Liberalization and privatization have been the buzzwords of all developed and developing economies of late. It was regulation that was blamed for economic stagnation and social backwardness and the all pervading diktat for success was to de-regulate. However, developing economies in particular which followed this dictum blindly did not get the expected resulst. The recent financial crisis is another example of why a laissez faire economy cannot function properly.
What is Regulation? It is a set of rules, decrees, laws and other practices and govt. formalities that govern the political, economic and social domain. Economic or market regulation is a subset which governs economic transactions between the various stakeholders in a market place. These focus on setting prices, entry into the market place and other financial and business license regulations.
What regulation impacts is on the various forces that shape industrial dynamics. Taking a cue from the Porter's five forces model, we can say that licensing can impose entry barriers, while labour laws and other similar regulations can impose barriers on the exit of firms. The rivalry among competitors is determined to a large extent by the ease of entry. Another form of regulation is environmental laws that are meant to create conditions for sustainable development. Take for example the case of Lavasa Hill town near Mumbai or Vedanta's mining fiasco in Chhattisgarh. In both cases, the companies had to comply with mining laws and environmental impact assessment study findings' to continue their operations. Land regulations and zoning laws are another constraint that define the threat of new entrants in the industry. Real estate industry is the one impacted as we recently saw in Greater Noida.
The debate raging is between regulation and competitiveness. Good regulations ensure that the rules laid down are welfare-oriented and at the same time do not harm the competitive nature of the market place. However, companies can argue that they need to operate in a dynamic environment and need to cope with changes on a regular basis. The regulatory authorities must also be prepared to keep up with the technologies and innovations in the market to better understand the competitive forces prevalent in the market. The purpose of regulations is to ensure that businesses are run efficiently and effectively and their progress must not be hindered by mindless rules. Therefore, the need of the hour is creation of responsive regulations.
To ensure compliance, regulatory authorities need to have a range of escalating penalties that are high enough to play deterrent to any intention of the companies not to play ball. Punishment for non-compliance needs to be swift and harsh otherwise companies would never comply. To guarantee the efficiency of the laws, the regulatory authority must be in close contact with the dynamics of the particular industry. Simulatneously, it is also important for the authorities to evaluate and forecast the effect of the mechanisms implemented and base their decision on the feasibility so adjudged.
When forming regulations, it is important to keep the welfare of the society and the people in mind. The rules laid down must be judged not only on the effect it could have on the market, companies and principles of the regulatory authority but also on the people at the ground level. The regulatory authorities need to understand that they have the dual expectation to make industry attractive as well as ensure the welfare of the people and the environment.
The efficiency of the regulations is a function of the goals and the cost. They are directly proportionate to the achievement of social goals and indirectly proportional to the economic cost of achieving them. The economic costs of regulation can emerge from 2 sources:
1. Administration cost of implementing the regulatory system.
2. Costs external to the regulatory mechanism that emanate from its implementation and befall on consumers and producers as they conform or evade the regulations.
There are three criteria to judge the efficacy of a particular regulation.
--- Accountability: Puts regulatory bodies within the bounds of law and compels them to take responsibility for their actions.
--- Transparency: Ensures that the protocol followed is in clear view of the policy-makers as well as the affected group. There are no hidden agendas or processes for decision making.
--- Consistency: Helps to build public confidence.
Finally lets take the contrasting examples of TRAI and FCI. While TRAI has managed the telecom industry to ensure competitiveness and welfare through private and public players engaging in healthy competition while offereing low prices, FCI, on the other hand, through its skewed regulations, has resulted in unnecessary stockpiling of goods and shortage of foodgrains coupled with wastage of the same due to lack of proper storage facilities.
In conclusion, we can say that, Regulation can make or mar any industry. Regulations cannot be dispensed with as they form an important part of the market system today. They ensure that the forces of demand and supply work without any constraints. Efficiency and effectiveness can be insured even during a market failure by healthy regulations. Regulation coupled with competitiveness leads to an optimal balance between the firm and the environment.
Cheers!!!
Signing off
Shauvik.
What is Regulation? It is a set of rules, decrees, laws and other practices and govt. formalities that govern the political, economic and social domain. Economic or market regulation is a subset which governs economic transactions between the various stakeholders in a market place. These focus on setting prices, entry into the market place and other financial and business license regulations.
What regulation impacts is on the various forces that shape industrial dynamics. Taking a cue from the Porter's five forces model, we can say that licensing can impose entry barriers, while labour laws and other similar regulations can impose barriers on the exit of firms. The rivalry among competitors is determined to a large extent by the ease of entry. Another form of regulation is environmental laws that are meant to create conditions for sustainable development. Take for example the case of Lavasa Hill town near Mumbai or Vedanta's mining fiasco in Chhattisgarh. In both cases, the companies had to comply with mining laws and environmental impact assessment study findings' to continue their operations. Land regulations and zoning laws are another constraint that define the threat of new entrants in the industry. Real estate industry is the one impacted as we recently saw in Greater Noida.
The debate raging is between regulation and competitiveness. Good regulations ensure that the rules laid down are welfare-oriented and at the same time do not harm the competitive nature of the market place. However, companies can argue that they need to operate in a dynamic environment and need to cope with changes on a regular basis. The regulatory authorities must also be prepared to keep up with the technologies and innovations in the market to better understand the competitive forces prevalent in the market. The purpose of regulations is to ensure that businesses are run efficiently and effectively and their progress must not be hindered by mindless rules. Therefore, the need of the hour is creation of responsive regulations.
To ensure compliance, regulatory authorities need to have a range of escalating penalties that are high enough to play deterrent to any intention of the companies not to play ball. Punishment for non-compliance needs to be swift and harsh otherwise companies would never comply. To guarantee the efficiency of the laws, the regulatory authority must be in close contact with the dynamics of the particular industry. Simulatneously, it is also important for the authorities to evaluate and forecast the effect of the mechanisms implemented and base their decision on the feasibility so adjudged.
When forming regulations, it is important to keep the welfare of the society and the people in mind. The rules laid down must be judged not only on the effect it could have on the market, companies and principles of the regulatory authority but also on the people at the ground level. The regulatory authorities need to understand that they have the dual expectation to make industry attractive as well as ensure the welfare of the people and the environment.
The efficiency of the regulations is a function of the goals and the cost. They are directly proportionate to the achievement of social goals and indirectly proportional to the economic cost of achieving them. The economic costs of regulation can emerge from 2 sources:
1. Administration cost of implementing the regulatory system.
2. Costs external to the regulatory mechanism that emanate from its implementation and befall on consumers and producers as they conform or evade the regulations.
There are three criteria to judge the efficacy of a particular regulation.
--- Accountability: Puts regulatory bodies within the bounds of law and compels them to take responsibility for their actions.
--- Transparency: Ensures that the protocol followed is in clear view of the policy-makers as well as the affected group. There are no hidden agendas or processes for decision making.
--- Consistency: Helps to build public confidence.
Finally lets take the contrasting examples of TRAI and FCI. While TRAI has managed the telecom industry to ensure competitiveness and welfare through private and public players engaging in healthy competition while offereing low prices, FCI, on the other hand, through its skewed regulations, has resulted in unnecessary stockpiling of goods and shortage of foodgrains coupled with wastage of the same due to lack of proper storage facilities.
In conclusion, we can say that, Regulation can make or mar any industry. Regulations cannot be dispensed with as they form an important part of the market system today. They ensure that the forces of demand and supply work without any constraints. Efficiency and effectiveness can be insured even during a market failure by healthy regulations. Regulation coupled with competitiveness leads to an optimal balance between the firm and the environment.
Cheers!!!
Signing off
Shauvik.
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