Regulation

Regulating my son’s Subway Surfing

My son loves playing Subway Surfers, and he is very good at it. I have been trying to put some sensible limits on his playing, and I have realized that I am faced with the same set of considerations I’d face if I were a regulator responsible for reining in an industry.

First, I need to know the game to be able to set my limits, if for no other reason than that I wouldn’t get my son’s respect if I didn’t. When I told him that he could play “five games a day”, he immediately corrected me to tell me that I should say “five times” because in his mind, “five games” meant five distinct games, not playing the same game five times.

Now, to know the game, I need to be at least mildly interested in the game, which means that I must have played it. But now, my limit setting is influenced, sometimes by my desire to take the tab away from him and play it myself, and other times by my thrill at seeing him play so well and wanting him to play more. An uninterested observer like my wife would be disinterested enough to be unswayed by these considerations, but she wouldn’t know enough to set good limits. This is exactly the kind of dilemma that one faces when one regulates industries.

I had started with the limit of five games a day. But soon I found that I needed to be dynamic and flexible. Sometimes, he’ll make an uncharacteristic error and get out of that turn early. To assuage his disappointment, I tell him that that turn wouldn’t count towards his limit of five games. Recently, school has started and he is unable to play on weekdays, so I increased his weekend limit to ten games. Sometimes I just let him play a few more games when he has to collect a certain targeted number of coins to make a purchase or something.

Such dynamic and frequent changes violate the principle that governance should provide consistency. If my son were a devious character, he would have learnt that the limits I set can be violated by protesting loudly. He isn’t, and that makes it easier for me to set sensible limits. Plus, he trusts me to do the right thing. In regulatory systems where the regulator isn’t clean and fair minded, providing the regulator with flexibility to set limits is a recipe for disaster.

Now, it so happens that I have only one son old enough to play Subway Surfer. If I had more than one son to regulate, my regulations would face issues of fairness very soon. If I had were regulating a whole bunch of Subway surfing children, my regulations would also face the problem of scale. I wouldn’t possibly have been able to tailor regulations for each kid. I would have to set one limit and be done with it.

Finally, there is the question of monitoring compliance. How closely should I monitor? Should I depend on my son’s self-reported count of how many times he has played or should I sit next to him and monitor? Like all good kids, my son lies and cheats on occasion, and sometimes he loses count of how many times he has played. Sitting next to him may suck up time and increases the risk of regulatory capture (I am tempted to play myself). I have learnt that letting him comply by himself by imposing a penalty for non-compliance works for him. It may not work for a different type of kd, with a different equation between the regulator and the regulated.

Rules and Principles

Kunal and Gaurav are right. In this post, I was talking of the trade-off between rules and principles in policy enforcement.  Actually, when you think of it, rules vs. principles is not a simple dichotomy, but a spectrum of choices.

Imagine that these choices are spread from left to right. At the left end of the spectrum is automation. Rules are enforced automatically, without anyone having the responsibility of enforcing them. The best example  of automation in my stories was actually the turnstile – it automated the task of checking for tickets, leaving very little scope for discretion.

Another example is the jugad “automation” that the Hyderabad police enforced. Blocking off the right turn doesn’t seem like an example of automation, but for our purposes, it is, because it enforced the rules without the police having to intervene.

To the right of automation come rules – clear and transparent rules that leave no scope of discretion to the enforcers. But then, whether to follow the rule or not is still a choice – and ensuring that officials enforce the rule depends on the existence of procedural mechanisms.

As you move further to the right,  you find that the rules have more and more discretion embedded in them. For example, consider the difference between enforcing a red light and ticketing someone for rash driving. The former is easier to enforce fairly than the latter.

At the extreme right of the spectrum is the idea of “principles-based regulation”.  This distinction  between rule-based regulation and principles-based regulation is used most often in the financial sector, so let me use an example from Banking to illustrate.

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Shruti on Bhopal

If I were to write a post on Bhopal, I would write almost exactly what Shruti has written.

You can, if you wish, paint Bhopal as an example of rapacious profit-seeking corporations putting profits above human lives. You can argue that thatzwhy we need strong regulations. But your argument will run into the problem that Bhopal occurred in 1984, in the India of the license-permit-quota raj.  Not all the permissions that Union Carbide had to seek, not all the inspectors they were forced to bribe, could prevent the disaster from occurring. Once it did occur, the paternalistic State, instead of looking out for its children, sold them out.

So, if the failure of the free market makes the case for regulations, does the failure of regulation make the case for loosening them? Well, that’s not what usually happens.  We’re more likely to hear that Bhopal makes the case for strengthening the regulatory framework.  We don’t need deregulation. We need stronger, more effective regulations, the argument goes.  If we don’t have strong regulations, what is to prevent corporations from creating a Bhopal every other day in pursuit of profits?

Well, strict liability and the tort system, for one. If we could sue the pants off any company that dares to impose harm on third parties, we would see fewer industrial disasters.  If we junk half our regulations and use the resources freed up to modernize our courts so that they deliver verdicts in months rather than decades, we will be much, much better off than we are. Shruti notes in her piece that the Indian government actively worked to minimize the compensation victims could claim from Union Carbide. This phenomenon is familiar, and has a name – regulatory capture.

The August Pragati

Have you picked up the August 2009 issue of Pragati yet?  It is good. The focus this time is on legal and regulatory reform and it has been guest-edited by Shruti Rajagopalan.  My favourites are this piece by Ajay Shah about the changes in legal regime required for  further Financial Reform, Aadisht’s article on the widespread prevalence of retail corruption in India, and Jaivir Singh’s article on Labour Laws and Special Economic Zones.

A little more about that last piece. The common wisdom is that we need to reform our labour laws to make life easier for our companies. The theory is that if employers know that they can lay off workers without getting mired in red tape, they will be more willing to hire workers.  Now, many people argue that labour inflexibility is not actually much of a burden on employers and that they get around restrictions by hiring contract labour or by “persuading” labour inspectors to be more flexible.

Labour laws do hamper employers when the workers have lots of market power anyway and there are strong unions, as was the case in the Bombay of the 60s and 70s, but when companies set up textile mills in remote areas of Tamil Nadu and Gujarat where employment is scarce and the low wages they offer are still better than the alternatives, they are pretty much useless. In other words, labour laws are ineffective precisely where they could be of use to Labour.

Jaivir Singh points out that instead of changing the law to provide a little more flexibility to employers, opposition to the relaxation   has forced government to adopt a subterfuge wherein they are ignored almost entirely within SEZs. Incidentally, Aadisht’s article is also about why India’s preferred mode of corruption is one where industries buy lax enforcement of the law, rather than lobbying to have laws changed.

Thatz Why We Need Strong Regulations

Okay, so why are Indian companies in trouble in spite of Palaniappan Chidambaram’s ironclad assurances that Indian markets are so well-regulated that we are insulated from the crisis?

It is because our financial sector is so well-regulated that we do not have a decent corporate bond market.  So, Indian companies that wish to borrow end up borrowing in foreign currency from global markets. In other words, we have regulated our financial markets so well that we are more tightly coupled with the evil deregulated financial markets than we should have been.

The solution, of course, is more regulation. It always is.

The Bhaskar Ghose Glasnost

Swami, arguing against my point that deregulation makes things better, claims that Tamil TV hasn’t got better at all after the entry of private channels – the positive changes have been balanced out by the negative ones. My only experience with TV in Tamil Nadu involved watching midnight masala on Sun TV when I was in Chennai, so I am not very qualified to comment about that. But about National TV, I partly agree. Indian TV was at its best during the Bhaskar Ghose era. The quality of serials that were on air at that time has not been equalled since.

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What the Government Says and What it Means

Ritwik says:

Your argument is essentially that regulations will ensure that only those who see a profit motive in education and are able to lobby with regulators will survive and the true educationists/ philanthropists will move out due to overburdening and ever increasing regulations. Isn’t this in contradiction to the usual lament that one of reasons why education lags in India is the fact that one can’t open schools for the profit motive? In such a case, a law that disallows the provisioning of education for the profit motive should keep these people out, right?

Ritwik is obviously not married and has never attended the Art of Living course.  If he had done either, he would have learnt that the words of your wife or of Sri Sri Ravi Shankar are never to be understood at the superficial level. There are always deeper levels of meaning to it. So it is with the words of the government.

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How Do You Find Good Schools?

In a curious response to my post, Ravikiran Rao points to an earlier post that draws an analogy between blogs and educational institutions. In particular, it should be easy for people to start educational institutions — just as it is easy for people to start blogs. You have heard about the death of set-up costs, haven’t you?

Students will be able to discover for themselves where the good institutions are, and they will flock to them — just like readers discover good blogs now. Death of transaction costs, too!

Ravikiran Rao seems very confident that he has found a clever solution to our higher ed problems.

Just imagine the possibilities of this wonderfully costless world: our students will be able to sample a whole bunch of colleges / courses for two minutes each. Or, they’ll just need to discover one or two good colleges, which will point them to many other similarly good colleges. (nanopolitan)

I did not intend to claim that I knew the solution to all the problems of higher education. I was merely pointing out that regulation is part of the problem, not part of the solution.  Regulations impose barriers to entry and they tend to penalize the honest the most. Being snarky does not free you from addressing the point.

His second point is of course, quite valid. If it weren’t for the government certifying the quality of schools, the only way to find out their quality is by enrolling in them and studying in those schools for two minutes. It is because of the regime of school inspection that has freed us from the burden of selecting schools for our children. It is a proven fact that middle-class parents who have to choose schools do so by draw of lots. It is also a fact that there is a social taboo against speaking about how good or bad your school is, which makes it impossible for parents to gain any information about the quality of schools.

Private Players in Higher Education Are Corrupt! How Horrifying!

Our current problem is not that there are no private players, but that they have among them too many crooks, politicians and thugs whose primary motive is demonstrably something other than education. So the real issue is this: What changes do we need in our regulatory structure so as to attract the ‘right’ sort of private players — philanthropists — to enter the education sector in larger numbers? How do we keep the undesirable kind from poisoning the pool? (nanopolitan)

Bzzt. Already answered. Next question please.

The Future of Futures Trading

 An expert committee set up over a year ago to study if futures trading influenced commodity prices will neither recommend a ban nor favour continuing trade in essential commodities, said a member of the panel. (AP)

When I heard this news a couple of days back, I could guess why.  The panel is headed by an economist who also happens to head the planning commision. If he claims that Futures trading causes an increase in prices, his fellow economists will laugh at him. If he claims that it does not, he gets into trouble with his political masters.

Sharad Joshi, founder of Shetkari Sanghatana and the member of the panel referred to above, explains that there is more to it  in a well argued article.  

In Which I Avoid a Trap Set By Nilu

Nilu says that I do not address a certain argument in favour of government schools. The argument has something to do with poor people having the vote. If that is supposed to mean that the poor can vote themselves better schools, Nilu should know that it is nonsense. One vote every five years is simply inadequate as an attention-getting tactic, when citizens have a hundred issues on which to draw their rulers’ attention. Presumably Nilu does know that, so he modifies the argument with something else that is still nonsensical.

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The Real Lesson of Kendriya Vidyalayas

A couple of years back, at a blog meet, I was having a discussion with Anand, who used to blog at locana. He was trying to defend government schools. His defence went: “Not all government schools are bad. I went to one myself. Ok, it was a government school at a campus that was filled with professors, but still…”

I sputtered a bit but never got a chance to complete my response in the din of the meet. This post at Nanopolitan reminded me of that conversation. This is as good a time as any for a response, I suppose.

People argue that private schools will serve only the rich and never provide the same quality to the poor. When faced with evidence that government schools also provide good quality only to the rich and neglect to serve the poor, their views undergo a fascinating inversion. The success of private schools for the rich is evidence that they will serve only the rich. The success of government schools for the rich is evidence that hope is on the way for the poor.  

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