Mad Cows, Mad Politicians

If telecom reform in the U.S. is an example of an industry where the process of deregulation should accelerate, the ongoing "mad cow" debacle in Britain shows why regulation is sometimes necessary. Since mad cow disease, or bovine spongiform encephalopathy, was first identified in 1986, the British government has tried, with varying degrees of success, to downplay the possibility that the disease could spread from cattle to humans. Indeed, in 1990 the Agricultural Minister put his daughter on television eating a hamburger to show there was nothing to worry about.

Now Britain faces the staggering prospect of having its beef exports to the European Union, totaling almost $1 billion annually, banned. In all likelihood, cattle worth billions of dollars will have to be slaughtered to halt the spread of the disease. The economic consequences could be enormous. As many as 100,000 beef-related jobs could be lost, and inflation could soar because of a sharp rise in beef and milk prices.

The moral of this story is simple. In an increasingly global economy, customers can almost always choose alternative suppliers. Government regulation may be annoying, but the discipline of global markets can be harsh. That means a country that ships unsafe or dangerous products could eventually find itself operating at a competitive disadvantage.

Taken in moderation, regulation--including safety standards--can play an important role in protecting access to global markets. It's necessary to reassure not only domestic consumers, but everyone else as well.

This principle goes beyond consumer safety issues. For example, the same issue of maintaining credibility through regulation is equally important for financial services. The credibility of a brokerage or a bank can disappear overnight--and when it does, so does the firm. Moreover, the country with the tightest financial regulations--the U.S.--is also the one that attracts the most money from all over the world, in part because foreign investors know that they can get a relatively fair shake.

It's the conventional wisdom these days that deregulation is necessary. But the lesson of the mad cow disease should not be lost on the political leaders of both industrial and developing countries. Johnson & Johnson's private-sector response to the Tylenol product-tampering scares of 1982 and 1986 showed that the right way to handle a corporate crisis was to be forthright and not to minimize the problem. In the same way, the mad cow episode may show that to be successful on the global markets, governments need to act quickly and efficiently to ensure that confidence is maintained.

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