Regulating the 21st century

| May 16, 2012

Modern society cannot exist without an effective regulatory framework. Patrick Callioni looks at how the reduction of some red tape could enhance business productivity and competitiveness in Australia.

The hallmark of success in a globalised economy, especially in a troubled economy, remains competitiveness.

Competitiveness depends on productivity, the value of output produced per unit of labour or capital or, to look at it another way, innovation plus process efficiency. Unfortunately, we in Australia are limiting our capacity to increase productivity by strangling the economy with red tape, with excessive and poorly crafted regulation. I am not against regulation. Without regulation capitalism does not work, but I am against bad regulation. The state needs the financiers and the entrepreneurs, to keep the economy vital and productive, and they in turn need the state and its machinery, including the machinery of regulation, to keep the economy alive and healthy.

Generally regulation is perceived by business as a hindrance or, at best, as a necessary evil. As rules change or new rules are made, there is a direct impact on the environment in which a business operates and sometimes on the business itself. As businesses struggle to comply with what they perceive as red tape, many see regulation and compliance as a threat to profitability and as a factor that discourages investment and damages competitiveness. These are reasonable human reactions, but we need to recognise that such reactions are based on emotional grounds, rather than rational thinking.

Modern society cannot exist without an effective regulatory framework. Only crooks and cheats prosper in an unregulated or improperly regulated market and the evidence is that properly regulated industries thrive to the advantage of most, rather than a few. Australia did better than most in dealing with the GFC because we have an effective regulatory framework for our financial system, unlike the USA, the UK and many others.

Having said that, it is also true that excessive or poorly designed regulation can be poison for the economy and, therefore, bad for the state and for society. Let’s be honest; the business of regulation is intrinsically difficult, but it is devilishly difficult when money, power and reputations are at stake and all those ingredients are present in the financial sector, in particular, but across all sectors of the economy. I agree with the first part of this proposition, but not the second. I think we can do better than arguing for a lesser evil. Research, experience and judgment combine to tell me that regulation is unavoidable and that an increasingly globalised web of regulation is desirable, to accompany our increasingly globalised way of living and ways of doing business.

We need to focus on prevention and on making the system stronger, to vaccinate it against both stupidity and cupidity. We need to boost compliance, rather than on reducing non-compliance. We need to reward good practice, while we also strive to eliminate systemic flaws. We need to avoid the traditional divide between laissez-faire and strangulation by red tape. How do we do this? We do it by re-shaping the fundamentals of why and how we regulate; tinkering will not suffice, just as more of the same will see us continue to suffer.

The problem with regulation in Australia – and elsewhere – is that we are trying to regulate a 21st century economy with 19th century tools, with rules set out in long, complex and often unworkable legislation. For example, when John Howard tried to de-regulate the workplace with Work Choices, he did it with hundreds of pages of legislation, thus increasing the amount of red tape for employers and employees, rather than reducing it. This is hard for me to say, in a way, because I am a lawyer, but it is because I am a lawyer that I understand the limitations of the law. Unfortunately, our politicians and public servants do not. The law is good for catching law breakers; it is not good for setting rules by which we can work, by which we can prosper.

The first step is to recognise that the law provides only a portion of the rules we need to run a complex society and economy (I have written about this here). Most of the rules we live and work by are not set out in law. We need something different. My proposal is that regulation should be primarily, but not exclusively built on standards. We should focus on developing a standards based approach, at both the national and global levels, rather than a traditional regulatory framework. This is so that we can reach the right balance between the needs of the state, of civil society, and of individuals and individual enterprises. This will help us to create a more flexible, responsive system, which means a more resilient system, a system that does not need endless red tape to keep it functioning.

Why standards? A standard is something established by authority, custom, or general consent as a model, sometimes, but not always, backed up by law. Unlike the law, which is made by a few people without broad consultation, standards are made by involving all parties that have an interest in regulating an industry or a segment of an industry. The law required to back up compliance based on standards is relatively simple, requiring only that when standards are set in and by the parties, the state will ensure that only products and services that are compliant can be traded. Standards inherently reward compliance, because a product or service that is not up to standard cannot be traded. Those who do not comply with a standard automatically exclude themselves from the market, limiting the need for complex enforcement mechanisms.

The process of developing a standard is also inherently useful, because it leads all parties, even competitors, to focus on the success of the eco-system in which they operate, to the benefit of all, rather than on petty private interests, which often limit the capacity of an industry to grow and develop. Standards can be changed relatively quickly, not requiring action by Parliament, enabling the rules to keep pace with changing requirements and expectations. 

“The regulation of economic activity is without doubt the most inelegant and unrewarding of public endeavours. Almost everyone is opposed to it in principle; its justification always relies on the unprepossessing case for the lesser evil.” — John Kenneth Galbraith

Patrick Callioni is a former senior public servant, with the Queensland and Australian Governments, and is now the Managing Director of consulting company, Enterprise Intelligence Pty Ltd, which specialises in helping business to do business with government and vice-versa.


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