‘Advanced economies [have] a huge advantage in shaping the regulatory system to serve their own purposes’ – Julius Sen

To launch our new interview series, we interviewed Julius Sen on the topic of ‘Better Regulation for Better Results’. Holding almost 30 years of experience in the Indian civil service, Julius is a graduate of Carleton University, Canada, holds an MSc from the London School of Economics (LSE), and is an Honorary Professor of Public Administration as appointed by the Academy of Public Administration under the President of Kazakhstan. Currently based in London as an Associate Director, Senior Programme Adviser and member of the International Trade Policy Unit at the LSE, Julius is also a special adviser to the professional public affairs body, FIPRA International and member of the Expert Group of the APEC SME Crisis Management Centre.

Julius has worked extensively on a broad range of projects exploring the regulatory implications of commercial development and on the broader implications of regulatory decisions taken by governments, international institutions and regulators from around the world.

 

In your view, who is regulation relevant to?

Everything is regulated. The exceptions to this are informal activities, and illegal activities. Otherwise, every single thing we use in our daily and professional lives is regulated. Deregulation is a myth.

‘The reason the mafia makes so much money is that they don’t have to worry about paper work…’ Woody Allen

Regulations can be made by anyone in authority, which in effect means that there are thousands of people with regulatory power in any society. Normally governments create system-wide regulations (driving rules, for example), while others create rules for their particular sectors/activities.

Why do regulations matter?

All regulations, without exception, create, modify or destroy markets. The policy challenge of good regulation is to try to ensure that regulations support a public purpose (higher standards, safer products, etc), while also supporting an economic model that supports growth, productivity, competition etc. Other public policy considerations – such as employment, equity or security – means that regulations need not always be economically efficient. This is easier said than done.

How do you think the current global context throws up new challenges for regulators?

About 35% of global economic activity involves cross-border trade, transfers or business. This in turn feeds local production and consumption patterns (for example, many countries import oil. This is an input into local electricity consumption, fertiliser production, plastics, etc).

The regulations of one country (oil quality standards, for example) therefore have a spill over effect on every other country, though in different ways. Traditionally, the larger and more powerful economies (the US, Europeans and the Japanese) create ‘global’ regulatory standards, which others have to accept. Smaller, developing countries find it difficult if not impossible to establish their own standards.

Global product standards in oil, banking, computers, IT, etc., are set in advanced economies which gives them a huge advantage in shaping the regulatory system to serve their own purposes.

Is there a shared need for regulatory reform?

Yes, absolutely. But there is almost zero chance of this happening. The national interests of major players are too deep and self-serving, and the structure of major institutions, such as the United Nations (UN), International Monetary Fund (IMF) and World Bank only reinforce this reality.

The only institution capable of re-balancing some of this inherent advantage is the World Trade Organisation (WTO), by recasting the rules relating to regulations. But global trade has recently fallen away as a policy priority for the US, and this generally means that the UK will move heaven and earth to make sure nothing changes.

Do you see any differences in the way jurisdictions are tackling the current challenges and how effective do you view these different approaches?

Yes, but they can only make a difference if they are big enough. This means, in effect, only China, India and Brazil, among emerging economies, but that too in only a very limited way.

The rest are too small and have insufficient leverage in major regulatory discussion (on banks, or the internet, or on vehicle emissions for example).

This issue has to be understood in terms of the economies of scale debate. If a market is very small, major producers are simply not going to bother to modify their products to meet the standards of these small economies. The result then is that these products are not marketed in these jurisdictions, which has two possible outcomes. The first is that consumers in these countries are effectively prevented from buying this product. The second is that it then creates possibilities for local suppliers to provide something similar.

Policy makers need to think about how regulations, in these circumstances, could serve a national development purpose. The problem is that they are often bullied by larger countries into accepting US, EU or Japanese standards.

I suppose this could only really change if international institutions played a more active role in framing regulations. The problem is that all international institutions are intergovernmental organisations, and the leverage of major powers still shapes the agenda.

How do you think regulatory review and/or reform might be of benefit?

Good question. I think this could only be effectively addressed through the WTO and the G20, which is where the principles regarding regulations are discussed with reference to trade (the WTO) and financial services (the G20).

The WTO is a member driven organisation where even the smallest country has the right of veto. The difficulty is in getting them to flex their muscles and assert their view. The G20, on the other hand, is a self-appointed club of big countries, so is not really a suitable forum to discuss this issue. One such principle is called ‘grandfathering’, which says, in effect, that any pre-existing regulation can remain in place without amendment even if it harms the exports of other countries, or is arbitrary or discriminatory.

Advance economies have lots of regulations that are ‘grandfathered’, which means that they are sheltered against legal challenge. They can and do continue to distort markets to the distinct disadvantage of developing countries, and more especially, smaller developing countries.

The problem is that political and commercial power are often tightly aligned in advanced economies and changing the system would be difficult if not impossible. But nevertheless worth discussing.

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