Rationalizing Rustic Regulators: How Should Australia's National Economic Regulators Be Reorganized?

Abstract

Australia has implemented extensive microeconomic reform since the 1980s. Part of this process involved developing a suite of independent economic regulatory authorities. These institutions largely developed in an ad hoc manner, without an overarching framework to consider which functions and responsibilities should be located in which institution, and how these institutions should be organised. This paper provides such a framework.The paper sets out some basic principles about the location of regulatory responsibility. When should functions be located in government departments, independent regulatory authorities, or dealt with through market interactions within the broad legal framework? The paper notes that the core benefits of arms-length regulation derive from improved decision making – better expertise and reduced sovereign risk. The paper recommends focusing independent economic regulation on four basic functions: market creation, market operation, market outcomes, and market failures. It develops a model to guide both the creation and review of independent regulators in these four areas.The paper identifies a number of basic problems that need to be addressed in design of the suite of independent economic regulators. In particular:• how to avoid regulators being captured by some party with vested interests,• how to make sure regulators are not slack,• how to prevent regulators from usurping policy functions,• how to limit potential mission creep by regulators, and• how to deal with changes in the economic environment that impinge on the relevance, responsibilities and requirement for particular regulators.The paper develops a set of regulatory principles that aim to address these basic problems. These are:• to maintain regulatory relevance, make it hard to establish new regulators, and review each regulator once a decade,• to give regulators clear and appropriate objectives and functions, and keep regulators separated from policy development,• to establish clear regulatory independence and rotate Commissioners and senior staff,• to make regulators accountable and transparent including through clear appeals processes, and• to enhance regulatory efficiency by separating Commissioners from day-to- day management.The paper then suggests how these principles might be applied in practice. It recommends that Australia consolidate its (national) economic regulators to just five:• National Markets Commission• Competition Commission• Reserve Bank of Australia• Consumer Protection Commission• Essential Services Commission