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Opinion: What can be done about regulation

COMMENT

Regulation affects all New Zealanders every day. Hundreds of regulatory regimes and many thousands of officials and inspectors work in regulation. It’s an essential component of modern, successful societies. 

But when regulation is done badly it can cause more harm than good. Last week, the Productivity Commission released its draft report into regulatory institutions and practices. 

Nobody knows this better than businesses about the impact of regulation. That’s why the commission was so keen to talk to them about their experiences with regulators. 

We received 53 submissions and had 92 face-to-face meetings – including many with New Zealand’s largest and most-regulated firms. But we also wanted to understand how other businesses thought about regulation. 

That’s why we commissioned a survey of more than 1500 businesses about how they perceive regulations and the regulators they work with.

The results were sobering. Only 24% of businesses thought the reasons behind regulators decisions were clear. Only 28% of businesses understood what they got for the fees regulators charged them; so it’s no surprise 48% of business didn’t think regulator charges were fair or reasonable. 

And 44% of firms thought regulators were rarely or never held accountable for the quality of their work; 49% said regulators rarely or never work together to reduce paperwork businesses have to fill out; and 37% said regulators didn’t understand the issues facing their business.

It wasn’t all bad news though. Only 16% of businesses thought regulators were unwilling to work with them to help them comply with regulatory requirements and 43% thought compliance officers were friendly and non-combative (only 12% disagreed).

These findings had a strong influence on our draft recommendations for improving regulations. Our key conclusions are based around six areas.

Six action areas

First, the regulatory system isn’t flexible enough. We have a “set and forget” mentality… until something goes badly wrong. The government spends a lot of time thinking about new regulations but not nearly enough about how effective and necessary the existing stock of regulation is. 

More systematic evaluation of existing regulations will help ensure requirements that are necessary stay current and that requirements that are unnecessary can be removed. 

Second, there are too many unjustified inconsistencies between the institutional arrangements and regulatory processes of different regimes. Readers will understand how this imposes unnecessary costs on business. It also makes life harder for government and officials than it needs to be. 

We can’t afford to run 200 bespoke regulatory regimes and cleaning up some of the inconsistencies will be a win-win for government and business.

Third, the commission agreed with the concerns from business about the capability and knowledge of regulatory staff. In fact, front-line staff say they’re concerned about their capability and access to training as well.  We can do more to lift their skills and understanding across the system.

Fourth, we think the checks on regulators could be stronger. The courts do a fine job but not every business can afford to challenge regulatory decisions in a court. That’s why we recommend looking at whether the Ombudsman is funded appropriately. 

We think Parliament could play a stronger role through the Regulations Review Committee to ensure new regulations are well-drafted, fair and don’t impose unreasonable costs.

Fifth, we need to do much better at monitoring the performance of regulators. Weak monitoring of standalone regulators by government departments doesn’t provide much confidence to ministers or the public that regulators are doing a good job, or early warnings of potential regulatory failures. More effective monitoring should provide a robust view of how our regulators are doing.

Our final message to the government is that the regulatory system needs a leader. Regulation is a huge system within government but compared with the management systems that control government expenditure and taxation, we know very little about the regulatory system. 

A minister with responsibility for regulation as a whole needs to be responsible for setting a strategic plan for government regulations, including how they will be better evaluated and improved.

Former US President James Madison said if men were angels, no government would be necessary. Until that time, there will always be a need for regulation. Our report aims to ensure regulation is as effective and efficient as possible, while protecting the rights of individuals and businesses. That’s not easy but it is important.

Comment and feedback on the draft report are welcome. Read the report and make submissions at www.productivity.govt.nz

Murray Sherwin is chairman of the Productivity Commission

Comments and questions
6

What alternate universe does Mr Sherwin live in?

Creating bodies and bureaucratic rules to regulate the regulators? Surely this is a joke.

Regulation in NZ can only be improved by abolishing most of the current regulators and establishing a "market system" of regulators that actually "compete" with each other.

Oh. The productivity commissar should be abolished too.

True regulatory reform cannot happen until there is a recognition of the deep and incurable flaws in the government regulation model, and the alternative is well articulated, understood and accepted by significant sections of the community.

Sherwin is a true believer in government regulation, and wants to make it better. It is my sad task in this message to inform you that government regulation cannot be fixed, its flaws are incurable. Salvation from government regulation problems is not at the hand of clever, well placed and well meaning people such as Sherwin proposing various tinkering and reforms.

What is wrong, at the fundamental level, with government regulation? Government regulation is based on the concept that various social needs and issues need to be balanced and addressed by government regulation, which is ultimately an organised form of coercion, and a tool for one group of people to impose their wills on everyone. Whether it is harsh loan terms, poor credit availability, financial literacy, conflicts of interest, drug addition, workplace accidents, leaky buildings or any other social, technological or economic issue, the solution of government regulation is essentially political, and subject to interest group politics, public choice problems, and regulatory capture. Government regulation is a fundamentally dangerous and uncivilised way to address issues.

All this is very unconvincing unless the alternative way of addressing the issues is articulated and recognised as morally and practically superior by far. And, this of course is the problem with political and regulatory dialogue, the alternative institutions of a free and civilised society are poorly understood and unappreciated.

The institutions of a free society are radically different from the institutions of government regulation. They have no institutional voice, and they operate so subtly and indirectly that that they are invisible to most people most of the time. The fact that they work without being understood is both their merit and their communication weakness.

The alternative vision to government regulation is a society based on spontaneous order. This is an order that emerges at the social and macro level that is dynamic, evolving and unplanned. The rules of this kind of order are mostly soft, flexible and situational. The fundamental strength of this type of society and social order and way of addressing social issues is that it is based on personal and individual agreement and negotiation and management. We get what we want in life and avoid life's perils by dealing with others with their consent. They have to get what they want in order for us to get what we want. We have to appeal to and satisfy their interests and needs, rather than our own, to satisfy ours. This makes imposing our wills on others, individually or collectively, not the way of life. This avoids the fundamental flaw of government regulation - getting what we want by restricting the freedom of others, taking away or reducing their choices and requiring them to do certain things because we will tell on them, fine them, lecture them, tell them that they're being anti-social, even jail them if they don't.

It is all very well portraying the moral high ground of dealing with others on terms of agreement rather than coercion. Although it is necessary to mention this important moral and civilised aspect, the refrain back is always the same: what about all those pesky social, economic, financial and environmental problems and issues. Surely there are important issues that need guaranteed solutions and ultimate protections?

These social issues and problems are so important that they deserve the best solutions, the most effective and the most efficient. Here is it necessary to understand that government regulation is never a better solution than the alternative process of us trying and finding work-arounds, mitigation methods, techniques, standards and institutions individually and socially through freedom over time. If this is not understood, government regulation remains as the optimal answer in some situations or problems, and the issue becomes one of selection and management of the scope and methods of government regulation rather than rejecting it as fundamentally and incurably flawed.

Our common law legal heritage is an example of how efficient and effective institutions can evolve and develop without a plan, without a guiding hand, and without a rule-making process. Common law is not a system of judge made law, in contrast to the politically created laws of statutes and regulations. True common law is discovered, not made. It comes from trial and error. Remedies and compositions of disputes are tried out by negotiation, a risky endevour because we have to predict how well it will work out and we could be wrong. Compositions or remedies that are effective and work out as desired are repeated, those that are ineffective or don't work out are generally avoided in future. Over time, successful compositions and remedies become expected, and become social norms. People feel they are entitled to them and demand and insist on them. Over time the legal system develops from a process of negotiation to the application of rights and rules. This is how the common law developed, and it provides the basis for contract law, property law, tort law and even criminal law. These are the fundamentals or law and underpin our social and economic order even today.

Why does common law work so well? It is because it embodies not just effective remedies to disputes but the customs, manners and habits of a free society. It is a truly customary system of law, it is inherently responsive to the realities of social life, and of the social issues we face in our communities over centuries.

True regulatory reform would restore to us the freedom to negotiate and solve our problems with each other. Composition of a dispute between the parties with actual and recognised rights and interest in it would end the dispute, and parties without recognised rights and interests and standing to contend the issues would not have any veto rights over how the dispute was composed or what the settlement was. People would be free to negotiate directly, or choose a process and/or forum to compose the dispute balancing factors such as speed, cost and quality of service and of outcome.

To find a better way of addressing our problems as a society is for us as individuals to engage with others as to address our problems through our own planning, discussions, experiments, and to learn through trial and error. We can't look to others to solve our problems when the solution is in our own hands. Free our hands, free our minds, kill the regulatory state and find a better life and a better society.

Membership of the WTO and trade with Europe, China, the US etc will require standards to be set and enforced, won't it? How do you do this without regulations and regulators? Through self-regulation? We need to have something to show to trading and investment partners in order to gain recognition, give confidence and provide accountability. A regulatory system offers this.

the ECU seems to be designed in parallel to the EU rather than harmonized with it. http://www.chathamhouse.org/sites/default/files/public/Research/Russia%20and%20Eurasia/0812bp_dragnevawolczuk.pdf
Russia, the Eurasian Customs Union and the EU: Cooperation, Stagnation or Rivalry?

Customary law does not require membership of international organisations by a state, in fact it does not require a state at all. The true alternative to state regulation is not a minimal state but no state at all, which is called anarchy. The best introduction to this can be found in John Hasnas's The Obviousness of Anarchy.

Of course that is not to say that there is not merit in reducing state regulation bit by bit, and even in an environment of states and international agreements and organisations of states, keeping out of such agreements and organisations has merit too. Economic resources and international connections are flexible and having a neutral stance and policy has a lot of merit and avoids a lot of back-door fine print cronyism, statutory monopolies and cartels and undesirable local acceptance of destructive policies, e.g. on 'intellectual property' tax administration cartels and drug prohibition and anti-money laundering enforcement.

Perhaps we should measure the productivity commission by its own standards.

The issues to be addressed:

'Only 24% of businesses thought the reasons behind regulators decisions were clear. Only 28% of businesses understood what they got for the fees regulators charged them; so it’s no surprise 48% of business didn’t think regulator charges were fair or reasonable.

And 44% of firms thought regulators were rarely or never held accountable for the quality of their work; 49% said regulators rarely or never work together to reduce paperwork businesses have to fill out; and 37% said regulators didn’t understand the issues facing their business.'

And how does the commission perform on this issue itself:

'The Commission does not accept any responsibility or liability for an action taken as a result of reading, or reliance placed because of having read any part, or all, of the information in this report. The Commission does not accept any responsibility or liability for any error, inadequacy, deficiency, flaw in or omission from this report.'

The commission fundamentally failed in its review to identify the main issue on the system of government regulation which is that is is coercive, dangerous, destructive, and undermines confidence and welfare, and that the alternative regulation of customary law is systematically safer and more effective. Instead they state:
'indispensable to the proper functioning of economies and societies. Regulation, when implemented well, underpins markets, protects the rights and safety of citizens, and their property, and assists the efficient and equitable delivery of public goods and services (Organisation for Economic Co-operation and Development [OECD], 2011). In this way, regulation is an important tool for preserving and advancing the public interest.'

But if they're wrong, they don't accept responsibility for it. The quality of their work speaks for itself.

There might be some further productivity gains to be made from examining the business-friendliness of regulation, even though repeated international comparative studies have ranked NZ highly in this regard. But from my perspective the very curious, and much more important feature of regulation in New Zealand is how often it fails to achieve its stated objectives.
We have a 25 year record of failure in controlling the taking and pollution of freshwater; rules around children on quad bikes can't be enforced; many individuals have faced dreadful losses from leaky buildings; miners die because mining regulation is derisory; floods, erosion and liquefaction cause unnecessary and costly damage through the neglect of natural hazards in planning; regulation in the financial sector (apart from Reserve Bank supervision of banks) has been spectacularly inadequate; the certified CTV building collapsed in Christchurch with no accountability; and there was the unexplained, questionable and hugely costly extension of a taxpayer guarantee to South Canterbury Finance. We patch up one thing after another but regulatory failure is an ongoing issue. We seem to have a deeper problem around getting trustworthy regulation.
The Productivity Commission, in regarding regulation only as a micro-economic reform problem, and from a business perspective, may be missing a more fundamental, persistent and crippling cultural, political and administrative inadequacy - one which is holding New Zealand back from achieving its promise as a good place to live and do business with trust and security.