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How policy capture works

  • Published at 10:57 pm June 14th, 2019
Impose the discipline of markets
Impose the discipline of markets / BIGSTOCK

We need to make our policy systems privilege-resistant 

Countries around the globe are seeking to diversify their economies and make them competitive. For this to happen, resources need to flow to firms that can make the best use of them. This is not the case in many countries. 

A good example is the Middle East, where the policy regime has evolved in a manner such that a small number of firms receive a disproportionate share of resources. It is the more connected, not the more efficient, companies that get a lion’s share of energy resources, public land, procurement contracts, finance and investment incentives. 

Consider the case of Egypt. Here, a World Bank study found that politically well-connected manufacturing firms have a greater presence in energy-intensive industries due to their privileged access to energy subsidies, not higher efficiency. A more blatant example is Tunisia from the days of Ben Ali. Here, restrictions on foreign investments shielded businesses connected to the former president’s family from competition and created space for them to dominate profitable service sectors. 

This skewed distribution of productive resources is a major reason why 15% to 25% of young graduates are unemployed in this region. In brief, in the Middle East, businesses with resources do not create many jobs. The ones that could have created jobs do not get the resources to do so. 

The time has come to ask if such a situation can emerge in Bangladesh or, more ominously, has already taken root. Bangladesh also needs to create a market economy where resources are allocated to firms that make the most efficient use of these. This will not happen if our policy and regulatory apparatus is vulnerable to capture or privilege seeking by influential businesses. In a privilege-ridden system, it will be difficult to create the enabling conditions for a competitive economy.

To address this problem, we need to understand how policy capture or privilege-seeking works. There are three channels. 

First, politically-connected businesses may influence the regulatory framework in a way that creates barriers to entry for potential competitors, through both de jure provisions in written laws or regulations, and in their de facto application, such as complex procedural requirements that make entry costs prohibitively high for many firms. 

Second, resources directly allocated by the state, such as public procurement contracts, public land or subsidized credits, may be captured by privileged businesses enjoying good contacts with politicians. 

Such privileged access to resources may also extend to areas influenced by the state such as the private banking sector. To the extent that these businesses are not particularly efficient or innovative, such resource allocation is sub-optimal. Those who get the resources are not competitive. Those who are competitive, and can create markets, do not get the resources they need.  

Finally, well-connected businesses may connive with regulatory officials to harass competitors. Collusion and harassment is facilitated if the regulatory compliance associated with business operations, such as customs clearances, business inspections, and periodic renewal of operating licenses is burdensome. 

Matters are made worse by regulatory uncertainty. Policies, laws, and regulations as written may not be relevant, consistent, or robust. Such deficiencies may leave regulatory gaps and create the de jure space for variable interpretation and discretionary decision-making. A variety of institutional factors then shape the extent to which the de jure space for discretionary behaviour is used de facto by regulatory officials. 

So, what can be done about this? How can we make our policy systems privilege-resistant and move towards a policy and regulatory framework that encourages competition and productivity growth? 

In a recently published World Bank report, my co-author and I seek to respond to this challenge and address the following question: What good governance features should be instilled in private sector policy and institutions to shield them from capture, discretion, and arbitrary implementation?

We should start by recognizing that policy capture or the pursuit of privilege happens both during the formulation of policy and regulations, and during their implementation. Well-connected businesses may distort both processes to extract privileges for themselves. Thus, the processes for formulating policies and regulations should be made transparent, participatory, and evidence-based. 

This may include prior notification of upcoming regulations, publication of draft regulations, solicitation of comments from citizens on the drafts, reporting of results of the consultations, and carrying out impact assessments of proposed regulations. 

A second set of actions relate to individual policy and regulatory areas. These involve introducing features in different policy areas that make them more resistant to privilege-seeking. The scope for capture is enlarged when rules and regulations are not accessible or are unclear, no grievance mechanism is in place, numerous human interactions are needed, and there is room for interpretation and discretionary implementation with no obligation to justify decisions, nor reverse them in case of complaint. 

Consider the case of public procurement, an essential source of business for many private firms including SMEs. There is need for a strong and independent institution governing public procurement. Procurement opportunities should be widely and transparently advertised to ensure equal opportunity of access to all bidders. A non-transparent procurement system discourages SMEs to apply for public procurement opportunities, depriving them from an important source of income and growth. 

Access to finance is also a very critical area where capture can occur. If regulations governing lending to related parties and politically exposed persons are absent or unenforced, the financial system could be captured to the benefit of politicians and the connected business elite while crowding out lending to newcomers who have new business ideas and a competitive edge, but not connections. 

Competition policy is another important area. Lower barriers to entry foster competition and encourage entrepreneurship. Having a competition law is good but not enough. Authorities entrusted with enforcing competition laws, such as competition commissions, need to be independent from political influence and have their own budget. 

They should have the power to shed light on and dismantle cartels, lower barriers to entry, and protect users and consumers.

These are just some ways in which policy capture and privilege-seeking can be addressed. There are other ways too. But the first task is to recognize that the problem may exist and find out the loopholes in our policy and regulatory framework that create the scope for capture. 

We have tried to make our policies business-friendly, ie, make life easier for business. We now need to make them market-friendly, ie, impose the discipline of markets.  We need to make sure we do not go the other direction, ie, making policies and regulations crony-friendly. 

Syed Akhtar Mahmood works at an international development agency.