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Levy and Spiller (1996) Summary -After Class

Levy and Spiller (1996) Summary -After Class

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Published by Carmel Jorgensen
Week 2 Levy, B and Spiller, P (1996) ‘A Framework for Resolving the Regulatory Problem’ in B. Levy and P. Spiller (eds.) Regulation, Institutions and Commitment, pp. 1-35.
Week 2 Levy, B and Spiller, P (1996) ‘A Framework for Resolving the Regulatory Problem’ in B. Levy and P. Spiller (eds.) Regulation, Institutions and Commitment, pp. 1-35.

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Published by: Carmel Jorgensen on Oct 22, 2007
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06/14/2009

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Levy, B and Spiller, P (1996)
‘A Framework for Resolving the Regulatory Problem’in B. Levy and P. Spiller (eds.) Regulation, Institutions and Commitment, pp. 1-35.
Week 2 Core Reading: Theories of Institutional Design
Summary by Carmel Jorgensen – after classThe World Bank sponsored authors consider regulation as a “political economic problem”.
1
In theauthor’s view overcoming the fundamental issue of the
commitment problem
is necessary for effective regulation. There must be certainty and protection for the investors against
politicalexpropriation
. Lodge (week 2), views this work within the
“principal-agent
” category.
Key words/concepts
: commitment, commitment problem, political expropriation (risk of change toregulatory regime), regulatory design, institutional endowments
A summary
The World Bank, and others, supported the privatization of nationalized utilities as the solution totheir poor performance, and to bring about improved service and lower prices. But foundprivatization success (measured by investment, fair/low prices to users and profits toshareholders/company) did not always happen. Why?Following their 5 country study
2
, the author’s conclude that
commitment
3
 
to a regulatory regime iskey to the success of utility privatization. To have commitment, the regulatory design must takeinto account a country’s
institutional endowments
4
 
in order 
 
to minimise
change
to the regulatoryregime from unhelpful
political expropriation
.
5
Political expropriation happens when the rulesgoverning the regulatory system can be easily reversed or 
changed 
by politics/parliament.The question utility investors will ask before making a long-term investment is, “How easy canlegislation be reversed?” “How far can we trust this regulatory regime”? Investors don’t like thethreat of short term arbitrary changes (changes the investors are not in charge of).
1
This “new institutional economics” approach to regulation is meant to take “…into account the way in which institutions,political and economic, affect the performance of economics over time.”
2
UK, Philippines, Argentina, Jamaica, Chile
3
Commitment here = “restraining mechanisms” to prevent fluctuations/CHANGE. Change can be because of apreference change; an intergenerational change; influenced by the short-term horizon of politics.
4
Institutional endowments, as defined by North and others:
1.
legislative
and executive institutions – formal mechanisms public appointments and laws and regs,
2.
 judicial institutions
and systems– formal mechanisms for aptg judges, judiciary structure, and disputeresolution private/private and private/state3.custom and informal norms that tacitly restrain the actions of individuals or institutions4.societies social interests, balance b/n them and role of ideology5.Country’s administrative capabilities.This study focuses on the first two and how they interact with regulatory processes and economic conditions.
5
Change is also called “arbitrary administrative action”.
1
 
The authors conclude that privatization success happens, whatever the regulatory design, “.. solong as
three complementary mechanisms
”/ “restraining mechanisms”/commitment assurances” are “.. in place and properly aligned in order to restrain arbitrary administrative action.”
6
 These 3restraining mechanisms are:[1]
Substantive restraints
 
on
discretionary actions by the
regulator 
, ex Chile – specified inregulatory incentives structures how prices are to be determined. Ex. UK and Jamaica gavefreedom to set prices subject to constraints: rate of return in Jamaica and price cap in UK[2]
Restraints on regulatory system changes
, ex conflict resolution mechanisms built inregulatory system (Chile)[3]
Enforcement of restraints
(through institutions) ex. Strong judicial system (UK, Jamaica,Chile) to hold up administrative law.To work the regulatory design needs to fit with the institutional realities and be able to resistchange. These
“regulatory governance” 
restraining mechanisms are needed for 
“regulatory incentives
” 
to work. The authors also say that regulatory incentives and how they are created isalso determined by the institutional endowments of a country. If the regulatory system is notcompatible with the country institutions then privatization will be disappointing.In countries with weak or unstable institutional endowments, the authors suggest internationaltreaties, or guarantees to shore up the national foundations in order to enable privatization. Ex.International investment guarantee programs, such as those from the World Bank, can “strengthenthe resolve of the host country to abide by its commitments”.
8
In other words the World Bank canhelp to hold a country accountable to its regulatory regime.
Critique
The institutional endowment aspect of the study seems to make sense – country’s with goodinstitutions are more likely to be able to offer a safer long-term investment opportunities for companies.However, this study’s hypothesis and conclusions also leave the authors’ open to critique for stating that in democratic counties (those with many voices having influence in regulatory design)make it difficult to enact “sensible rules in the first place” or to “adapt the rules as circumstanceschange”.Additionally, the authors’ assert that “In countries with these types of political institutions[democratic], reform [to a regulatory system] may have to await some shock to the politicalsystem.”
9
A shock would be a time of confusion when the democratic systems are not working asthey normally would. This would then be the time to install a regulatory regime that is mostfavourable to business. From these views a conclusion could be drawn that the authors’ see adestabilising shock to a democratic system advantageous to making opportunistic regulatorysystem changes in the interests of the industry.This could leave the reader with the understanding that more authoritarian political regimes aremore favourable places to set up regulatory structures. Coupled with the authors’ advice to make itvery difficult to change the regulatory structure, whatever happens in the political arena, leaves abusiness centric model, in place. Thus, a newly democratic state would be bound by theconditions set by a former dictatorship (with the leakage of profits to select few that could occur inthis unaccountable system). The World Bank is stating that it could help with enforce thisconditions.
6
Aka political expropriation
7
Regulatory incentives are essentially rewards for performance exceeding minimum standards
8
Page 35
9
Page 5 (Naomi Klein’s 2007 book The Shock Doctrine: The Rise of Disaster Capitalism elaborates andprovides many examples illustrating “
brutal economic shock therapy” her words
)
2

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