Thursday, September 17, 2009

Politics and the Pursuit of Efficiency in New Zealand

Posted by D. Daniel Sokol

Bronwyn_howell_1 Bronwyn E. Howell, NZ Institute for the Study of Competition and Regulation Inc. and Victoria Management School, Victoria University of Wellington writes on Politics and the Pursuit of Efficiency in New Zealand.

ABSTRACT: Economic analysis takes as its defining performance benchmark the pursuit of increases in efficiency.  Competition law and industry-specific regulation provide two competing means of intervention whereby the pursuit of efficiency can be enhanced.  Ultimately, legislators decide how governance of industry interaction will be allocated between these two institutional forms.  Whilst competition law can govern interaction in most industries, where the underlying economic conditions are sufficiently different, industry-specific regulation offers advantages.  However, its weakness is the risk of capture, leading to the subjugation of the efficiency end to the pursuit of other objectives.  But if the regulatory institution could be bound in some way to pursue an efficiency objective, could the risk of capture be averted?  New Zealand's 'light-handed' regulation, instituted in 1987, attempted to enshrine the pursuit of efficiency into statute, firstly by relying solely upon competition law and contractual undertakings, and subsequently creating a regulatory body with an explicit legislated efficiency directive.  In practice, however, the inability of a government prioritising efficiency to bind its successors to pursue the same objective renders sector strategy, and hence the efficiency objective, subject to political capture.  Consequently, inherent systemic instability attends the pursuit of the efficiency objective and the institutions overseeing its enforcement.

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