Why regulatory reforms?

Zahid Hossain

THE observation of highly reputed economists Raghuram Rajan and Luigi Zingales that “A truly free and competitive market occupies a very delicate middle ground between the absence of the rules and the presence of suffocating rules “ is now generally considered more realistic and acceptable specially in the aftermath of the present horrendous global financial collapse in history. And that is why now the need for sector and area wise regulatory monitoring, supervision and if needed control is felt more strongly and widely.

Governments around the world, rich and poor alike, struggle with the challenge of providing modern, efficient and affordable infrastructure services and other welfare benefits for their people. This challenge is particularly acute for developing countries like Bangladesh where inadequate infrastructure and service facilities act as a significant constraint on economic growth and has a direct impact on the living standards of households.

In fact, infrastructure industries and services are crucial for generating economic growth, alleviating poverty and increasing international competitiveness. Recognising infrastructure's importance, many countries have started implementing far-reaching reforms over the last few years- restructuring, encouraging private participation and establishing new approaches to regulation. This new policy redirection identifies the challenges involving massive regulatory reforms within the historical, economic and institutional context of developing and transition economies.

While the links between infrastructure reforms and subsequent performances are complex, several conclusions can be drawn. First, reforms have significantly improved performance, leading to higher investment, productivity and service coverage and quality. Prices have become better aligned with underlying costs. Prices have also become more responsive to consumer and business needs and to opportunities for innovation.

Second, effective regulation- including the setting of adequate tariff levels- is the most critical enabling condition for infrastructure reform. Protecting the interests of both investors and consumers is crucial to attracting the long-term private capital needed to secure adequate, reliable infrastructure services and to getting social support for reforms. In reality crafting proper regulation is the greatest challenge facing policymakers in developing and transition economies and there lies the real need for appropriate regulatory reforms in a country like Bangladesh.

Thus in sum, infrastructure restructuring and regulatory reforms offer substantial potential benefits for governments, operators and consumers as well. As such institutional reforms can be undertaken only on the basis of proper evaluation and sufficient experience as a guide. Those should not be pursued blindly in a specific country or industry without carefully assessing the institutional and structural prerequisites and without explicit attention to the concerns they raise.

In Bangladesh, much study and analysis have not been done in the area of regulatory reforms, although some of the regulatory commissions have been in the operations for quite a few years. The usefulness and effectiveness of much talked about Anti-corruption Commission and Election Commission are very much in currency and people in general have high expectations in these two very key areas for establishing democratic system and good governance in the country. Quite a few other regulatory commissions have also been working but with little impact so far on the reform agenda of the government. The main reason, as some experts suggest, appropriate, really capable,suitable and professional persons have not been selected for the key positions of these organisations. In fact, questions have been raised about the selection procedures of these highly professional bodies resulting in the poor performances and non-delivery of requisite services to the people.

According to one study, the major problem in Bangladesh is not over-regulation or under-regulation. Rather the problem is ill-regulated regulations which really sometimes accelerate the sufferings of the common people. Another major source of public suffering in our country is the bureaucratic red-tapism and administrative inefficiency which have in reality nothing to do with the existing rules and regulations. As such only amendment of rules/regulations/laws/bye laws/administrative orders and other instruments having legislative effect will not always be enough for lessening the administrative hurdles and other obstacles in order to redress the sufferings of the common people.

What is thus more important for us is to properly ensure transparency and accountability in every area- starting from selection of personnel for the regulatory commissions and finally proper, effective and sincere implementation of their recommendations. Administrative reforms are equally important and those are vitally needed so that decisions are not only taken within the definite time-frame, those are also properly and effectively implemented always keeping the motto of service to the people above every other consideration.

There is a general complaint in Bangladesh that existing rules/regulations/laws/bye- laws are not always easily available and the decision makers take longer time for giving their decisions which sometimes discourage prospective foreign investors and buyers thereby causing immense financial loss to the country. In this connection, an example cited in the published report of the Regulatory Reform Commission may be mentioned here. The elected government in 2001 published their promotion policy in the gazette and surprisingly enough, the Establishment Division illegally kept all copies of the gazette confined to their custody and did not allow for general circulation. As such the Commission in its report recommended to the government to put all the gazette notifications and other government orders in the website immediately without delay for ensuring transparency so that concerned people can get it anytime.

At present there are as many as 106 regulatory agencies in Bangladesh and performances of most of these agencies have enough scope for further improvement of their administrative efficiency and quicken the speed of their working procedures through review and evaluation for reform keeping the interests of the users and consumers. In the same way, investment-related rules/regulations/laws need to be further simplified for creating convenient investment friendly atmosphere and reducing cost of doing business in the country. For this the Law Commission and the Regulatory Reforms Commission may be assigned to take up the job with due urgency and importance.

Some reform measures undertaken by the Central Bank with Dr. Atiur Rahman as the Governor have started to produce some good results basically due to prudent monetary policy. The new policy to provide budgetary assistance to Small, Medium and Large scale initiatives in the productive sectors including agriculture has strengthened the economic base of the country.

But we have scope for further improvement of our economy by undertaking some financial system reforms. In this connection the relevant authorities may like to consider the recommendation of the McKinsey Global Institute which was made in Indian context in 2006. Their recommendation was that the government can meet its social objectives more effectively by reforming the financial system than by controlling the way it lends. Banks are currently obliged to lend priority sectors because the government wants to ensure a flow of credit to rural households engaged in farming and small businesses. Yet country's rural poor as well as its entrepreneurs would be better served if the financial system allocated all its available capital to the country's productive businesses.

Finally, for effective regulatory governance, a good match between the institutional capacity of our country and the structure of regulatory governance is crucial to build a credible and stable regulatory regime that ensures respect for property rights and that reduces the risk of expropriation. There are no universal rules for institutional design, but rather objectives that should be sought, specially considering our institutional environment. The analysis of good governance, transparency and accountability, therefore, goes beyond the consideration of strict features of the institutional design and involves taking stock of the broader institutional capacity as well as of the actual practices and processes of the regulatory process rather than the legal or formal rules.

Zahid Hossain is Chairman, Society for Projection and Advocacy for Awareness Programme.

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