Book Excerpt: Macrowikinomics (Part 7)

Why the old model of command and control regulation doesn't work, and how increased transparency and public participation will replace it

…Some of the issues that challenge today's regulators include the sclerotic pace of rule making, growing economic complexity, increasing international interdependency, the corrosive influence of "junk science" and industry lobbying, and a broadly insufficient capacity for effective oversight.

Arguably some of today's troubles are self-inflicted. After dismantling or circumscribing centralized regulatory agencies in the 1980s and 1990s, many governments handed industry the power to police itself in areas ranging from toxic emissions to financial services. The thinking was that government regulation was too burdensome and costly, and the mechanics of updating it were clunky. Delegating rule making to industry bodies would make regulation more responsive to the needs of industries that were evolving quickly and becoming increasingly global in scope. Governments were to be the "regulators of last resort"—stepping in only after self-regulation was deemed to have failed.

The problem, in practice, is that most instances of industry self-regulation have deficiencies (like lax rules or inadequate enforcement) and governments (for the most part) have proven unable or unwilling to take swift action when market failures become evident. Indeed, after years of chronic underfunding, it should be no surprise that many regulatory agencies are ill equipped to pick up the slack, let alone confront novel challenges for which they have neither the resources nor the expertise….

So if the old model of command-and-control regulation is broken, what could replace it and how would it work? We believe effective regulation is more likely to stem from efforts that increase transparency and public participation in a broad swath of areas that affect the health of our children, families, and communities. This isn't the same as allowing a small group of powerful companies to police their own activities. Our proposal is the reverse. We say open up the regulatory process: make everything transparent on the Web and let citizens and other parties contribute their own data and observations. Where possible, let citizens help enforce regulations too, perhaps by changing their buying behavior or by organizing public campaigns that name and shame offenders. …

There is some precedent for this idea. For several decades, transparency has been used to spur behavior change in areas ranging from corporate accounting to nuclear disarmament. In her edited volume The Right to Know, for example, Brookings Institution scholar Ann Florini argues that citizens in all parts of the world have shown themselves to be unwilling to tolerate secretive decision making. "As a result," she says, "India, South Africa, the UK, Japan, Mexico and a host of other countries have all adopted major freedom of information laws; intergovernmental organizations such as the World Bank and the IMF have adopted sweeping new disclosure policies; and hundreds of major multinational corporations have adopted voluntary codes that require them to disclose a wide range of information about their environmental, labor, and other practices." Even NGOs and charities are routinely providing more information about their policies and activities to members and stakeholders.

The idea behind this transparency trend is fairly simple: revealing information about the activities of powerful institutions is a potent deterrent to misbehavior. The more people can find out, inform others, and organize, the less politicians and corporate leaders can pursue self-serving behavior or act against the public interest. As a tool of regulation, transparency helps provide reassurance that others are doing what they are supposed to. Investors can be reassured of the quality of their investments, the international community can be certain that no individual nation is polluting beyond its CO2 emission quotas under Kyoto, while NGOs can be satisfied that the companies they scrutinize are meeting their commitments to ethical conduct.

More rigorous and accessible financial disclosure will also allow society to assert some control over a global financial system that has become so large, complex, and opaque that it remains beyond the capacity of even the largest actor in the markets to understand. Even George Soros, the legendary master investor, is said to have been wary of derivatives because he didn't "really understand how they work." If enough individual and institutional investors followed the Soros rule, it would have quickly disciplined the markets. In other words, offer more transparency or you don't get my money.

Skeptics may doubt the capacity of citizens and advocacy groups to help regulatory bodies develop more effective systems of monitoring and enforcement.

But a growing number of regulatory agencies are already convinced, as evidenced by the U.S. Environmental Protection Agency's efforts to open up its rule-making processes and the SEC's recent announcement that it is developing new systems for collecting anonymous tips in the investment community. Even when inertia prevails in government, other organizations are taking the lead. The FDA may not require manufacturers of processed foods to label where a product came from, whether it contains genetically modified organisms, or was produced using synthetic hormones, antibiotics, and pesticides. But retailers like Tesco and a legion of online product guides are making this information available anyway. Why? Because customers are demanding transparency! …

…We're not saying transparency is a substitute for better regulation by national governments and international institutions, but we are convinced that more disclosure and increased civic participation in regulatory systems could be a formidable complement to traditional command-and-control systems. …

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