The Regulatory Challenge

1. The Regulatory Challenge Wyn Grant University of Warwick

2. The big picture • In this lecture I shall be summarising a vast political science literature on regulation • We will discuss PSD related issues in the workshops • My underlying assumption is that regulation is a key task that serves the public interest – but presents many challenges for regulators

3. It all started at Putney in 1647

4. An historical ideal type • Limited/night watchman/Westphalian state • ‘The chief end of government is to preserve persons as well as estates’ – Major William Rainsborough • Tasks are defence of territory, law and order; mobilisation of finance • 1790 – debt, defence and administration – 82% of all spending

5. Keynesian/command state • 1890 traditional functions still account for 65% of expenditure, 20% social (mainly education) • Before First World War government accounts for 15% of GDP • First steps towards new type of state taken with People’s Budget of 1900 (Lloyd George)

6. Keynesian Welfare State • Promise of full employment • System of social insurance • National Health Service • Public housing • Public expenditure grows faster than GDP – a specific political objective • Faces a crisis as rate of growth falls

7. Concept of regulatory state • Term originates in work of Chalmers Johnson on Japan (1982) as contrast to developmental state • Historically US was best example, regulation preferred mechanism for dealing with market failure • A regulatory state as one that attaches more importance to regulation than other forms of policy making

8. What is regulation? • Not easy to define but involves application of predetermined rules to actions of firms or individuals for public benefit (in principle) • Rule-based behaviour, controlling or permitting behaviour • Use of institutions of scrutiny and enforcement • Technocratic or depoliticised, semi-detached from everyday political pressures

9. Moran’s interpretation • (Originally) saw it as ideal typical Weberian progression • Command state involved hierarchical, classical bureaucracy • ‘Club government’ – tacit knowledge of insiders, self regulation (City) • World of command infantilised us all, subjects rather than citizens

10. Regulatory state emerges • Old world undermined by scandal, weakened systems of self regulation, e.g., financial markets (self-regulation survives in sport) • New world of self-steering networks, governance rather than government • Regulatory state is a low trust state and a risk state

11. Many drivers of regulatory state • Majone: EU as a regulatory state, comparative advantage is in regulation, as has few fiscal instruments • Modernity multiplies risks, there is a heightened sense of risk – a cultural construction but important • Low public expenditure way of meeting public demands, costs met by regulated • Privatisation leading to utility regulation

12. Scandals picked up by media • New scandals highlighted by media lead to demands for government action • FSA asked to regulate hamper clubs, bus services outside London re-regulated • But regulators may clash: Ofcom resisted Food Standards demands on obesity because of responsibility for high quality tv programmes – ‘two regulators approaching the same public policy challenge from the perspective of their very different remits’ – head of Ofcom

13. Arguments for regulation • Reflects growing complexity of society, need for task specific regulators • They can bring expert knowledge to responsibilities • Decisions based on rigorous scrutiny of evidence rather than on party political assumptions

14. But their task is difficult • Single issue pressure groups, reflecting more fragmented society • Accountability of such groups to no one, lack transparency • Assertions not backed by evidence publicised by the media, especially the case in food chain issues

15. Arguments against regulation • Regulatory capture argument. Largely invalid. Based on experience in US resulting from ‘iron triangles’ of Congressional committees, regulatory agencies and regulated • Asymmetries of information between regulator and regulated. Can be a problem, but better dealt with by specialised agencies rather than generalist civil servants

16. Arguments against regulation (2) • Replacing decision-making by insiders by decision-making by experts • Technocratic undermining of democracy • Moran repudiates benign view, empowering civil society, enhancing transparency, now sees it as ‘more threatening and interventionist’

17. What we have learnt (1) • Need to choose right policy instruments • Over reliance in past on command and control mechanisms, high transaction costs, often ineffective, leads to bargaining outcomes (but they have a role) • Cooperation agreements, but above all taxes and trading mechanisms. Carbon tax arguably best approach to global warming

18. What we have learnt (2) • Need to review structure and organisation and agencies regularly • Hampton Review in UK commissioned by Treasury, looked at 63 national regulators • Reduction in number of agencies • Better Regulation Executive

19. The regulatory challenge • Regulators have to work within a statutory framework • The consequences of making a mistake is serious, particularly where public safety/environmental protection is involved • But they also have to respond to changing demands in society

20. Regulatory innovation • Almost a contradiction, but important if regulators are to retain trust of politicians and stakeholders • Exogenous pressures picked up by internal change agents, desire to do a better job • Value of policy learning from regulators outside UK, also from research

21. A need for balance • Who regulates the regulators? The courts and ministers retain ultimate control • Change in architecture of public policy formation demands care about which decisions should be made by regulators • What sort of society we should have and what is unlawful is a political decision