Global agenda: The return of regualation

Protection provided by governments to companies, sectors and entire economies is easily identified by economists as a source of inefficiency.

regulation 88 (photo credit: Courtesy)
regulation 88
(photo credit: Courtesy)
Privatization, deregulation, globalization... these have been key buzz-words over the last generation in a global mega-trend focused on reducing state control of and intervention in economic activity, in favor of greater reliance on market forces. Deregulation, meaning the reduction or abolition of rules controlling who can do what, has been an especially critical element in this process. Protection provided by governments to companies, sectors and entire economies is easily identified by economists as a source of inefficiency - leading to higher costs, higher prices and less choice than need or ought to be the case. Eliminating protection and opening markets to competition, thereby providing more choice and forcing prices and costs down, was the obvious solution. In the case of deregulation, it is even possible to identify where and when the revolution began: the deregulation of the airline industry in the US in the late 1970s. The "before and after" of airline deregulation came to be widely hailed as a case study in why deregulation was necessary and worked. It is, therefore, all the more ironic that the US airline industry is today one of the areas where re-regulation is seen as necessary and is being most seriously discussed. The airline industry is undergoing "concentration," as rivals merge or acquire each other. The shrinking number of major airlines are using their increasing market power to bolster their competitive positions - often by reducing services, raising prices and eliminating choice in the domestic market, thereby leaving the consumer worse off in every respect. The wheel seems to have come full circle. Nor is the airline industry unique. Incredibly, the American corporate sector is becoming more pro-regulation than the government. Recently, many top executives at leading companies have called on the US government to adopt a more pro-active approach to environmental concerns generally, and carbon emissions in particular. This is, of course, part of the general panic concerning global warming that has suddenly engulfed the world. Nevertheless, it is extraordinary that corporate bosses are dragging the Bush Administration out of the laissez faire attitude (denial, in the view of global warming adherents) that has characterized it for the last six years. However, the rethinking of deregulation and readiness to consider reregulation goes far beyond any specific industry or country. The fact that the subject has become acceptable in the economic debate in the US is perhaps the strongest evidence of how much things have changed, but it has to be seen in a wider context. There are many sectors, in many countries, where deregulation has not generated the positive results that were expected or promised, inevitably leading to disappointment. Where this backlash is being led by consumers - the putative beneficiaries of deregulation - it carries more weight than when its champions are leading firms from the industry in question, because in the latter case the likely goal is to introduce protectionism under the guise of looking after the best interests of the general public. It is also becoming apparent that there are limits to deregulation, meaning that there are sectors where removing the overt barriers to competition will not, in practice, generate more competition. An excellent case in point is the Israeli banking sector: this week, the Bank of Israel proposed that the Supervisor of Banks be granted authority, under a new law, to determine and oversee bank charges to retail customers. This represents a conceptual about-face as great, in its own way, as the one underway in the US airline industry. After many years of maintaining that greater competition would be achieved by restructuring the industry, or by the entrance of foreign players, or by Internet banking, the central bank seems to have accepted that no market force will ever break the power of the banks - especially the Big Two, Hapoalim and Leumi. Faced with "market failure" (the economic term for this state of affairs - and also the excuse needed to explain to the IMF why such a departure from the ruling economic orthodoxy is necessary), the only alternative is direct, "brutal, heavy-handed," state intervention, via a law and a regulatory authority. In short, regulation is no longer a dirty word. Hopefully, however, the next swing of the pendulum will not be characterized by the kind of dogmatism seen in the previous two cycles, which led to over-regulation and then to excessive deregulation. In a complex and rapidly-changing world, there are sectors and situations where regulation is the lesser evil and others where it is unnecessary and counter-productive. In Israel today, as in most countries, there are areas crying out for deregulation - alongside others that need more or better regulation. This state of affairs is not contradictory and no solution is applicable across the board.