General concept of economy?s institutional regulation

Zviad Cheishvili, Nona Karalashvili, Nino Gorgadze

Market order ideas (liberalism) have been actively propagandized in modern Georgia. This implies rule of law, phasing out of state interference in economy, development of private property rights, human freedom, personal motivation growth, etc.

A majority of political and economic establishments supports the ideas, yet when speaking about certain reforms there becomes evident a collision of corruptive interests between some officials, politicians and the so-called liberals as well as attempts of misleading the society ? towards measures for minimizing state interference in economy. “Principal argument”
*Loss of market regulation instruments by the state will lead to oppressing consumer interests ? the “argument” bears actual and great social weight.
To give a clear idea of general concept for economy’s institutional deregulation we should characterize
some directions of functioning of institutional regulation system
Nowadays almost all fields of economic activity are subject to regulation in Georgia.
An important mechanism of regulation is represented by current licensing and permission system. There are five conditional groups presented as a result of analyzing current practices in Georgia:
*Health protection field. The field includes all kinds of activities, where any living organism is a consumer of products and services;
*Technical field. It is connected with technical provision of all kinds of activities (construction, ammunition, energy, transport, etc.);
*Environment. Activities that in any way affect the environment (environmental protection, geology, geodesy, etc.);
*Humanitarian and cultural field. Activity that is in any way related to education and culture (historical inheritance, educational institutions, cultural monuments, etc.);
*Economic field. It comprises activities that are related to customs, finances, insurance, export-import, gambling, etc.
There are 65 fields liable to licensing though each field has certain activities that require different licenses and certificates. Their total number is great, for instance:
*There are 23 kinds of licenses and 3 kinds of permissions in construction;
*There are 6 kinds of licenses and up to 200 certificates in environmental protection field, and so on in other ones.
It is noteworthy that licensing terms are determined by license-granting bodies alone, which provides them with a powerful mechanism for interpretation of laws? and, in reality, for market structure formation. In certain cases, a license-granting body acts as a market participant and therefore, it freely sets terms for a competitor’s entry onto the market, which, in reality, is less possible. Some licenses are not based on logic, a clear example of which is a license for importing Georgian cultural values to Georgia. This testifies to the fact that the present licensing system is not based on social interest protection, but rather on desires of some interest groups.
Tariff regulation is also a most important regulation mechanism implemented by independent regulatory agencies (their competence also includes licensing in certain fields) and appropriate transport administrations.
It is noteworthy that for the reason of preserving independence some regulatory agencies are financed through regulation fees, i.e. through interest from market participants’ turnover. Consequently, regulation fees designed to protect consumers’ legal interests are not paid by the service consumers, but rather by a supplier.
Apart from the fact that regulation fees seem to be an additional tax to agents of certain fields, which emerges as an additional barrier for the entry of new participants into the highly important fields (energy, telephone service, gas supply, etc.), there is also an objective consequence of regulation:
*Enlisting the support (absorption) of regulatory agencies by agents of some fields, as a result of which regulators’ work no longer focuses on consumer interests (the only purpose of the agencies’ formation), but rather on economic agents of the fields.
Conclusion: The brief analysis of current regulation reveals the fact that the whole mechanism needs to be substantially revised: first of all, it requires determination of purposes and interests, and based on it, reduction of regulatory fields while concentrating on true protection of really important interests.
Goals and methods of economy’s institutional regulation (new approach)
The most important goal of institutional regulation is protection of consumers’ and third persons’ vital, political, cultural and economic interests without obstructing economic development.
*Vital interests imply provision of technical safety and consumers’ healthcare;
*Protection of political interest is performed in accordance with the broadcast law and it does not represent a discussion object of the given concept;
*Cultural interests are related to preservation of historical inheritance;
*Economic interests imply financial and municipal service expenses, i.e. everything that has or might have an effect on consumers’ economic status.
Given the permanent compromise between protection of interests and economic development, it is most important to consider regulation methods. With the purpose of minimizing latent expenses we have suggested four main methods of regulation:
*Determination of minimal technical safety standards ? establishment of minimal, obligatory technical standards and requirements for participants of life-threatening fields. It is also most important that already existing safety standards of a certain branch should be viewed as a safety standard, which excludes any additional unreal requirements. For instance: If a potential investor wishes to build a new hydroelectric power station, the minimal safety requirement he should meet will be consistent with the already existing current safety standards for hydroelectric power stations.
*Production and consumption license ? giving rights for producing and using life-threatening production and service. To overcome latent regulation expenses via the method, we have suggested the following licensing system: in case of meeting unilaterally established and generally equal minimal technical requirements, a license grantor will be compelled to issue an appropriate license. The above-mentioned example of hydroelectric power station shows that if a potential licensee meets minimal technical standards, he will encounter no problems in obtaining a license. Such principle will exclude a license grantor’s arbitrariness, reduce corruption and remove additional and groundless barriers to market entry. What is more important, the powerful mechanisms of market distortion and artificial monopolies, i.e. exclusive licenses will be prohibited.
Substantial changes of licensing system are to be made in the fields where resources (natural resources, radio and TV frequencies, etc.) are used as a result of license activities. As license only means granting rights for business, such fields seem to lack logic. There occurs complete and exclusive use of social property and extremely limited resources for petty license fees. Added to this is the fact that a license-holder often wastes resources due to lack of interest towards property. To set right the illogicality and to give rise to market stimulus we have suggested turning a license for the use of resources into lease. Such form would completely change the picture and guide the field’s relations towards a natural course.
*Self-regulation of branch standards ? its essence lies in market participants’ guarantees of their own production and service quality. In order to attract as many customers as possible, in competitive environments market participants alone establish standards for their own production and services as well as ensure compliance with the standards. The practical example of self-regulation mechanism is search for a hairdresser or an auditor. In this case no one gets interested in their licensing. At first, information on them is obtained in different ways (through friends, partners, advertisements or other methods), then a decision is made after comparing their skills and terms with those of competitors. Therefore, interference of a third party ?state, along with suppliers and consumers, will only involve additional charges for market functioning and development (for increase of standards). Similar self-regulation mechanism is to be found in any other professional activities. Thus, we have suggested deregulation of any professional activities and formalization of active self-regulation mechanisms within it.
Self-regulation might be introduced through the use of other world-approved mechanisms. For instance, formation of private associations that alone set standards and ensure their compliance and improvement in order to preserve rating and attract customers.
*Tariff regulation ? it is detailed in the concept of tariff regulation institutional reform.
Tariff Regulation Institutional Reform
Tariff regulation is, in reality, an anti-economic action as it leads to economic de-motivation of fields’ agents thus standing in the way of branch development.
The only reason for using the mechanism in economy’s institutional deregulation process ? in transition period ?is maintenance of social stability. Therefore, it is most important to attain the goals through minimal expense via the tariff regulation principles suggested by us:
*Equal consideration of suppliers’ economic interests and consumers’ purchasing power ? equal protection of the law for both participants of the process (suppliers and consumers) and equal consideration of economic interests are of much importance.
*Determination of upper margins of service and end consumption tariffs by a special property owner? ? there appears market stimulus for price formation.
There is no alternative for special property in short time. Yet, in case of profitability alternative might arise in long-term period. Accordingly, in short-term period formation of competitive environment encounters obstacles. To set this right, it is first of all advisable to introduce principles for the involvement of third parties. This is possible by assigning a special property owner the task of making equal requirements for all potential suppliers and by offering service to them on condition that they meet the requirements. In this way, upper margins of tariffs will be established prior to the formation of competitive environment.
As for end consumption tariff, in effect, a supplier is himself interested in expanding scales of production and service by reducing the tariff on condition that there is no guaranteed exclusive license from a state (e.g. Telas’s exclusive license for service supply in Tbilisi).
To overcome latent expense typical to tariff regulation it is not sufficient to only reduce regulable production phases, but it is also essential to determine the fields necessary for attaining the only goal of tariff regulation ? social stability in transition period.
In other words, tariff regulation should spread on such kinds of economic activity that are directly related to consumers’ social interests. Fields and branches that meet the below-given five criteria will be subject to tariff regulation:
*Commonly used, indispensable goods and services;
*Vitally important production for low income families, i.e. goods and services that make up a large share of families’ expenditures;
*Restrictedly circulating goods – where it is difficult to build up stores and create infrastructure in a short period of time;
*Their consumption form is formed “historically” implying that a consumer is used to consuming goods bought at a particular place, in certain quantity, from certain suppliers, on certain terms;
*For certain consumers there is one supplier. Penetration of several suppliers onto market in a short period of time is hardly possible; consumer choice of suppliers is not made.
Consequently, only fields of energy, gas, water and fixed telephone communications will be subject to tariff regulation.
We have suggested the following institutional reform of tariff regulation: administrative bodies that fulfill the tariff regulation function should be relieved from the responsibility, and instead an independent diversified tariff regulation collegial body should be formed. The body will be financed by state budget (regulation fee will be cancelled) and it will submit annual report to the Georgian government.
The following is essential for the new regulatory agency to become much more objective:
a) Independence from political situation in order to prevent state structures from using tariffs for their own purposes and creating non-predictable environment for suppliers. The goal can be achieved by cycle appointment (e.g.. for 7 years’ term) different from officials’ political cycle as well as through other possible ways.
b) Independence from suppliers and consumers to be achieved through budget financing (as a supplier by no means determines a regulator’s budget whereas sums paid by consumers for their interest protection do not go directly to the budget).
c) Absolute transparency of information on regulator’s activities, which will strengthen control over regulators and move them towards real fulfillment of their functions.
It is noteworthy that in establishing marginal tariff special conciliatory measure is envisaged in case of disagreement between a regulatory agency and a supplier?. It will not interfere in supplier’s financial or other activities so that not to obstruct their work.
Subsequent to the formation of competitive environment, in certain sectors independent tariff regulatory bodies will be relieved from responsibilities in appropriate branches that are subject to further total deregulation.
A new independent diversified tariff regulation collegial body will be more protected from branch influence due to its integrity. It will conduct flexible and compact tariff policy. A supplier will be encouraged to optimize expenses due to the easing of tariff regulation. Not an exact tariff, but an upper margin will be established for suppliers, i.e. they might gain more profit by optimizing expenses, which, in the long run, will lead to further natural decrease of tariffs. The reform will also contribute to the free development of market participants. Consequently, investment climate will improve through reduced regulation.
The present deregulation reform, mainly, serves to liberate economy from excessive state burdens and enable individuals to make their free choice. This can be implemented via exact determination of social interests and realization of regulatory measures aimed at the protection of really essential interests, which requires minimal latent expense.
It is important to note the role of society in enforcement and success of the given regulation reform. To realize real deregulation, individuals should make use of their rights to promote the natural process of market’s permanent development. Therefore, deregulation reform is not a first development step, but rather a way to the step to be ultimately made by the society.