Institution building: Regulatory framework a must to promote growth

KARACHI: Almost 69 years ago in November 1946, the Reserve Bank of India passed the Banking Companies Bill setting foundations for a comprehensive framework of banking regulation in the subcontinent.

Regulations are needed to achieve certain social, economic and political outcomes that are otherwise not possible by solely relying on market mechanism.

Ben S Bernanke, former chairman of the US Federal Reserve, shed light on the importance of regulatory quality in 2010 when he held regulatory failure responsible for the housing bubble which exacerbated into a full-blown crisis.

Regulatory quality is an important component of the overall governance framework and crucial for the development of a nation. Regulatory management systems can help governments prepare better rules and reform existing ones.

Academicians and policy practitioners have pointed out that improving regulatory management is a continuous process and one that is pivotal to promote economic development, investment and trade.

An important aspect of regulatory quality is the inherent institutional capacity in the country. Dr Douglass C North, who recently died at the age of 95, won the Nobel prize in economics in 1993 on his work on institutions.

North’s phenomenal work was the recognition that individual’s interests are governed by relative prices, endowments and constraints put by institutions as well as perceptions of how the world around them works (cognition and beliefs).

Independent regulatory institutions contribute to improved regulatory decision-making. Quality of institutions, regulatory or otherwise, has been termed an important component of a well-functioning system of governance.

Measuring governance: the case of Pakistan

An important question arises here: Can we measure the quality of governance in which regulatory quality is one key variable? The World Bank’s Worldwide Governance Indicators reports aggregate and individual governance indicators for 215 economies over the period 1996-2014 for six dimensions of governance.

These are namely voice and accountability, political stability and absence of violence, government effectiveness, regulatory quality, rule of law and control of corruption. Pakistan shows mixed results in these indicators.

Whereas consistent improvement has been witnessed in the indicator of voice and accountability, other indicators such as political stability and government effectiveness have shown a decline over time.

Regulatory quality has also been on the downward trend with slight improvement seen recently. Moreover, Pakistan’s performance on regulatory quality is quite poor compared to other countries in the South Asian region such as India and Sri Lanka.

Regulatory quality can only be improved if political support is available for it to succeed. Citizens and the state must have respect for the institutions that govern economic and social interactions among them.

In Pakistan, successive governments have had their vision limited to the time they are in power and pay little heed to institution-building, the benefits of which appear in the longer horizon. Except for perhaps the State Bank of Pakistan, regulatory institutions are defunct organisations and their effective functioning is hampered by interference from bureaucracy and other centres of power.

The recent merger of two telecom giants, Warid and Mobilink, is putting more challenges for the Competition Commission and the Pakistan Telecommunication Authority in protecting consumer rights and in curtailing the creation of huge monopolies in one sector.

Recently, there has been much debate on the poor performance of the government in improving the overall system of governance. Policy practitioners have pointed out that regulatory policy must focus on two important dimensions of regulatory activity: appraisal of new regulation to ensure the quality of “the flow” of new regulation and reform the old regulations, “the stock”.

Some of the measures that the government could take to improve the regulatory quality are to adopt, at political level, broad programmes and establish clear objectives and frameworks for implementation, assess impacts and review regulations systematically to ensure they are meeting their objectives in a changing economic and social environment and lastly, to ensure that regulatory processes are transparent and non-discriminatory.

The writer is an economist and ex-central banker

Published in The Express Tribune, November 30^th,  2015.

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