2nd CUTS-CIRC International Conference REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION

1. When Institutions Fail: The Challenge of Regulatory Coherence Scott JacobsManaging Director, Jacobs and Associates 2nd CUTS-CIRC International Conference REVIEWING THE GLOBAL EXPERIENCE ON ECONOMIC REGULATION – A forward looking perspective April, 18-20, 2011

2. We are used to dramatic failures, but slow institutional failure is more dangerous As the doctors say of a wasting disease, to start with, it is easy to cure but difficult to diagnose. After a time, unless it has been diagnosed and treated at the outset, it becomes easy to diagnose but difficult to cure. So it is in government. Machiavelli in The Prince

3. Government intervention in the economy is increasing… • Increasing the risks of government failure. • Fred Jenny: Are we better able to predict market failure? • Government institutional failure is increasing in frequency and magnitude due to systemic problems whose effects are worse • Are we better able to predict government failure? • If we can predict, can governments do anything about it?

4. Slow failures of regulatory institutions In the regulatory area, we see many institutions increasingly unable to achieve the purposes for which they were created -- even actively destroying national wealth -- yet continuing to devour resources.* Why? • Capture and corruption • Fragmentation • Failure to evolve with markets • Tension between state regulation and private regulation • Incoherent mandates • Cumulative and interactive effects • Perverse incentives – control over results Adapted from Dee Hock, “AN EPIDEMIC OF INSTITUTIONAL FAILURE” at http://hackvan.com/etext/deehock--epidemic-of-institutional-failure.html

5. Capture and corruption: Greece “We built a world of bureaucracy and lust for power. A world of corruption, of small and big privileges and interests for anyone who could take advantage of other people.“ -- Greek Prime Minister George Papandreou, 11 September 2010, announcing a deregulation program

6. Fragmentation: USA and financial crisis • US Financial Crisis: Nine separate and mostly ineffective financial regulators could not regulate off-balance sheet risks • Fragmentation creates incentives for dangerous behavior: Funds moved more towards the unregulated segments of the market (regulatory arbitrage)

7. Failure to evolve with markets: India • In India today, there are still: • Department of Fertilizers • Department of Coal • Department of Heavy Industry Reflecting older ideas of industrial policy: • Department of Industrial Policy and Promotion • Secretariat for Industrial Assistance

8. Tension between state regulation and private regulation: Food safety • Food safety shows more centralized forms of state regulation and toward decentralized forms of private self-regulation The inherent difficulties of effective and efficient regulation of complex technological and economic processes Globalization of markets and the creation (or strengthening) of international regimes to regulate them

9. Incoherent mandates: Independent regulators in APEC Asia • Conflicting public policy missions include, simultaneously, protecting jobs and stability while promoting consumer interests, reducing prices, and attracting foreign investment. • Four regulators who are responsible for protecting jobs in the sector are also mandated to reduce consumer prices and protect consumer interests. • Almost 80 percent are responsible for protecting the financial stability of the regulated firms, and over 90 percent must also protect consumer interests. • Seven of the 14 are responsible for enforcing or monitoring competition laws and policies, but six of those seven are also responsible for protecting the financial stability of incumbent firms. • Fewer than half are responsible for “free” competition but 2/3 are responsible for “fair” competition.

10. Cumulative and interactive effects: USA EPA Source: American Forest & Paper Association, 2011

11. Perverse incentives such as control over results – Japan Goal: To protect people from dangerous medical devices The following licenses are required for selling a medical device in Japan: • License for Manufacturer (4,269 as of 2007) • Accreditation of Foreign Manufacturers (about 1,000) • License for Marketing Authorization Holder (MAH: 2,676) who is responsible for marketing medical devices and was Manufacturer or Importer of MDs under Old PAL. 3 controllers are required, Marketing Supervisor, Safety Control manager, Quality Assurance manager (quite unique compared with US, EU) • License for Retail and Rental Business of Class II - Class Ⅳ MDs and Registration for sales of ClassⅠ • License for Repair Business of each Technical Support Office Result: Innovation slows. Medical devices in Japan use older technologies, more risky and more costly than good international devices. People use more dangerous medical devices.

12. Successful strategies for institutional reform

13. How RIA improves public sector performance • Analysis: Calculating the costs and benefits of government action • Consultation and responsiveness to a wider range of interests • Integrating multiple policy goals (social and economic policies) • Change of regulatory culture to reduce unneeded intervention and symbolic regulation • Faster learning, increasing benefits of government action, finding lowest cost solutions, reducing policy failures • Transparency, building trust, and reducing regulatory risks for private sector, reduce “information monopolies” • Policy coherence in a complex world; break down vertical silos and promote horizontal thinking • Accountability for actions and results (within ministries, to the public). Client-oriented, credible, and responsive government