the same time, such cooperation cements habits of cooperation among national officials and builds personal bonds among them, facilitating international communication across linguistic, cultural and political frontiers over a broad range of issues.” (3)
Modes of International Cooperation
“International cooperation on regulatory reform can involve different levels of commitment, including 1) an exchange of information on the experiences of member governments, 2) the commissioning of analytical papers, 3) the development of voluntary guidelines for the use of member governments in the development of their policies, 4) mechanisms for the development of international standards or for the mutual recognition of national standards, 5) international norms or rules for the development of national regulations that impact on international trade and investment, or on the openness of national markets to global competition, 6) international regulations that govern particular activities largely international in nature. …
The adoption of international standards and norms always entails a sacrifice of local choice with respect to the desired social objectives, and that should be necessary only where the expected economic or political benefits of international cooperation offset the economic, political and social benefits of local choice.” (4)
Venues for International Cooperation
“A number of different venues are available for expanding international cooperation on regulatory issues, including the OECD itself, the regional trade organizations such as the EU, NAFTA, APEC and the FTAA, the World Trade Organization, specialized global organizations such as the ISO, and global organizations in individual sectors such as the ITU, the BIS and IATA.
Each of these organizations have their unique strengths, and any efforts to expand international cooperation on regulatory reform should take advantage of the particular strengths of each organization. Ultimately each of these organizations has an impact on government regulations, and a successful strategy in pursuing the domestic and international economic benefits of regulatory reform would involve all of them in one way or another.
A number of international fora are available for obtaining the domestic educational and political benefits of international cooperation. The OECD is perhaps best know international organization for serving this objective, and it has a number of initiatives under way in this area. On the basis of work carried out in the OECD’s Public Management Committee, for example, the OECD Council on March 9, 1995 adopted a Recommendation on Improving the Quality of Government Regulation. This document provides the first international standard on regulatory quality. A number of regional trade organizations such as APEC and FTAA are also serving as international fora for the exchange of information and for building political support for regulatory reform.
The World Trade Organization, and the regional trade organizations, are the appropriate vehicles for the reduction or elimination of regulatory barriers to trade. The existing rules of the World Trade Organization, and of regional trade groupings such as the EU and NAFTA, contain many provisions designed to minimize regulatory barriers to international trade and investment among its member countries. Some of the relevant provisions of the World Trade Organization are explored below. Generally, the World Trade Organization does not address the substance of individual regulations or standards, but rather establishes principles and procedures for the design and implementation of national regulations, with the objective of removing unnecessary barriers to trade.
The development of international standards has been primarily the role of the International Standards Organization (ISO) and its regional counter parts such as the European Standards Organization (ESO). The ISO, and its various regional counter parts, provides a mechanism for the development of international standards that governments and firms can adopt as they choose. It provides the basis for the development of standards that can be used for internationally tradable goods and services where they meet the social requirements of particular governments in the case of critical requirements or the commercial needs of firms in the case of non critical requirements.
The development of international regulations for the regulation of economic activities that are international in scope has primarily been the role of sectoral organizations such as the International Telecommunications Union (ITU), the Bank for International Settlements (BIS), the International Air Transport Association (IATA), etc. To a considerable extent, the regulations incorporated in the relevant international agreements serve as extensions of the national regulations for international activities, and are in as much need of regulatory reform as the underlying national regulations.
Bilateral agreements by countries on specific areas of regulation provide an alternative mechanism for dealing with the need for cooperation on specific issues. Bilateral mechanisms have been the major method of cooperation in certain areas, e.g. air transportation. Bilateral agreements on regulatory issues are particularly appropriate where neighboring countries face overlapping regulatory objectives with respect bridges, waterways, watersheds, etc.. Bilateral agreements are also a useful mechanism for exploring new areas of cooperation, e.g. mutual recognition agreements.” (5)
Principles for Regulatory Reform
“In 1995 the Japanese government proposed that various OECD Committees analyze the issues related to domestic regulation, with the objective of seeking to crystallize principles for the reform of such regulations. The Japanese government believed that such an effort might assist governments in designing more effective and economically efficient regulations, while also reducing potential barriers to trade.
The development of a set of guidelines for regulatory reform might represent an optimal kind of soft law which helps minimize the cost of national regulation, without unnecessarily intruding into the substantive rule-making responsibilities of governments at the national level. Such guidelines could assist national decision-makers in reforming national regulations, and provide an impartial reference point in bilateral trade disputes centered around regulatory issues.
Such guidelines might also assist negotiators in the World Trade Organization as they seek to negotiate more concrete international commitments on liberalization of trade barriers and new competition rules for previously heavily regulated sectors in services, negotiations which have proven difficult to conclude. It is conceivable that some of these principles might find application at some future time in a WTO code on regulatory activity.
Principles Embedded in the GATT/WTO. The existing rules of the World Trade Organization provide a number of principles which might assist efforts to remove regulatory barriers to international trade and investment. Some of these principles are incorporated in the basic GATT Articles, while others are incorporated in the Standards Code or the GATS Agreement. These principles are as follows:
- Transparency – Everyone should be given full information about all rules and regulations governing economic transactions so all potential competitors can base their decisions on an accurate assessment of potential costs and market opportunities.
- Due Process – Everyone affected by proposed standards should be given the opportunity to comment and the right to pursue issues related to their implementation with appropriate officials.
- Proportionality – The cost of standards should be proportional to the regulatory benefit expected from their implementation.
- Minimizing Distortions of Trade – Governments should adopt the least trade distorting method of achieving legitimate social objectives and to use international standards where such standards meet the desired level of performance with respect to that objective.
- National Treatment – Regulations should be applied to domestic and foreign products on an equivalent basis.
- Mutual Recognition of Testing Results – Governments are encouraged to negotiate agreements for the mutual recognition of testing results with respect to the certification of technical standards and for the mutual recognition of applicable educational and professional experience with respect to the certification of professional experience.” (6)
- Geza Feketekuty, Regulatory Reform and Market Openness: An Overview