Tomorrow sees the publication of a Lateral Economics report commissioned by the Victorian Government on Regulation and Innovation. It argues that our current approach to ‘regulation review’, though laudable in intent, is having at best modest success and that the reason for this that it remains bedevilled by the ‘central planning’ paradigm.
Like most other countries, our own approach to ‘regulation review’ has involved a degree of hostility to regulation itself – in the words of the recent British report on reducing red tape “Less is More“.
Of course in a commonsensical sense it is perfectly true that we don’t want any more regulation than we need. But that’s not the most empowering thought in trying to make that regulation that we do have the best it can be – and of course whether one gives heed to political necessity or economic efficiency and equity, there will be many areas in which we will not want to regulate – and so we should be trying to do it well.
Such areas as consumer and investor protection, regulation of the professions, regulation of standards in various industries, health, safety and environmental regulation. Spectrum regulation and on it goes.
Readers of my posts here will notice some of the things I’ve been going on about. The report argues that our approach to regulation including ‘regulation review’ is trapped in a ‘Taylorist’ world view. If you don’t know what Taylorism is, it’s management speak for the kind of things that Hayek used to say about central planning.
As I tried to outline in this post, business has pursued various strategies to try to energise the process by which a business production system is continually optimised. But that’s not happened with regulation review which imposes more and more disciplines from the ‘top down’ and (so) downplays the importance of an alternative strategy which is to try to empower those at the coal face to come up with better approaches – better ways of delivering what those at the centre say they want.
The report can be downloaded from the Lateral Ecoconomics output’s page here (pdf). I was pleased with an interview I’ve just done on Counterpoint in which I try to outline these ideas. And the op ed of the report is appearing in the AFR and is over the fold.
Regulation and innovation: Beyond top down solutions
Why didnt Australia make the worlds first keyless car?
In the 1970s NRMA mounted a public campaign against the ludicrous ease with which our car thieves could ply their trade just insert coat hanger and drive away!
Our car industry raced to the forefront of car security technology a none too daunting target back then. The Australian subsidiary of the German firm Bosch became a world leader and Australian car security technology like engine immobilisers and keypads supplying Falcons in the local market and then exporting them to Europe.
So when Australians bought luxury European imports from Fiat, Volvo, Porsche and Ferrari they came duly fitted with Australian engine immobilisers.
By then, car keys were pretty much dispensable. Why didnt we go the next step?
Perhaps no-one thought of it.
But it sure didnt help that selling a keyless car would have been illegal!
Australian Design Rule 25 (ADR 25) required mechanical door, ignition and steering locks. It even mandated the number of tumblers in the locks!
With the new car security measures having rendered ADR 25 redundant by the mid 1990s the Productivity Commission duly recommended ADR 25s repeal.
The result? No action was taken. Indeed, six years later ADR 25 was expanded to require engine immobilisers as well.
Amid so many success stories in economic reform, this sorry saga is a case study in our failure to make regulation responsive to new developments and new possibilities.
The limitations of regulation are the limitations of top down management or central planning. Even when well intentioned, those at the top dont have the information to make good decisions.
Large firms, like governments also face diminishing marginal returns to central planning or top down management. The good ones decentralise decision making.
At a time when Anglo-American managers were putting more and more effort into minutely specifying what they required from their employees on the line and their suppliers, Japanese firms like Toyota realised massive productivity gains by engaging their customers, their employees and their suppliers in an endless circle of responsiveness and continuous improvement.
Employees enthusiasm for improving they way they worked was assiduously cultivated even to the point of giving them real power for instance to stop production to fix a problem.
With regulation our response to the diminishing returns to top down management has not been to try to energise and empower those at the coal face to continually improve their own performance. Its been more top down management.
All Australian governments have introduced regulation review regimes that require any new regulation to run the gauntlet of a regulatory impact statement (RIS).
The idea, laudable enough, is to impose a rigorous cost-benefit quality hurdle on all regulation. The practice has invariably fallen short often scandalously so. The ALP government introduced the policy in 1986. Ten years later formal compliance was derisory. Three out of every four RISs required by the policy were completely ignored, and only one in ten were fully compliant with the policy.
Another decade on, formal compliance is much better, but RISs are regarded cynically as boxes to be ticked.
While a major inquiry was being held into the problem, WorkChoices passed through Parliament with an RIS that read more like a corporate brochure than an economic analysis.
But even when its not traduced in this way, regulating the regulators with RISs seems to have done little if anything to stem the tide of red tape. Youve heard of Moores Law in computing effectively that computer power doubles each 18 months. Well heres the Law of More in regulation the number of pages of legislation doubles every decade and so far this decade were a little ahead of schedule!
Where it cannot be swept away with the stroke of a pen à la tariffs, and shopping hours, and airlines regulating well is no easy problem.
Regulatory systems will always be commands from the top down. But regulation should take a leaf out of businesses book. In addition to the thankless and so far largely unsuccessful task of confining new regulation to cost-efficiency, we should pay much more attention to the responsiveness of existing regulation.
We need to give those who are regulated powers to challenge regulation and to propose better ways of achieving regulatory objectives, just like we give workers the ability by giving them the power to improve workflow on the line.
Our report to the Victorian Government released today provides examples of opportunities lost because of the time, effort and uncertainty for businesses trying to get regulation changed to enable them to do new things, or to do old things better.
And it shows how we could benefit from becoming a regulatory pacesetter.
For instance in greenhouse gas abatement we could pioneering new ways of measuring, verifying and auditing carbon emissions for instance agricultural methane emissions from livestock. In addition to placing ourselves in the box seat to influence the evolution of the global trading system, wed place Australian companies in the box seat to develop new technologies to export to the world when it caught up.
The report also argues that firms with a proven commitment to excellence should be subject to fewer impositions from regulation.
Right now regulating the regulators, like a lot of regulation, isnt really delivering the goods. I recall in 1994 conducting an inquiry for the Productivity Commission asking the Federal Office of Road Safety why they wouldn’t change ADR 61 to allow vehicle manufacturers to reduce cost and improve security by replacing aluminium compliance plates with self-voiding plastic stickers.
Its not that easy. We would have to do a regulatory impact analysis and that takes time and resources we dont have.
Perhaps its time for some fresh ideas.