The Changing Face of Economic Regulation

All so-called ‘market economies’ around the world are regulated by their governments to a greater or lesser extent. This blog looks at the changing shape of economic regulation from sector regulation to the ‘ecosystem’.

Background
 
Since the Thatcher/Reagan market reforms of the 1980s the main rational for regulation in market-oriented economies has been to protect the consumer interest. Regulation on an economy-wide basis was dropped in favour of sector specific regulation. The focus of economic regulation has been on trying to promote competition within markets and standing in for the consumer interest where competition has been limited. Taken together, regulators shape the marketplace.
 
The sector focus reflected the historical circumstances of the Thatcher/Reagan reforms where privatisation in the UK followed a sector pattern. It also served a purpose for the regulators themselves. They could develop their own specialised expertise relatively quickly, and form network connections with other sector regulators to exchange knowledge and experience.
 
This orientation is now crumbling. It has been undermined by two related changes. First, the focus on competitive pricing as the main indicator of the consumer interest is clearly too narrow. Secondly, market structures are changing. The sector perspective, taken by itself, is too restricted a basis for addressing changes in corporate organisation. 
 
The broadening focus
 
Consumers remain pre-occupied with the prices they pay for their basic services, whether it is for services to the home, or outside on public transportation, or on health care. This supports a continued focus for economic regulators on the prices people pay. At the same time other consumer concerns have risen. Notably, privacy concerns and the potential for the misuse or unauthorised use of personal information have become a major concern. 
 
In addition, geopolitical changes and tensions in the world mean that security is now also a major concern for governments. Infrastructure is vulnerable and the potential misuse of personal data has an added dimension. Furthermore, governments are having to adapt their thinking to frontier technologies such as AI and concern themselves with their future competitiveness in the global market. ‘Industrial policy’ involving government support for strategic industries, not so long ago seen as encouraging the waste of public resources, is now back.
 
Finally, concerns about corporate behaviour have widened beyond pricing. The way many utility companies have leveraged their balance sheets may be in the interests of their shareholders but not in the interests of other stakeholders. 
 
In theory and in practice sector regulators can adjust to this widening range of concerns. Their specialised sector knowledge remains invaluable. Nevertheless, changes in corporate and market structures are also making a sector focus outdated.
 
Corporate organisation
 
There are two changes in corporate structures that have taken place over the last two or three decades that are particularly relevant to the regulatory world. First markets have seen lengthening and more complex chains of intermediation from the start of supply chains to the end product or service delivered to the consumer. Corporations have had to decide how much of their product to internalise and how much to contract out to others with possibly superior knowledge and experience or with cost advantages. This is partly associated with the benign period of trade expansion of the 1990s but, even in the much less benign circumstances of today, chains of intermediation remain long and complex. 
 
Secondly, an increasing number of companies no longer specialise in delivering products or services of a particular type but offer platforms on which diverse products with unlike features can be offered. When regulators permit market access or encourage companies only offering like products in a sector, they are restricting rather than encouraging competition from potential new providers. 
 
Taken together, the variety of patterns of intermediation combined with providers establishing platforms for diverse offerings mean that corporations no longer can be regarded as interacting only with other providers of like products or services in self-contained sectors. It is probably best to think of market segments as ecosystems. They interact at their edges with other market ecosystems.
 
Adjusting the role
 
The market shaping role of economic regulators can adjust to these changers in two main ways. First, they can widen their remit to include, for example, concerns about security and the structure of corporate balance sheets. Secondly, their structure can be rebased from a sector organisation to an ecosystem organisation.
 
Widening the remit
Widening the remit of regulators may involve changes in the powers delegated to them by parliaments. As important is that it involves regulators in much greater involvement over a wider range of activities in the so-called performance management of those they regulate. The move from price regulation and consumer protection against unfair practices such as ‘drip pricing’ to a concern about the structure of balance sheets represents a major step towards much greater involvement in the way companies are managed. Security concerns will mean regulators will have to take an active role in supervising approaches to software and hardware systems.
 
Organisational change
Organisational change will involve the amalgamation of sector specific regulators to cross sector organisations. For example, utility provision and regulation for households might be brought together, and possibly distinguished from utility provision and regulation for businesses. The focus will be on offerings to households from platform providers and their practices in relation to other potential platform providers.
 
Challenges for regulatory/ government relationships
 
Governments will have to take a lead in revising regulatory terms of reference and organisation. The EUs GDPR provides the best-known example of a legislative framework for privacy concerns that affects all regulators. There are however, two aspects that will be of increasing concern in government-regulatory relationships. 
 
The first is that regulators with wider remits and cross sector responsibilities will themselves require greater monitoring. This places a greater onus on the investigative role of committees of parliaments. It also suggests that independent bodies will be needed to hold regulators to account. An example is provided by the UKs Office of National Statistics where an independent body within ONS monitors the integrity of ONS reporting.
 
Secondly, governments will have to assess how far regulatory frameworks should be reactive to market developments (as in the GDPR) and how have it should be anticipatory and precautionary (as in the EU’s AI act). The danger about precautionary measures is that future risks may be misdiagnosed, as is alleged in the case of the AI act.
 
Conclusion
 
The regulatory world of economic regulation is changing. It affects all sectors from utilities and critical infrastructure to finance and welfare services. It is time for a thorough review and overhaul of current structures and practices on both sides of the Atlantic.