The costs and benefits of regulation : implications for developing countries

The past two decades have seen an unparalleled rise in new health, safety, and environmental regulation in industrial countries. At the same time, insome countries there has been substantial economic deregulation of several industries (including airlines, railroads, trucking, energy, telecommunications, and financial markets). Developing countries are engaged in deregulating some sector of the economy and devising new regulatory frameworks for others. After reviewing the literature, the authors provide an overview of the costs and benefits of regulation throughout the world, highlight the potential gains from reform of regulation and deregulation in both industrial and developing countries, draw lessons from experience with government regulation, and suggest how to improve regulation in developing countries. They find that it is possible to explore systematically the cost and benefits of regulatory activities using standard economic analysis. They conclude that regulation - especially regulation aimed at controlling prices and entry into markets that would otherwise be workably competitive - can limit growth and significantly reduce economic welfare. Although unnecessary process regulation can hurt the economy, social regulations may significantly benefit the average consumer. But some regulations do not meet goals effectively and may sometimes reduce living standards. Developing countries can consider several regulatory policies, tools, and frameworks to improve their approach to regulation. What they choose will depend on available administrative expertise and resources, as well as political constraints and economic impacts. Generally, local and national capabilities for evaluating regulation need to improved. Regulation is not generally undesirable, but it often has undesirable economic consequences, which result in part from political forces to redistribute wealth. These forces can be mitigated by more sharply evaluating in consequences and tradeoffs of proposed regulations.