Analog regulation, digital world

Initiative Matters: Policy falls short of the ideal of allowing entrepreneurs to innovate in areas where there is little real risk to the public.

New Zealand has always had to run a little faster than everyone else just to keep up.

Too small to rely on its own internal markets, and too distant to profit from tight integration with larger neighbours, New Zealand has had to compete by being nimble. And so it has developed some of the world’s best policy settings.

New Zealand is consistently at or near of the top of the rankings for overall economic freedom and ease of doing business.

But where the internet’s first growth wave came with predictions of the death of distance, things have played out rather differently.

We all can have a video chat with anyone in the world using any one of dozens of different phone apps. But mobile apps have done more to make New York better at being New York than to bring Auckland closer to North America.

World-leading policy settings are even more important than they were 20 years ago, and especially when it comes to technological innovation. So how does New Zealand fare?

This week, Internet New Zealand and the New Zealand Initiative jointly released a report on technology and regulation, Analog Regulation, Digital World. We found a few areas to celebrate and a lot of areas for improvement.

Permissionless innovation
Software engineers and entrepreneurs are a bit like water: They flow to the path of least resistance. If developing a new technology is too hard in one place, they will do it elsewhere. Making sure policy does not hinder innovation then matters rather a lot.

The Mercatus Center’s Adam Thierer makes the case for permissionless innovation. Rather than require that entrepreneurs seek permission to develop new ideas, government should set a presumption in favour of innovation.

Allowing entrepreneurs to innovate in areas where there is little real risk to the public sounds obvious. But New Zealand policy often falls far from that ideal. That will matter more as other countries develop more flexible regulatory frameworks.

Consider something as simple as streaming video content.

When Lightbox started, it needed expensive classifications for any content requiring New Zealand ratings. The Censor’s Office has since stepped back from claiming jurisdiction over streaming content but the previous government had been considering putting streaming providers under the Broadcasting Standards Authority – a move that could easily shut out smaller foreign sites.

And it is all unnecessary in a world where parents can access comprehensive details about every film and TV show from a host of websites to check whether any programme might be appropriate for their children. Why require permissions?

A better regime, leaning more heavily on permissionless innovation, would simply allow anyone to distribute content that already carried a rating from other countries and would remind parents where to look if they wanted to know what a US PG-13 rating means.

Bespoke regulations
The principle extends more broadly. If other places already have reasonable rules, regulations here should allow firms either to comply with New Zealand’s home-made standards or with standards that have proven successful elsewhere. New Zealand’s bespoke rules around cloud computing hindered government adoption of cloud services for years.

When it really matters, New Zealand’s regulatory agencies can shine. Our report highlights MBIE’s success in developing the rules allowing Rocket Lab to operate. Permissionless innovation is a great ideal but some safeguards are needed around rocket launches. And New Zealand got this one right.

When Rocket Lab looked to be ready to launch before New Zealand’s regulatory regime was ready, MBIE was happy for it to operate under American launch authorisations.

Meanwhile, it developed a set of regulatory settings fit for small and nimble launches from the far end of the world. Launch permissions in the US are costly, requiring sign-offs from a half-dozen lettered agencies.

Those costs can make sense for launches costing hundreds of millions of dollars but do not for the fast, light and cheap launches New Zealand will facilitate.

But it took a whole-of-government effort that would be difficult to replicate in other areas. The regulatory framework cut across a lot of different areas and MBIE was able to pull together a team of its best to make it happen. It would be difficult to do that for more than one regulatory area at the same time.

That kind of cross-agency work could be warranted again, though, to set a framework to allow better blockchain adoption.

Tax law, anti-money laundering and know-your-customer rules, and securities regulation all need to be looked at in tandem so New Zealand entrepreneurs wanting to innovate will not be bounced from agency to agency. And if it does not happen quickly, Australia will leave us behind.

Making a difference
Sometimes, small changes can make a world of difference.

The second generation of supersonic passenger aircraft is under development in the US. Once in operation, they would reduce the flight time from Auckland to San Francisco from about 13 hours to six. A Silicon Valley venture capitalist could hop on a flight to New Zealand, meet entrepreneurs here and catch a flight to make it home to bed.

But if New Zealand’s rules for airframe certification are not clarified, those planes could be precluded from flying here entirely.

New Zealand has a deserved reputation for being nimble and business-friendly. But its regulations need to keep up with technological change so that its innovators are not held back.

We are already small and distant. We cannot afford also to be years behind.

Dr Eric Crampton is chief economist with The New Zealand Initiative. He is co-author with James Ting-Edwards of Analog Regulation, Digital World.

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