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The institution of "regulator" is a key discriminator between centrally planned and market economies. Economic theory accepts that real world markets frequently do not comply with the stringent assumptions of perfectly competitive markets. That is, there may be no scale economies (including long-term sunk costs such as in power transmission systems); perfect information, including perfect foresight (unlikely for any market); no external effects on third parties (environmental impacts, pervasive across many sectors); only atomistic buyers and sellers (i.e. no monopolies, oligopolies, or monopsonies - difficult to conceive of in many sectors); no barriers to entry or exit of buyers or sellers (typically through restrictions on potential competitors created by corporations; however, licensing by the government may be actually intended to create entry barriers); no transactions costs (including various administrative costs, such as lawyers' fees); and only homogenous products (violated in virtually all commodities).
Economic wisdom requires that these "market failures" be corrected by public regulators (since at least some powerful market players benefit from them and, accordingly, the market will not self-regulate) in case "economic efficiency" be lost and thereby the entire philosophical justification of a market economy. The correction by the public regulators would entail mimicking or restoring the outcome that would prevail in the absence of the market failure. In a centrally planned economy, on the other hand, the Commissar decrees all prices, outputs and allocations and thereby seeks to accomplish a socialist paradise. Unfortunately, the Commissar is limited by the extent of information that he/she can possess and bring to bear on his/her task. In addition, both neo-classical economics and socialism make assumptions about human behaviour that are at variance with empirical fact - this inherently limits the extent to which either paradigm can, in fact, say useful things about the real world.
However, public policy may extend well beyond the narrow economic objective of restoring efficiency, and encompass other objectives in addition to, or instead of it. Thus, considerations of social equity in several contexts (through, for example, lifeline power rates for poor households) may supersede those of efficiency. Similarly, while the market may have a great appetite for competitive supply of pornography or gambling or intoxicants, which would without doubt enhance economic efficiency, public interest may require these to be curtailed. There may also be strategic considerations - the mitigation of market risk for critical industries or infrastructure, or avoiding players growing "too big to fail" in important sectors, or retaining national capacities in key areas.
An important question that currently engages Indian policy aficionados is this: who, under Indian circumstances, is best qualified to be a regulator? The debate frequently turns on the question of who has the necessary domain knowledge. Proponents of this view typically espouse the cause of corporate managers who have long experience in the given market sector. However, such domain knowledge, albeit from different perspectives, is also possessed by academics who have researched the field, judges who have contributed to relevant jurisprudence and civil servants who have helped in policy making in the given context.
However, in another view, domain knowledge is only one part of the required competence. What matters most is the philosophical orientation of the candidate regulator. What is the specific, essential philosophical orientation required? I would argue that it is the deep internalisation of the public interest by the regulator. The unseen participant in all regulatory actions is the general public. While the public is represented in Parliament and the regulator is ultimately accountable to Parliament, the fact is that in actual regulatory proceedings the direct participants are limited to the potential regulatees who inevitably represent their own, private interests. The law behind the regulatory statute or formal policy documents informing the statute may lay down broad guidelines for the regulator to observe but ultimately, just as judges interpret the law through their judgments, the regulator creates policy through his/her decisions.
In determining whether a candidate regulator is indeed possessed of this perspective, interrogation of his/her prior career path is essential. In this "leopard does not change its spots" view, prior career experience of the candidate regulator determines his/her perspectives. Does the candidate's career experience consist largely in creating or exploiting the very market distortions (or making other departures from policy objectives) that the regulator is expected to remedy? Does it consist of generating and validating hypotheses about which strategies will help realise market distortions, that would count as useful contributions to the professional literature for MBA programmes? Does it comprise adjudicating disputes between participating contestants? Or is it long engagement with actions that promote the public interest that, in turn, has to be inferred from familiarity with the workings of the political institutions of democracy and a record of political neutrality?
A second point of debate is whether regulatory bodies should have single or multiple members. A multi-member body may synthesise from multiple, valid perspectives. Or it could get gridlocked through conflicting views. On the other hand, a single regulator, despite careful selection, may turn out to be a loose cannon and make unworkable, or skewed pronouncements. In public policy, one must be risk-averse, since the potential damage from a perverse and not easily reversible finding (because of legal protections necessary for safeguarding regulatory independence) may be humungous. Prudence would, therefore, suggest multi-member regulatory institutions; the odds of a majority of members turning out to be flaky are, hopefully, appreciably less than that of a single member.
The author is Distinguished Fellow, TERI, and a retired Secretary to the Government of India
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
