Regulation is a key concept which evolved and was further glorified in the scenario witnessed by economic reforms and liberalisation.
The role of regulation as emphasised in the economic theories is to promote or restrict competition (say, regulation of natural/artificial monopolies), redistribute income (redistribute scarcity rent [windfall taxes]), increase or reduce barriers to entry (Competition law), increase or reduce externalities etc (pollution, congestion), and to address information problems (inadequate/asymmetric information [food, drug, health, safety, lemons goods, experience goods]). Thus, the role of regulation is to change consumer/producer behaviour to achieve optimum output in the economy.
The instruments of regulation include inter alia price (price floors and ceilings), quantity standards, information disclosures, registration, certification, licensing, moral suasion, legislation, incentives and education. Though quantity regulations are less flexible and less efficient, it produces greater certainty in outcomes (e.g. control of greenhouse gases).
However, the most practiced regulation tools in the liberalised era were price-based regulation and tools which reduce information asymmetries. There may indeed be a regulatory failure when regulation generates more economic costs than benefits. The question here is — whether these tools undergo a change in the emerging tech era and if so, in what combination and form?
The emerging technology era is generally characterised by declining trends in the costs of technology, rising computational power and capabilities, bulk increase in data volumes and fast advancements in Artificial Intelligence (AI) producing robotic devices and automation, and finally routine tasks level now deciding jobs vulnerability.
In this complex environment, due to interconnectedness and interlinkages, new types of vulnerabilities might evolve from similar links, the failures of the same propagating through the different systems-resulting in provoking unexpected and unimagined threats to the other economies. In these types of cases, there arises the necessity of listing dependability, safety and trust, ensuring requirements as also remodifying them as achievable and as per functionality requirements.
In view of the above, risk-based regulation assumes significance in the emerging era in light of dynamic efficiency (one size fits all approach is ineffective in a rapidly changing world), allocative efficiency (traditional approach unnecessarily restrictive to strong institutions), cost-effective enforcement (enforcement resources scarce) and mainly due to the difficulty to eliminate all risks and so, better to prioritise. Thus, it focuses on allocating supervisory resources according to impact and risks; higher for systemic and reputational risks.
It also ensures that institutions are supervised on an integrated (across industry) and consolidated (across geography) basis; maintain high standards of supervision including benchmarking with best practices (for financial regulation); and seek to reduce the risk of failure instead of preventing failure (financial regulation).
It also leverages relevant stakeholders, professionals, industry associations and other agencies; empowers consumers to assess and assume for themselves the risks of their decisions; and gives due regard to competitiveness, business efficiency and innovation when introducing regulation. It also adopts a consultative approach to regulation, given the inherent information asymmetry in risk regulation.
Another key concept of regulation in the emerging world is self-regulation. Self-regulation is not mandatory but it creates reputational pressures for its use. It also ensures greater transparency – enabling charities to self-evaluate and disclose to the public, the extent of compliance with the code guidelines.
There might be different folks, and different strokes in this environment, given the diversity of the charity sector with common objectives and differentiated roles. It is indeed a participatory process of regulation. Self-Regulatory Organisations (SROs) assume a key role in this process, ensuring and supporting effective regulation in coordination with regulators. SROs are in existence in some form or the other in various economies.
In the technology era, there may indeed be certain regulatory issues which may arise in the form of standard setting, especially in technology applications in the financial sector, environment, health, safety etc. The ideal process in this context is to balance the costs and benefits of regulation and the real process is to have a negotiated/adversarial process with stakeholders; and a top-down approach where the coordinated role of regulators and the government becomes vital. The inevitable component in this context may be the need for cooperation by industry to provide information as a basis for standards.
The standard setting issues may also inter alia be in the form of how to deal with core problem vs. surrogate standard and at what level be the degree of specificity of standard i.e.; how much discretion should be given to enforcers with a tradeoff between too specific and too general. The other standard-setting issue may be the determination of design vs. performance standards.
While the design standard specifies how a machine is to be built and whether a standard is easy to enforce, performance standards focus on how a machine must perform and whether it is costlier to enforce. The challenge may arise in this regard due to a shift in technology and using the standard to force the industry to change technology. The regulator needs industry information but the industry has little incentive to provide the same.
Predatory Pricing is another major challenge as large players sell at a loss to force smaller players to sell at a loss and close down and then big players raise prices to recoup losses. This is indeed difficult to prove in court and the use of other strategic/competitive tools may be difficult in this case. This ultimately necessitates understanding the economics and politics of regulation/deregulation and also the need for regulatory diagnostics.
Thus, the key aspect which demands utmost consideration is the need for collaboration by regulators, government and technologists/industrial stakeholders to address new challenges of disruptive technologies and for effective regulation of the same in the tech era.
Surjith Karthikeyan serves as Civil Servant at Indian Ministry of Finance. Views expressed are personal.
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