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Deregulation is the removal or simplification of government rules and regulations that constrain the operation of market forces. Deregulation does not mean elimination of laws against fraud or property rights but eliminating or reducing government control of how business is done, thereby moving toward a more laissez-faire, free market. It is different from liberalization, where more players enter in the market, but continues the regulation and guarantee of consumer rights and maximum and minimum prices. An example of Deregulation would be Financial Deregulation.
- 1 Overview
- 2 By country
- 2.1 Argentina
- 2.2 Australia
- 2.3 Canada
- 2.4 European Union
- 2.5 Japan
- 2.6 New Zealand
- 2.7 Russia
- 2.8 United States
- 3 Controversy
- 4 See also
- 5 Notes
- 6 Further reading
- 7 External links
The stated rationale for deregulational is often that fewer and simpler regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall.
Deregulation is different from liberalization because a liberalized market, while often having fewer and simpler regulations, can also have regulations to increase efficiency and protect consumers' rights, one example being anti-monopoly legislation. However, the terms are often used interchangeably within deregulated/liberalized industries.
A parallel development with deregulation has been organized, ongoing programs to review regulatory initiatives with a view to minimizing, simplifying, and making more cost effective regulations. Such efforts, given impetus by the Regulatory Flexibility Act of 1980, are embodied in the United States Office of Management and Budget's Office of Information and Regulatory Affairs, and the United Kingdom's Better Regulation Commission. Cost-benefit analysis is frequently used in such reviews. In addition, there have been regulatory innovations, usually suggested by economists, such as emissions trading. Academic research on wedding economic theory with regulatory activity continues.
One can distinguish between deregulation and privatization. Privatization can be seen as taking state-owned service providers into the private sector. This can result in making the privatized enterprise more subject to market forces than was the state-owned entity. But the degree to which there is freedom to operate in the market and the extent of competitiveness in the market for the goods and services of the privatized entity or entities may depend on other measures taken in addition to privatization.
In some instances, partial privatisation may be selected, where provision of some portion(s) of the state-owned service are provided by private-sector contractors, but the government retains the capacity to self-operate at contract intervals, if it so chooses. An example of partial privatization would be some forms of school bus service contracting, such as arrangements where equipment and other resources purchased with government capital funds are used by the contractor for a period of time in providing services, but ownership is retained by the governmental unit. In such situations the arrangement can be seen as a sort of contracting out of functions for which the government takes responsibility.
One influential measure of worldwide business regulations that has inspired mostly deregulation but also in some instances increased regulations is the Ease of Doing Business Index.
Australia was an early leader in deregulation with a broad program of deregulation beginning in the early 1980s. Having announced a wide range of deregulatory policies, Labor Prime Minister Bob Hawke announced the policy of 'Minimum Effective Regulation' in 1986. This introduced now familiar requirements for 'regulatory impact statements' but it took many years before the policy was complied with by government agencies. Australia experienced deregulation of their labor market during the late 1980s under Hawke/Keating Labor government's. The country saw extensive deregulation of the labor market beginning in 2005 under John Howard's Liberal Party of Australia through their WorkChoices policy. However it was reversed under the following Rudd Labor government. In 2007, the Rudd Labor Government promised extensive deregulation, particularly in the business sector, appointing Lindsay Tanner Minister for Finance and Deregulation.
Natural gas is deregulated in most of the country, with the exception of some Atlantic provinces and some pockets like Vancouver Island. Most of this deregulation happened in the mid 1980s.
The province of Ontario began deregulation of electricity supply in 2002, but pulled back temporarily due to voter and consumer backlash at the resulting price volatility. The government is still searching for a stable working regulatory framework.
The current status is a partially regulated structure in which consumers received a capped price for a portion of the publicly owned generation. The remainder of the price is market price based and there are numerous competitive energy contract providers. There is price comparison service operating in these jurisdictions.
The province of Alberta has deregulated their electricity provision. Customers are free to choose which company they sign up with, but there are few companies to choose from and the price of electricity has increased substantially for consumers because the market is too small to support competition.
Former Premier Ralph Klein based the entire deregulation scheme on the Enron model, and continued with it even after the highly publicized and disastrous collapse of Enron because of illegal accounting practices.
- 2003 Corrections to EU directive about software patents
- Deregulation of the air industry in Europe in 1992 gave carriers from one EU country the right to operate scheduled services between other EU states.
Republic of Ireland
The taxi industry was deregulated in Ireland leading to an influx of new taxis. This was due to the price of a licence dropping overnight. The number of taxis increased dramatically.
The Conservative government of Margaret Thatcher started a program of deregulation and privatization after the general election of 1979. These included express coach (Transport Act 1980), British Telecom (completed in 1984), privatisation of London bus services (1984), local bus services (Transport Act 1985) and the railways (1993).
Since 1997 the Labour governments of Tony Blair and Gordon Brown developed a programme of better regulation. This included a general programme for government departments to review, simplify or abolish their existing regulations, and a "one in, one out" approach to new regulations. In 2006, new primary legislation (the Legislative and Regulatory Reform Act 2006) was introduced to establish statutory principles and a code of practice.
The Labour governments did not privatise any public services, although some other government-owned businesses such as QinetiQ were privatised. But a great deal of infrastructure and maintenance work was contracted to private enterprise under the Public-Private Partnership, with competitive bidding for contracts within regulatory framework. This included large projects such as building new hospitals for the National Health Service, building new state schools, and maintaining the London Underground.
Since the Japanese asset price bubble of the 1990s collapsed in the early 2000s, the Japanese government has seen deregulation as an effective way to lift its economy, because it has a huge budget deficit and cannot make a large tax cut.
New Zealand has had extensive deregulation since 1984. Originally instigated by the Labour Party, it was later continued by the erstwhile opposition National Party. As a result, New Zealand, from having a reputation as an almost socialist country, is considered one of the most business-friendly countries of the world, next to Singapore. However, critics charge that the deregulation has brought little benefit to some sections of society, and has caused much of New Zealand's economy (including almost all of the banks) to become foreign-owned.
Russia went through wide-ranging deregulation (and concomitant privatization) efforts in the late 1990s under Boris Yeltsin, now partially reversed under Vladimir Putin. The main thrust of deregulation has been the electricity sector (see RAO UES), with railroads and communal utilities tied in second place. Deregulation of the natural gas sector (Gazprom) is one of the more frequent demands placed upon Russia by the United States and European Union.
History of regulation
Many industries in the United States became regulated by the federal government in the late 19th and early 20th century. Entry to some markets was restricted to stimulate and protect the initial investment of private companies into infrastructure to provide public services, such as water, electric and communications utilities. With entry of competitors highly restricted, monopoly situations were created, necessitating price and economic controls to protect the public. Other forms of regulation were motivated by what was seen as corporate abuse of the public interest by businesses already extant, such as occurred with the railroads following the era of the so-called robber barons. In the first instance, as markets matured to where several providers could be financially viable offering similar services, prices determined by competition were seen as more desirable than those set by regulatory process.
One problem that encouraged deregulation was the way in which the regulated industries often controlled the government regulatory agencies, using them to serve the industries' interests. Even where regulatory bodies started out functioning independently, a process known as regulatory capture often saw industry interests come to dominate those of the consumer. A similar pattern has been observed with the deregulation process itself, often effectively controlled by the regulated industries through lobbying the legislative process. Such political forces, however, exist in many other forms for other special interest groups.
During the Progressive Era (1890s–1920s), Presidents Theodore Roosevelt, William Howard Taft, and Woodrow Wilson instituted regulation on parts of the American economy, most notably in regulating big business and industry. Some of their most prominent reforms are trust-busting (the destruction and banning of monopolies), the creation of laws protecting the American consumer, the creation of a federal income tax (by the Sixteenth Amendment; the income tax used a progressive tax structure with especially high taxes on the wealthy), the establishment of the Federal Reserve, and the institution of shorter working hours, higher wages, better living conditions, better rights and privileges to trade unions, protection of rights of strikers, banning of unfair labor practices, and the delivery of more social services to the working classes and social safety nets to many unemployed workers, thus helping to facilitate the creation of a welfare state in the United States and eventually in most developed countries.
During the Presidencies of Warren Harding (1921–23) and Calvin Coolidge (1923–29), the federal government generally pursued laissez-faire economic policies After the onset of the Great Depression, President Franklin D. Roosevelt implemented many economic regulations, including the National Industrial Recovery Act (which was struck down by the Supreme Court), regulation of trucking, airlines and the communications industry, the institution of the Securities Exchange Act of 1934, and the Glass–Steagall Act, which was passed in 1933. These 1930s regulations stayed largely in place until Richard Nixon's Administration. In supporting his competition-limiting regulatory initiatives President Roosevelt blamed the excesses of big business for causing an economic bubble. However, historians lack consensus in describing the causal relationship between various events and the role of government economic policy in causing or ameliorating the Depression.
Deregulation gained momentum in the 1970s, influenced by research at the University of Chicago and the theories of Ludwig von Mises, Friedrich von Hayek, and Milton Friedman, among others. Two leading 'think tanks' in Washington, the Brookings Institution and the American Enterprise Institute, were active in holding seminars and publishing studies advocating deregulatory initiatives throughout the 1970s and 1980s. Alfred E. Kahn played an unusual role in both publishing as an academic and participating in the Carter Administration's efforts to deregulate transportation.
The first comprehensive proposal to deregulate a major industry in the United States, transportation, originated in the Richard Nixon Administration and was forwarded to Congress in late 1971. This proposal was initiated and developed by an interagency group that included the Council of Economic Advisors (represented by Hendrik Houthakker and Thomas Gale Moore), White House Office of Consumer Affairs (represented by Jack Pearce), Department of Justice, Department of Transportation, Department of Labor, and other agencies.
The proposal addressed both rail and truck transportation, but not air carriage. (92d Congress, Senate Bill 2842) The developers of this legislation in this Administration sought to cultivate support from commercial buyers of transportation services, consumer organizations, economists, and environmental organization leaders. This 'civil society' coalition became a template for coalitions influential in efforts to deregulate trucking and air transport later in the decade.
After Nixon left office, the Gerald Ford presidency, with the allied interests, secured passage of the first significant change in regulatory policy in a pro-competitive direction, in the Railroad Revitalization and Regulatory Reform Act of 1976. President Jimmy Carter devoted substantial effort to transportation deregulation, and worked with Congressional and civil society leaders to pass the Airline Deregulation Act (October 24, 1978), Staggers Rail Act (signed October 14, 1980), and the Motor Carrier Act of 1980 (signed July 1, 1980).
These were the major deregulation acts in transportation that set the general conceptual and legislative framework, which replaced the regulatory systems put in place between the 1880s and the 1930s. The dominant common theme of these Acts was to lessen barriers to entry in transport markets and promote more independent, competitive pricing among transport service providers, substituting the freed-up competitive market forces for detailed regulatory control of entry, exit, and price making in transport markets. Thus deregulation arose, though regulations to promote competition were put in place.
U.S. President Ronald Reagan campaigned on the promise of rolling back environmental regulations. His devotion to the economic beliefs of Milton Friedman led him to promote the deregulation of finance, agriculture, and transportation. A series of substantial enactments were needed to work out the process of encouraging competition in transportation. Interstate buses were addressed in 1982, in the Bus Regulatory Reform Act of 1982. Freight forwarders (freight aggregators) got more freedoms in the Surface Freight Forwarder Deregulation Act of 1986. As many states continued to regulate the operations of motor carriers within their own state, the intrastate aspect of the trucking and bus industries was addressed in the Federal Aviation Administration Authorization Act of 1994, which provided that "a State, political subdivision of a State, or political authority of two or more States may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier." 49 U.S.C. § 14501(c)(1) (Supp. V 1999).
Ocean transportation was the last to be addressed. This was done in two acts, the Ocean Shipping Act of 1984 and the Ocean Shipping Reform Act of 1998. These acts were less thoroughgoing than the legislation dealing with U.S. domestic transportation, in that they left in place the "conference" system in international ocean liner shipping, which historically embodied cartel mechanisms. However, these acts permitted independent rate making by conference participants, and the 1998 Act permitted secret contract rates, which tend to undercut collective carrier pricing. According to the United States Federal Maritime Commission, in an assessment in 2001, this appears to have opened up substantial competitive activity in ocean shipping, with beneficial economic results.
The Emergency Natural Gas Act (signed February 2, 1977) was a mix of regulation in response to OPEC price hikes and deregulation and the 1973 oil crisis in the U.S. As a result of this legislation Natural Gas Choice programs have sprung up in several states. Natural Gas Choice programs allow residential and small volume natural gas users to select a natural gas supplier other than the traditional utility. There are hundreds of unregulated natural gas suppliers operating in the United States.
Communications in the United States (and internationally) are areas in which both technology and regulatory policy have been in flux. Rapid development of computer and communications technology – particularly the Internet – have increased the size and variety of communications offerings. Wireless, traditional landline telephone, and cable companies increasingly invade each others' traditional markets and compete across a broad spectrum of activities. The Federal Communications Commission and Congress appear to be attempting to facilitate this evolution. In mainstream economic thinking, development of this competition would militate against detailed regulatory control of prices and service offerings, and hence favor deregulation of prices and entry into markets. On the other hand, there exists substantial concern about concentration of media ownership resulting from relaxation of historic controls on media ownership designed to safeguard diversity of viewpoint and open discussion in the society, and about what some perceive as high prices in cable company offerings at this point.
The financial sector in the U.S. has evolved a great deal in recent decades, during which there have been some regulatory changes and the creation of new financial products such as the securitization of loan obligations of various sorts and credit default swaps. Among the most important of the regulatory changes was the Gramm-Leach-Bliley Act in 1999, which repealed the parts of the Glass–Steagall Act which had not already been repealed. This 1999 Act took down barriers to competition between traditional banks, investment banks, and insurance companies, and allowed firms to participate in all three markets in some circumstances.
Some believe that this deregulation contributed to the U.S. financial crisis of 2007-2009 and the Global financial crisis of 2008-2009. However, others dispute this assertion, and a lively debate on the causes of financial crisis is still under way as of August, 2009.
- 1976 - Hart-Scott-Rodino Antitrust Improvements Act PL 94-435
- 1977 - Emergency Natural Gas Act PL 95-2
- 1978 - Airline Deregulation Act PL 95-50
- 1978 - National Gas Policy Act PL 95-621
- 1980 - Depository Institutions Deregulation and Monetary Control Act PL 96-221
- 1980 - Motor Carrier Act PL 96-296
- 1980 - Regulatory Flexibility Act PL 96-354
- 1980 - Staggers Rail Act PL 96-448
- 1982 - Garn–St. Germain Depository Institutions Act PL 97-320
- 1982 - Bus Regulatory Reform Act PL 97-261
- 1989 - Natural Gas Wellhead Decontrol Act PL 101-60
- 1992 - National Energy Policy Act PL 102-486
- 1996 - Telecommunications Act PL 104-104
- 1999 - Gramm-Leach-Bliley Act PL 106-102
The deregulation movement of the late 20th century had substantial economic effects and engendered substantial controversy. As preceding sections of this article indicate, the movement was based on intellectual perspectives which prescribed substantial scope for market forces, and opposing perspectives have been in play in national and international discourse.
The movement toward greater reliance on market forces has been closely related to the growth of economic and institutional globalization between about 1950 and 2010.
There are a significant number of risks associated with economic liberalisation and deregulation, which many see the need to secure against with regulation that does not distort markets and allows them to continue to be competitive, or perhaps even more so. Much as the state plays an important role through issues such as property rights, appropriate regulation is argued by some to be "crucial to realise the benefits of service liberalisation". Regulation can play an important role in, but not exclusive to, the following situations:
- creating a level playing field and ensuring competition (e.g. ensuring new energy providers have competitive access to the national grid);
- maintaining quality standards for services (e.g. by specifying qualification requirements for service providers);
- protecting consumers (e.g. from fraud);
- ensuring sufficient provision of information (e.g. about the features of competing services);
- preventing environmental degradation (e.g. arising from high levels of tourist development);
- guaranteeing wide access to services (e.g. ensuring poorer areas where profit margins are lower are also provided with electricity and health services); and,
- preventing financial instability and protecting consumer savings from excessive risk-taking by financial institutions.
These issues can cause high levels of market distortions and barriers to entry. For instance, regulation ensuring that specific qualifications are needed to provide a service can be problematic for foreign firms wishing to invest, when those qualifications are provided only by domestic institutions. Thus, regulation must be carefully implemented and respond to any issues that develop to ensure that liberalisation delivers the expected benefits, for instance by creating mutual recognition agreements (MRAs) of qualifications or cross-border harmonisation of rules. Regulation often involves a complex balancing act between market and social objectives and it is argued policy space is required to ensure regulation can constantly be adjusted and adapted to changing market and social realities.
Adam Thierer wrote, "The first step toward creating a free market in electricity is to repeal the federal statutes and regulations that hinder electricity competition and consumer choice."
"Electricity deregulation was supposed to bring cheaper electricity prices and more choice of suppliers to householders. Instead it has brought wildly volatile wholesale prices and undermined the reliability of the electricity supply."
- Economic liberalization
- Public service company
- Electricity provider switching
- Michael H. Belzer
- Political economy
- Rule according to higher law
- Stranded costs
- ^ Sullivan, Arthur; Sheffrin, Steven M. (January 2002). Economics: Principles in Action. New Jersey: Pearson Prentice Hall. ISBN 0-13-063085-3.
- ^ a b "A Funny Thing happened On the Way to Utopia", Ontario Electricity Restructuring, Public Interest Advocacy Centre, 11 November 2002, http://www.piac.ca/energy/ontario_electricity_restructuring/, retrieved 2009-04-26
- ^ http://www.encyclopedia.com/doc/1G1-16514254.html[dead link]
- ^ Rose, Seely and Barrett, Tracey (2006). "The Best Transportation System in the World". from the selected National Archive White House Files. University of Ohio State Press. http://www.ohiostatepress.org/index.htm?books/book%20pages/rose%20best.html. Retrieved 2008-01-12.
- ^ Rose, et al., pp. 152–160
- ^ Rose, et al., pp. 154–156
- ^ Kleinknecht, William. 2009. The Man Who Sold the World: Ronald Reagan and the Betrayal of Main Street America." New York: Nation Press.
- ^ Pfaff, William (3 April 2006), "Deregulation Gone Mad", New York Times (Paris), http://www.nytimes.com/2006/04/03/opinion/03iht-edpfaff.html, retrieved 2009-08-17
- ^ Crandall, Robert W. (1 December 2004), Competition and Chaos – U.S. Telecommunications Since the 1996 Telecom Act, Brookings Institution, ISBN 978-0815716174
- ^ Taibbi, Matt (19 March 2009), "The Big Takeover!", Rolling Stone, http://www.rollingstone.com/politics/story/26793903/the_big_takeover, retrieved 2009-08-17
- ^ See for example the Wall Street Journal Opinion Page, March 21, p. A13, which discusses various contentions that a global capital excess, poor bond raters, mortgage fraud, regulators disinclined to regulate, poor decisions by the Federal Reserve, and/or the Community Reinvestment Act led to the crisis.
- ^ a b c d e Massimiliano Cali, Karen Ellis and Dirk Willem te Velde (2008) The contribution of services to development: The role of regulation and trade liberalisation London: Overseas Development Institute
- ^ Thierer, Adam D. (13 April 1998), A Five-Point Checklist For Successful Electricity Deregulation Legislation, Heritage Foundation, http://www.heritage.org/research/energyandenvironment/bg1169.cfm, retrieved 2009-04-26
- ^ Beder, Sharon (3rd quarter 2003), "The Electricity Deregulation Con Game", PR Watch (Center for Media and Democracy) 10 (3), http://www.prwatch.org/prwissues/2003Q3/dereg.html, retrieved 2009-04-26
- Barnum, John W (September 15, 1998), What Prompted Airline Deregulation 20 Years Ago? Presentation to the Aeronautical Law Committee of the Business Law Section of the International Bar Association, http://library.findlaw.com/1988/Sep/1/129304.html, retrieved 2009-08-17
- Derthick, Martha; Quirk, Paul J. (September 1985), The Politics of Deregulation, Brookings Institution, ISBN 978-0815718178
- Kahn, Alfred E., "Airline deregulation", Concise Encyclopedia of Economics
- Moore, Thomas Gale (November/December 1988), "Rail and Truck Reform: The Record So Far", Regulation
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- Powering a Generation of Change, Smithsonian Institution, http://americanhistory.si.edu/powering/, retrieved 2009-04-26
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- Regulation: From Economic Deregulation to Safety Regulation, Federal Highway Administration, 8 November 2006, archived from the original on October 18, 2007, http://web.archive.org/web/20071018143938/http://ops.fhwa.dot.gov/freight/theme_papers/final_thm8_v4.htm, retrieved 2009-04-26 . This comprehensive study indicating, among other things, that transport deregulation reduced distribution costs in the United States from about 14% of gross domestic product to under 11% (If this measure is selected, current dollar savings can be calculated by multiplying current GDP by @3%).[Misplaced in article]
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