Is Government Regulation an Obstacle to Competitiveness?

Published in the Telegraph-Journal 27th March 2012

Is government regulation an obstacle to competitiveness? The federal government thinks it is. And it has answered this question in a number of ways. Early in 2011, Prime Minister Stephen Harper launched the Red Tape Reduction Commission and tasked it with working with all federal government departments to reduce unnecessary paperwork that reduce opportunities for growth. He made it clear that the scope and scale of the undertaking would be extensive, noting that “today’s government is expected to bring a healthy skepticism about government to Ottawa, and to ask hard questions about what government can do and cannot do.” The intended beneficiaries of the Commission’s work are entrepreneurs and small business who have lobbied the federal government to ease the paperwork burden that slows growth and job creation.

In one notable case, government regulation was considered to provide an obstacle to investment because regulatory jurisdiction was distributed among the provinces rather than under the federal government regulatory umbrella. Finance Minister Jim Flaherty’s plan to establish a single national securities regulator was recently rejected by the Supreme Court of Canada, which ruled that his proposed legislation was unconstitutional. He had complained that the current system of thirteen provincial and territorial regulators was unwieldy and inefficient, unable to provide consistent oversight for capital markets. Although Mr. Flaherty said he would respect the court’s decision, he continues to work toward the creation of a Canadian securities agency with the assistance of the provinces, noting that broader issues, such as systemic risk, are the jurisdiction of the federal government.

More expansively, the federal government has signaled to the business community, as well as to international investors, that it is “determined to do what it can to create a greater degree of certainty for business and to establish realistic timelines to help make conditions that encourage competitiveness and investment,” according to Environment Minister Peter Kent. To achieve this, the federal government has stated that a modern and rigorous regulatory system characterized by transparency, effectiveness and efficiency is necessary.

Mr. Kent was referring specifically to environmental regulation, which has become a lightning rod of discontent for a number of industries, notably in the natural resources sector. The Prime Minister’s speeches to potential investors in countries such as China and Japan repeatedly feature references to Canada’s willingness to reduce the environmental regulatory burden for investment, particularly in energy projects such as oil and gas pipelines.

One underlying assumption of this line of thinking is that less stringent environmental regulation would produce a competitiveness ecosystem where energy companies would thrive. The accompanying assumption is that the environmental review and assessment process is an unnecessary obstacle to growth, job creation and prosperity.

The evidence to support these assumptions is mixed but research findings provide insights on the so-called Porter hypothesis, which maintains that the appropriately designed prescriptive regulatory framework raises corporate awareness and motivates new process and product innovation, promoting competitiveness. An instructive example of how innovation was encouraged by government regulation is the U.S. automotive industry. The Clean Air Act was passed by the U.S. Congress in 1965, with strident opposition from leading American automotive firms such as General Motors, Chrysler and Ford. In tandem with the Energy Policy and Conservation Act of 1975, government regulatory requirements committed the American auto industry to ever-more stringent emissions standards over time.

Additional federal regulations targeted at the automotive industry focused on new standards for consumer safety, corrosion resistance, bumper protection, crashworthiness and fuel economy. For the consumer, the consequences of industry innovation have contributed to vehicles that today are safer, last longer, are more reliable, possess superior performance, produce fewer emissions and are more fuel efficient.

A stringent but transparent regulatory framework can promote competitiveness. While regulatory waivers may be appropriate under certain circumstances, we do industry and society a disservice by setting the regulatory bar too low.

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Filed under automotive industry, Environment policy, Innovation strategy

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