IMPORTANCE OF REGULATIONS IN ECONOMIC DEVELOPMENT

Q&A WITH KHALID MIRZA, FORMER CHAIRMAN SECP & COMPETITION COMMISSION OF PAKISTAN

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June 13 - 19, 2011

Khalid Mirza, former Chairman Securities & Exchange Commission of Pakistan (SECP) has recently made his observations on what he called the government's inability to handle economic issues and creation of hurdles in the way of economic regulators consequently leading to trigger inflation and price hike in the country.

Discussing the role of regulators in corporate governance, Mirza explained that regulators have failed to make a tangible difference to the economy as the government has completely overlooked the prescribed role of the regulators.

Khalid Mirza who carries a vast experience of dealing with matters related to economic governance such as economic regulation and competition enforcement to his distinguished professional career dilated upon the significance of regulation and competition enforcement with PAGE and its impact on economic efficiency.

He quoted saying of Danish philosopher, Kierkegaard, "life can only be understood backward, but it has to be lived forward." This is the basic disconnect we are constantly faced with, which is why, I am more likely to be wrong than right, he said in a lighter mood.

Khalid also discussed the causes and implications of the global financial turmoil erupted from the United States and threatened the developing economies around the world. Following are the questions and answers.

Q: WOULD YOU LIKE TO SPEAK ON THE FACTORS BEHIND THE GLOBAL FINANCIAL CRISIS AND IMPACT ON THE DEVELOPING AND UNDER DEVELOPED ECONOMIES?

ANS: Take a look at the recent financial crises that beset the world and that continues to affect global financial markets. What went wrong? Only about four years ago, at a conference in New York, the tall claim was made that the US financial system was sound and secure, all loopholes had been plugged, and nothing could go wrong! But, it did!

The reality is that in the United States, where the trouble began, the system was loosely regulated. For eight years, basically the Bush era, there was somewhat extreme form of commitment to free enterprise; to no government intervention in commercial activity; to laissez faire. The perceived wisdom was that the market was self-correcting and should be left to its own devices; that the best environment for business to thrive was one in which there was minimal supervision or regulation. Better still, no regulation.

Not only was sectoral regulation, like bank regulation or securities regulation, openly derided and belittled but also enforcement of competition or antitrust norms was discouraged and considerably weakened. Quite apart from excesses and imprudence, which were rampant, businesses trampled over each other - the strong crushed the weak, the dominant abused the small in a free-for-all, jungle-like, atmosphere. The system clearly rotted from within - it was like Pandora's box or a can full of worms just waiting to be opened by accident or by design, and that's what happened - figuratively, of course.

If, instead of their misconceived ardor in favor of more or less unbridled freedom in commercial activity, the United States had applied competent regulation as well as engaged in the due enforcement of accepted competition or anti-trust standards, and the consequent encouragement of a level playing field for economic agents, the recent cataclysmic crises may not have occurred. It is almost axiomatic that the more an economy liberalizes the greater is the need for sound regulation and effective enforcement of competition norms.

As a consequence of bad public policy, in just one or two years Wall Street inflicted more harm on capitalism than could have been wrought by the proponents of socialism over a hundred years. And, the aftershocks of this upheaval continue to recur - the situation has not stabilized so far.

Q: WOULD YOU LIKE TO SUGGEST CORRECTIVE MEASURES AIMED AT MITIGATING THE ADVERSE EFFECTS OF THE GLOBAL FINANCIAL TURMOIL?

ANS: There is clearly a need to save capitalism from capitalists. The ecology of a jungle has no level playing field - as a result all animals are under threat which is surely no way for civilized human beings to live. It is necessary to ensure that the rights and interests of all economic agents are protected in a fair manner, and that they are enabled to operate and compete with each other on a level playing field. Apart from the edifice of laws and regulations and their proper implementation, the due enforcement of accepted competition norms is an important element achieved that end.

Q: SINCE YOU HAVE AN EXTENSIVE EXPOSURE DEALING WITH MISUSE OF OVER-DOMINANCE OR MONOPOLY IN THE ECONOMY, WOULD YOU PLEASE SHARE YOUR VIEWS HOW TO DEAL WITH THIS ISSUE?

ANS: I would now like to turn specifically to competition law and policy. It is noteworthy that while "economic efficiency" and "consumer protection" are the two motivating pillars of modern competition legislation, it is the "consumer protection" aspect, with its populist overtones, that has caught the public imagination and comes to mind whenever anyone refers to competition law and policy. However, what is hidden from view is the fact that modern competition laws really promote and facilitate business growth and their main beneficiaries are business enterprises. It would be wrong to assume that the reference to consumers in our competition law, which is awaiting Presidential assent, is only with respect to the lay consumer at the retail or individual level!

Let me explain: business enterprises sit on both sides of the demand supply equation and are producers or suppliers as well as consumers.

"I know for a fact - since I have actively promoted foreign direct investment into developing countries during the nearly two decades I spent in IFC - that the foreign strategic investor or foreign technical partner in a joint venture in any country would very much like to see an adequate and properly enforced competition law and a level playing field within which to operate. The absence of an effective competition regime in a country is now universally regarded as constituting a grave lacuna in the investment climate of that country".

For a market economy to cater to efficient use of resources, competitive forces must be able to operate freely and on a level playing field. I understand there is a lot of literature that supports this view. And it is for this reason that the Government of Pakistan has tried to strengthen its framework to enforce competition norms.

The Government has set up the Competition Commission of Pakistan i.e., CCP, which is designed to be a state-of-the-art quasi-judicial, quasi-regulatory, law enforcement agency that investigates and penalizes anti-competitive conduct. It is mandated to enforce free competition in all spheres of economic activity in order to enhance economic efficiency and to protect the consumer from anti-competitive behaviour.

Q: WOULD YOU SUGGEST THE ROLE OF THE REGULATORY BODIES AND REGULATORY IMPERATIVES TO STREAMLINE SMOOTH ECONOMIC GROWTH?

ANS: In so far as regulation is concerned, I have already indicated how the lack of sound and competent regulation in the sectors which it is needed can adversely affect economic activity in those sectors with negative repercussions for the economy as a whole and the general retarding of economic growth. Generally, any sector which because of its peculiar structure or for legacy reasons suffers from an imbalance of market forces would need ongoing, adjustable, measures to correct this imbalance, avert the precipitation of systemic risk and protect the legitimate interests of all economic players, including most importantly, the more vulnerable elements involved.

Sectors that basically need to be regulated are those that exhibit natural monopolies, or those that endure dominance by recently privatized entities, or those that suffer from the phenomenon of moral hazard, or those that essentially entail concessions granted by the government. Furthermore, sectors that are historically prone to behavioral issues often need to be regulated.

Ordinarily, regulation comprises, firstly, the making of regulations, and secondly, enforcement of the regulations made. Clearly, ensuring through regulation, the elimination of imbalances, a reduction in systemic risk, and the protection of the interests of all economic elements would mean enormous benefits accruing to the economy. On the other hand, it is equally obvious that badly conceived or poorly implemented regulation is often worse than no regulation.

For regulation to be useful, it is essential that: the regulator is duly empowered, professionally competent, operationally independent, and not only has integrity but is manifestly seen to have integrity. It is extremely important that regulation retains purity of formulation and execution and is not tainted by any political agenda. The regulator is at once a monitor, a policeman, a magistrate and a father-figure and patron of the market. In developing countries, facilitating and incentivizing the development of the market through appropriate regulatory positioning is an additional significant function of the regulator.

For the magic of the market place to actually work and show beneficial results - and to avoid, or at least contain, the damage caused by human imprudence, excesses, un-natural exuberance, and runaway markets - sound, well-functioning regulatory institutions are a must. And, it goes without saying, that the Government must refrain from intervening in the work of the regulators.

"Here, I must point out that like many developing countries, the regulatory environment in Pakistan is actually an almost impossible format. From my own experience as a securities regulator, I found all this to be a formidable environment in which to foster a free, efficient, and transparent market, well-functioning market intermediaries, and investor protection and to ensure reduction in systemic risk".

Q: DO YOU FEEL THAT SECP AS A REGULATORY BODY HAS SUCCESSFULLY DELIVERED IN STREAMLINING THE CAPITAL MARKET IN PAKISTAN?

ANS: "It is noteworthy that as Chairman of SECP, I publicly articulated and meticulously followed a basic policy creed for SECP which had four elements: First, the SECP would be an agency that in all its dealings would be "firm, helpful, and fair". Second, the SECP will not compromise on integrity - in relation to staff, market players, corporate managers, auditors etc. Third, the SECP would hold the protection of the small investor or shareholder supreme; and fourth, the SECP will lay emphasis on the equitable approach i.e., it will eschew technicalities and strive to engage in a progressive interpretation of laws, rules etc. in order to achieve equity and justice. I took the view that we were a court of justice, not a court of law. I can tell you, with all due modesty, that this policy stance and an emphasis on substance over form not only had a salutary effect on investor confidence and the operations of the securities market, but also, by the Grace of Allah Almighty, the SECP was able to develop considerable moral authority which was acknowledged on all sides and enhanced its effectiveness as a regulator. And, as a result, the capital market's performance improved manifold and it was able to play a much more potent role in the matter of mobilizing and allocating resources on a risk adjusted basis.