Wednesday, December 19, 2012

Why the Density of Regulation for Global Issues is too high today

Recently I was at a conference about finance and ethics. One of the discussed topics there were regulations in the finance industry. Although the discussion was controversial there was somewhat of an overall agreement that regulation is basically necessary but that its density today is too high. I asked myself why there is on the one hand an insight that regulations are needed and on the other hand a moaning about too much regulation?

The answer, I think, is to be found in the globalization. When the West triggered the economic globalization by national and international market liberalization and deregulations one consequence was the global integration of finance and other industries. The second consequence was that especially states in the West lost control over important political instruments for regulation. And by eliminating regulative buffers, the development of economic and financial crises was facilitated because unleashed financial streams could flow nearly without control.

Besides the political instruments already given away due to deregulation and liberalization the now established economic globalization has created new realities: according to the political scientist Ch. A. Kupchan, still state-based political instruments as e.g. financial- and monetary policies have become ineffective in a globalized world because of its inherent global competition. This all shows that states – and especially Western states which carried out deregulation more thoroughly than others – aren’t able to provide solutions (alone) for global issues as the challenges in the global financial system.

Because of this inability of states and the need to solve global issues, many international and transnational regimes and organizations have come into existence or tried to expand their sphere of activity in the past two decades (e.g. OECD, WTO, Basel III, Kyoto Treaty, GRI). They aim to contribute to solutions of global issues by providing systems of regulation. Because a global coordinating authority like a world-state is not existent, this development meant that a plethora of state and private-actors, organizations, initiatives, conferences and summits try to provide regulations concerning concrete issues.

The result is that there is a mess referring regulation of global issues today. It is not very surprising therefore that regulation concerning single issues such as e.g. unleashed finance or labour conditions in producing countries has become very dense and confusing. One even can speak of a market for regulation of global issues: different international regimes and organizations etc. offer each their “regulation-package” for one and the same issue (what leads to arbitrariness instead to effective solutions).

Because the mostly unintended lack of coordination on a global level can be seen as a central reason for the high density, it is inappropriate to speak of a willfully regulation frenzy. Thus, it is better to speak of an absence of effective regulation on the level of single states as well as of an absence of coordination on a global level, which principally would be the level on which meaningful regulative solutions need to be established.

It remains to be seen if the development of institutional structures for global governance is on the way to a necessary simplification of regulations which are at the same time more binding. Solutions are the aim to which regulations are expected to contribute effectively: this is what they are needed for. Besides, also factors such as moral, (economic) Weltanschauung or mind-set play important roles for effective solutions. But regulations are an indispensable part of them.

Claude Meier

Monday, December 10, 2012

About minimizing costs and transferring costs

 In general, minimizing costs is seen as a virtue: Who in the process of producing goods and services seeks to keep costs as low as possible avoids the unnecessary squandering of often valuable resources, which could otherwise be put to good use. Who would oppose this? Unfortunately, one soon discovers that the word ‘minimizing costs’ is not always used in this positive sense, but often with far less noble intentions.

When I call my insurance company, as a rule I’m told that all the employees are busy at the moment, that my call is however welcomed and I will be connected as soon as possible with an available representative. Then without being requested, an overview of the products and services of the company are transmitted, framed by a catchy melody by Mozart or Louis Armstrong. In the meantime, without having asked for it, my waiting time has increased and with it the cost. After a certain time the whole welcome ritual is repeated – all at my expense! The reason for this is that the insurance company has reduced the number of its employees in order to cut costs, which by virtue of my waiting time has in essence been transferred to me. This is not cost minimization but rather cost transferral.

Something similar takes place when I’m at the train ticket-window of the Zurich Main Station to get a train ticket not available from the automat. Of the 11 available windows, only 3-4 are open; of which one is served by someone in training and another Korean tourists are trying to put together their trip through Switzerland. At the 2-3 well functioning windows a queue of maybe 10 or 15 people are waiting. Again the company is minimizing its costs at the expense of their customers. How the cost transferral of the Swiss train service takes place can be witnessed at the above location, daily for hours and especially at rush hour. It would be interesting to calculate how many man-years the economy loses or to estimate how much is lost in human wellbeing, including that of the persons at the windows, who are subject to constant pressure and the cantankerous reactions of customers. In no way does this correspond to the concept of “people for people”, as we understand up-to-date value creation in firms.

The most crass examples of unreal cost minimization are those promoted by some politicians. They tell the public for example how the cost for health or educational institutions can be kept low or that one can save money on infrastructure. However they fail to say that this very often involves a tangible reduction in benefits. This has less to do with the virtues of minimizing costs than with a net loss in the quality of life.

Edwin Rühli