Designing regulatory institutions


Titulo: Designing regulatory institutions

Autor: Sarah Mosedale

Fuente: CRC Policy Brief

Año: 2006

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Research indicates that a country’s
legal system is related to its economic
growth. However this does not imply
that successful legal systems must
conform to a Western model. It is true
that some basic components seem to
be important everywhere. These
include the protection of property
rights, institutions that cannot easily
be subverted by powerful individuals,
an independent judiciary and stability
of rule-making. But there are also
variations which can be effective in
their own contexts. For instance
disputes need not always be settled
through formal channels. In China and
East Asia, for example, informal
negotiation using negotiators is
common and may well have
contributed to economic success.
Background
The kinds of legal reforms promoted
for less developed countries have
varied enormously over time. Early
attempts to transplant liberal
democratic Western legal models
were not successful in promoting
economic growth. Reformers came to
understand that the situation was
more complex than they had originally
assumed and that the cultural and
political environment had to be taken
into account. The second wave of
reforms focused on enabling strong
state intervention. It was hoped that
such a state could foster development
that was less dependent on external
forces. Some also hoped that
resources would be distributed more
equitably. But again, in practice, the
promised economic growth did not
materialise and, far from a fairer
distribution of resources, it seemed
that the power of the political and
bureaucratic elite was enhanced.
The ‘third wave’ of reforms followed
the collapse of the Soviet Union and
coincided with the rise of privatisation
and deregulation in the West.
Economic crisis meant less developed
countries became more dependent on
donors – for whom legal reform was
important for two main reasons.
Firstly, the new focus on regenerating
the private sector meant a new role for
the state, so a supporting legal
framework was needed. Secondly,
‘good governance’ was increasingly
Number 13 2006
Designing
regulatory
institutions
Western models of regulation have a growing influence in
developing countries. Promoted by the World Bank and IMF, they
are assumed to lead to economic growth. But many problems
arise when attempts are made to put these imported models into
practice – strategies designed for a Western context often do not
work well when transplanted to different economic, social and
political cultures. Although this is well recognised the most
common response is to simply carry on ‘as well as possible’ in
the circumstances. We ask whether a more creative response
might produce better results.
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being invoked as a prerequisite for
speedy economic growth. Since
donors are always reluctant to get
involved directly in politics they tend
to focus instead on legal and judicial
reform.
Most reformers currently promote a
number of basic principles. Firstly,
government itself must obey the law.
In general the rules should be
reasonably certain, clear and stable.
They should be published so that
everyone can know what they are
and there must be ways of ensuring
that they are applied fairly to all. An
independent judiciary must operate
without unreasonable delay in its
proceedings and judicial sanctions
must be effective.
Problems of policy transfer
Of course in practice it is very
difficult to assess whether a
particular system is ‘fair’ or ‘just’,
especially as ideas about justice and
fairness are contested. However this
has not stopped many donors from
advocating major reforms to
developing country legal systems.
These often involve trying to improve
institutions such as courts, judges
and law enforcers and trying to
ensure that government institutions
obey the law. However many such
efforts fail to a greater or lesser
extent. Reforms may be achieved on
paper but what goes on in the real
world often remains much the same.
Political interference, a lack of
transparency in decision-making and
corruption often mean courts
continue to be weak.
Bureaucratic failure is often blamed.
In other words it is claimed that
senior bureaucrats are so close to
the ruling elite that there is no clear
dividing line between politics and
bureaucracy. Alternatively it may be
suggested that it suits the ruling elite
if reforms exists only on paper.
But there are other reasons why
reforms may fail. One is a relative
lack of resources such as staff and
information technology. Lower
education levels may affect both the
decision-making ability of officials
and the likelihood that the general
public will be able to contribute to
enforcement. Although rule-making
may be cheap, implementation is
expensive and labour intensive. So
might more effort be put into
designing rules that are relatively
cheap and easy to enforce?
However, even if all the necessary
institutions had been set up and there
was no lack of resources, it would be
still be unreasonable to expect people
to behave in the same ways as their
counterparts in the West. In some
countries even the idea of invoking
the law in one’s everyday life would
be strange to most people. And
traditional cultures may use very
different models of rule-making and
enforcement. For example lawyers
may be much less important than
mediators, wise men or religious
authority. Society may be strongly
hierarchical, family groups (rather
than individuals) may be seen as the
building blocks of society, customs
may vary greatly from one area to
another, decision-makers may have a
lot of discretion and so on. Attempts
to impose Western legal systems in
such contexts are not likely to
succeed. Instead we should give
more thought as to how systems can
be designed to fit their particular
contexts.
Responding to difference
Reformers often note such resource
constraints and cultural differences
but carry on regardless with an
unchanged strategy. Might a more
creative response be possible? It
should be noted that, in many
countries where traditional law has
been strong, it has not been static but
has adapted to changing political and
economic circumstances. It would be
helpful if regulatory regimes could
become identified with, or internalised
by, the community. Where regulatory
goals are compatible with community
norms they will be easier (and
therefore cheaper) to enforce.
But there may still be problems in
applying sanctions where many
lawbreakers simply cannot afford to
pay fines. Imprisoning people for fairly
minor crimes is obviously an
unattractive option and not to be
recommended. If social norms
support the regulations then social
disapproval and stigma may be
effective deterrents. But in some
contexts it may be worth considering
introducing ‘vicarious liability’. In other
words, if the offender cannot pay the
fine is there someone else (who can)
who might reasonably be held
responsible? This method is familiar in
Western business law where
companies can be held responsible
for acts of their employees. In a
developing country context it might be
considered appropriate for a member
CRC Policy Brief | Number 13 2006
of the offender’s extended family or
community to be held responsible for
his or her rule breaking.
In recent years Western styles of
regulation have tended to move away
from detailed rules towards stating
more general principles. This then
gives enforcers more discretion to
consider the particular circumstances
when making their decisions. In less
developed countries this might also
seem an attractive option, especially
given the high levels of discretion
often found in traditional law. But
where regulations are not integrated
with traditional law problems may
arise. Firstly, low general levels of
education may mean that the
necessary knowledge and expertise
are in short supply. And secondly,
exercising discretion provides greater
opportunities for corruption.
We now go on to look at two specific
areas of regulatory policy in
developing countries – licensing and
corruption. After first considering
current practice and problems we
look at some possibilities for change.
Licensing – the public interest
All governments need some way of
ensuring that customers are protected
from unscrupulous enterprises
offering unsafe products and services.
In Western countries the usual
method is to set standards and
require all businesses to comply with
them. Regulatory agencies then
ensure standards are being met
through inspections which may be
random or targeted, sometimes in
response to complaints from
customers.
But there is another way of providing
customer protection – businesses may
be required to obtain a licence before
they start trading. This option is much
more expensive and in industrialised
countries tends to be reserved for
high risk sectors. However in less
developed countries licensing is
much more widely used. Why is this,
given it is so much more expensive?
How is licensing usually justified?
Sometimes the quality of goods or
services cannot be easily judged
before they are bought. To help
consumers make the right choice,
suppliers can be made to provide
information. But it may be that
governments do not think people are
capable of understanding the
information and acting in their own
CRC Policy Brief | Number 13 2006
best interests. And of course where
education levels are lower people are
likely to be less able to process
complex information. So, where this is
the case, governments may feel
justified in preventing enterprises that
will not meet minimum standards
from starting trading. But can this
really explain why the costly process
of licensing is so widespread?
If the very high costs involved in
scrutinising every supplier’s licence
application are to be justified then
there must be some compelling
reason why the alternative of
checking up on businesses while they
are operating is unacceptable. The
usual argument put forward is that
less developed countries are not
capable of setting up and operating
such monitoring systems; they have
neither the resources nor a general
public willing and able to make
complaints.
At first sight these appear powerful
arguments but on closer examination
they are perhaps less so. Firstly they
assume that licensing is a better use
of scarce resources than investing in
monitoring and policing systems. Is
this true? Although licensing may
indeed prevent some would be rogue
traders from starting to operate,
others may simply decide to start up
anyway, illegally, without a licence.
Evidence suggests there are many
unlicensed traders to be found in the
informal economies of some
countries. So policing remains
necessary. Indeed it is also needed in
order to check that licensed
businesses are operating according
to the terms of their licence. And if an
applicant is to be refused a licence
then evidence will be needed to
demonstrate why they are unsuitable.
In fact it is clear that, in less
developed countries, licensing has
another significant, purpose. Indeed
this is sometimes its main purpose. It
is an important source of revenue,
particularly for local government. To
achieve this the fees payable are set
at levels above those needed to cover
administrative costs. Such a way of
raising money is easier to organise
than conventional taxation. And it may
well be that traders are less resistant
to paying taxes when they are
disguised as fees.
But the higher fees are set the more
likely that an enterprise will decide to
avoid the whole process. So, if
licenses are not solely a moneyraising
device but are also intended
for consumer protection, then higher
fees mean more consumers will
remain unprotected. Also, if licensing
is to remain an attractive alternative to
taxation, then fees will probably be flat
rate. This will not be compatible with
fiscal policy which requires payments
to relate to, say, the number of people
an enterprise employs or its turnover.
Licensing – private interests
Do politicians have an interest in
maintaining control over who enters
the market? Widespread regulation of
market entry implies the government
has a lot of control over the economy
as a whole. Historically, rulers have
extended their power by keeping
control of key industries. That some
politicians are reluctant to relinquish
such power may partly explain why
entry controls such as licensing
remain so popular.
And what about public officials? Do
they also have an interest in
maintaining licensing systems? Such
systems are labour intensive so
officials may have an incentive to
protect their jobs and career
opportunities. Furthermore, when
issuing a licence calls for some
discretion on the part of the issuer,
they may have opportunities to extract
bribes from applicants.
It would seem that, in the public
interest, it would be better if many
licensing systems were dismantled
and replaced by monitoring and
policing regimes. However our
analysis of private interests indicates
that this might well be difficult to
achieve.
Corruption – the usual
remedies
Corruption is a big problem for all
regulatory systems and it is not
difficult to see why. Regulatory
officials make decisions that can
enrich or impoverish others, not only
when they issue contracts and
licences, with their obvious profitmaking
potential, but also when they
interpret and enforce standards. They
may interpret standards in a
prejudiced way and, when they catch
people who are breaching them, they
have the power to choose whether or
not to punish them. When grants are
negotiated or behaviour scrutinised
for compliance, the necessary face to
face contact provides further
opportunities for bribery.
Because corruption seriously affects
economic development some
governments have launched wideranging
assaults on it and some, such
as in Singapore and Hong Kong, are
generally considered to have been
successful. But their experience shows
that political will is essential for
success. Where this does not exist it
will be necessary to accept that
corruption is to some extent inevitable
and to focus on reducing the damage
it does, rather then eliminating, it.
When working out anti-corruption
strategies it is important to be sensitive
to how the local political and cultural
environment differs from that of the
industrialised countries where most
such strategies originate.
For example, popular Western
strategies for reforming bureaucracies
include depoliticising the civil service,
removing conflicts of interests,
recruiting better staff, insisting on clear
procedures and reasoned decisionmaking,
better internal auditing and
monitoring, and extending external
powers of appeal and review. But
these sorts of changes need a strong
and impartial judiciary, a proactive
citizenry, adequate resources and
effective implementation. In many less
developed countries this would require
major cultural changes and the costs
would simply be too great.
However some more modest
measures can be cost effective. In
South Korea, for example, investing in
information technology to provide
public information and automatically
record transactions has made
decision-making more transparent. It
has also enabled some transactions to
be carried out electronically, so
reducing face to face contact.
Computerising the Philippines
customs service has reduced the time
taken to process cargoes from about
eight days to two hours and
presumably significantly reduced
corruption too.
How should regulators decide on the
penalties for corruption? Usually
making the penalty fit the crime
involves ensuring that the costs to
criminals outweigh the benefits, after
taking into account the likelihood of
detection. In the case of corruption
this might suggest relating the size of
the penalty to the size of the bribe.
However so much corruption goes
undetected that allowing for this would
result in penalties so severe that most
courts would refuse to apply them.
This CRC Policy Brief draws heavily on the CRC Working Paper below:
No 119 Ogus, A. Towards Appropriate Institutional Arrangements for
Regulation in Less Developed Countries 2005
which is available on the CRC web site at:
http://www.competition-regulation.org.uk/publications/working_papers/
CRC Policy Brief | Number 13 2006
CRC Policy Briefs are intended to
provide those involved in development
policy and practice with a clear
understanding of the main issues and
findings presented by CRC research
and publication programmes on
regulation, competition and
development. This Policy Brief has
been prepared by Sarah Mosedale on
the basis of CRC published outputs.
Centre on Regulation and Competition
Institute for Development Policy and Management
The University of Manchester
Harold Hankins Building, Precinct Centre
Oxford Road, Manchester M13 9QH
Tel: +44 (0)161 275 2798
Fax: +44 (0)161 275 0808
crc@manchester.ac.uk
Some suggest that creating a special
anti-corruption agency, independent
from the police, can be effective and
indeed Singapore seems to have had
some success with this method.
However, where the political will to
push through wide-ranging reform is
lacking, creating a separate agency
can backfire by increasing the
opportunities for corruption.
Limiting corruption –
alternative methods
Conventional anti-corruption
strategies as outlined above are likely
to be less effective precisely where
the problem is worst i.e. where the
criminal justice and law enforcement
systems are themselves corrupt,
where resources are scarce and the
political will is lacking. An alternative
is to consider how institutional
arrangements can be designed so as
to limit opportunities for corruption or
make it less profitable.
Some such reforms might mirror what
is happening in industrialised
countries. Others would not or would
be ambiguous. Take decentralisation
for example. Does this help the fight
against corruption? Some
commentators say it should, arguing
that when decisions are made at local
level they are more transparent,
making corruption harder to hide. On
the other hand, others suggest that
when the regulatory process is
centralised, paying a single (and
perhaps more effective bribe) to a
more powerful official may have less
negative impact on the overall
economy. Might this help explain the
difference between Indonesia and
India’s economic performance? Both
countries suffer from similar levels of
corruption but in the more
economically successful Indonesia it
is centralised. In India, in contrast,
bribing takes place at many different
levels of bureaucracy.
Similarly we can ask how competition
between different regulatory agencies
affects corruption. Some evidence
suggests that such competition can
reduce it. This seems to be the case
in the US, for example, where local,
state and federal agencies are all
involved in controlling illegal drugs.
On the other hand, if competition
leads to more bureaucracy, corruption
could well be expected to increase.
What other strategies might help?
Perhaps it would be helpful if
committees made decisions rather
than individuals. Regularly moving
bureaucrats between different offices
could also reduce their opportunities
for corruption. Sometimes simply
reducing the amount of regulation can
be effective – legalising off-course
betting in Hong Kong had this effect
for example. However it is unwise to
generalise from such a relatively
peripheral topic to critically important
issues such as health and safety or
environmental protection. While
unnecessary regulation is certainly
unhelpful, of course it does not follow
that less is always better. Another
useful strategy is to use administrative
sanctions rather then criminal courts
where possible. Evidence suggests
that bribes get much larger when
courts are involved in law
enforcement.
The need to contain corruption also
suggests strategies that are very
different from those preferred in the
West. For example, in industrialised
countries recent reforms have tended
to increase the amount of discretion
regulatory agencies have in
interpreting and implementing the
rules. Clearly this helps them react
more sensitively to the particular
circumstances of the case. But of
course it also provides more
opportunities for corruption. Therefore
in some countries clear and
unambiguous rules which offer less
room to manoeuvre may be more
effective.
Similarly, in Western contexts, there
has been a move away from formal
rules towards the issuing of
guidelines. This recognises that
business people themselves may
often be in a better position than
regulators to work out how to meet
regulatory goals at least cost. But
similar moves in some developing
countries have been unsuccessful.
People have found themselves
confronted with many specific rules
and procedures while knowing that
these may not be enforced in
practice. In fact preferable informal
rules will prevail for the favoured few.
Those unwilling to pay the costs of
admission to this favoured circle risk
being penalised through the (often
unreasonable) formal rules. What
seems to be needed here then are
fewer and simpler formal rules rather
than informal rules.
Consultation is another area where a
different approach might be useful.
In the West, those who will be
subject to regulation are increasingly
encouraged to get involved in
drawing up the rules. There are
obvious benefits in terms of
information flows, transparency and
accountability. But of course direct
access to regulatory officials also
increases opportunities for
corruption. In the US attempts to
deal with this have included making
all private communications and
records of all private meetings
available for public scrutiny. But the
necessary policing and record
keeping may not be possible
everywhere. In which case cutting
down on consultation may be an
effective, if unpalatable, alternative.
To sum up, we have argued that too
much effort has been put into
struggling to implement Western
models of regulation against the
prevailing cultural, social and
political circumstances. Rather than
carrying on regardless we suggest
that reformers should explore how
regulatory regimes can be made
more compatible with their contexts
since, if they could be internalized as
social norms, community
disapproval might well be a more
effective deterrent than imposed
sanctions.

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