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Dambisa Moyo is tired and frustrated by the aid apparatus that has not only come to “trap” poor and indebted African states but is, in her view, the root cause of poverty. The central argument of Dead Aid is that aid is the fundamental cause of poverty and therefore eliminating aid is critical to spur growth in ailing African states. Aid is the disease that we must treat to bring us back to full economic health. A bold and daring statement built around the central belief that aid distorts incentives among policymakers and society at large. It makes governments less accountable to their citizens and has led to civil wars, rampant corruption (electoral and otherwise) and has been central to an undercurrent of irresponsibility culminating in increased and self-reinforcing poverty since the end of colonialism. None of these arguments are new of course, but Dambisa is probably the first economist to boldly claim that aid causes poverty.
This article is a review of Dambisa Moyo "Dead Aid"
Also in openDemocracy:
Anna Lekvall, "Democracy and Aid: the missing link" (13 May 2009)If aid is the disease that causes endless bleeding, to stop the bleeding you simply need to stop aid, the only challenge therefore is how to do it. The Dead Aid solution is a five year exit strategy built around the idea of incentivising poor countries to access finance on international markets, supported by the tripod of microfinance, trade/foreign direct investment (FDI) and remittances. In the Dead Aid world there’s a stash of money out there on the international financial markets that is just waiting to be tapped by any African country willing to invest in a credit rating. If African countries can enter these markets and borrow, it would provide the right incentives to spark good governance since the international markets would be more willing to “punish” bad behaviour compared to those that provide aid at infinitum. In other words, borrowing through international financial markets is a sort of "self commitment mechanism" to good governance, and with that comes better long term prosperity.
It is certainly likely to be slightly more expensive than “easy money” that concessional loans and grants bring, but by rejecting these overtures nation states will find themselves on a better path to prosperity. The trouble is that African governments have limited incentives to do this on their own, though some have made progress in this direction, so they need to be compelled through the Dead Aid proposal of terminating aid completely within a five year period.
Radical stuff indeed, but is it too radical? Depending on your view of aid, this is either the most ingenious idea you have ever come across or the most naive, if not downright reckless. At this present time when many western countries are tightening their belts and some are seeking aid themselves due to the fallout from the credit crunch and many people are growing weary of Darfur, Guinea Bissau, Mauritania and Zimbabwe, the Dead Aid message is likely find some appeal not just in your Daily Mail or Fox News . I am afraid to say, and with deep sorrow, that the Dead Aid proposal falls far short in many areas, with at least four worth highlighting.
First, there’s a general lack of clear analytical rigour evidenced by elementary confusion in key areas : correlation/causality issues; definitional problems; poor evidence on policy counterfactuals; incomplete and unbalanced citation of evidence; and, perhaps more worryingly lack of general familiarity with refined areas of existing literature. Too many problematic issues to cover within this short review, but some key examples are worth highlighting.
In a number of instances Dead Aid embarrassingly confuses correlation with causality. For instance the correlation between foreign aid and savings, which Dambisa takes as strong evidence that foreign aid reduces domestic savings. It does not take a genius to work out that one expects poor nations to correlate with reduced domestic savings, and in so far as foreign aid is prevalent in poor countries, the issue of correlation between higher aid and low domestic savings becomes meaningless. Perhaps more worryingly is that in a number of places Dead Aid seems to rely on evidence just from single sources that always reinforces its general argument that aid is bad. So when Dead Aid posits that remittances are more effective than international aid, it ignores other studies that have shown remittances can also be a “curse”.
Evidence of poor research abound, with one of the glaring examples being the lack of reference and consideration of new emerging literature led by Daron Acemoglu and others on the importance of drawing a distinction between proximate and ultimate causes for underdevelopment. In many respect if aid was going to be a factor it would be nothing more than a proximate cause because ineffective aid preys on inefficient states, which are strongly determined by the existing distribution of power in society (ultimate cause).
Secondly, the treatment of aid in a homogeneous and aggregate way is particularly problematic. Dead Aid defines aid as the “sum total of concessional loans and grants”, but excludes “emergency aid” e.g. help for Darfur or the Asian Tsunami. There’s no distinction within Dead Aid between budget support, infrastructure aid, person to person aid, heath related aid, grants or concessional loans for discretionary spending. It is all discussed under one umbrella and handed the same fate. This is a remarkable assumption, especially given that the same book acknowledges the effectiveness of the Marshall Plan which largely focused on infrastructure spend. Surely the Marshall Plan demonstrates that a more nuanced assessment of aid has the potential to reach different conclusions? We may for example find that some of the aid is bad, some good and some requires further study.
This distinction is also important because we are now seeing a plethora of literature that suggests that some mechanisms work better than others e.g. cash based incentives as recently argued by Göran Holmqvist . When Britain gave Zambia £40m in 2007, I remarked that "I hope the money was new but not given freely". It presented a new opportunity for Britain to think outside the box and consider the possibility of converting this "new cash" into long term Kwacha bond claims of Zambians on the Zambia Government. Such a move would have helped restore much needed accountability in our system as well as strengthening our debt management practices. Britain could have allocated a share of the bonds to civil servants as part of civil service pay increase and so forth. The underlying point here is that not all form of aid leads to perverse incentives and indeed not all forms of aid perpetuate dependency. To put all aid in one basket makes the book appealing to the uninformed but it does not make for convincing argument to policymakers.
Thirdly, Dead Aid is characterised by a plethora of inconsistent arguments. A key example that stands out is the emotive issue of Chinese investment. Dambisa dedicates a whole chapter explaining why the “Chinese are our friends”, largely arguing from their historical involvement in Africa and their renewed commitment to trade and FDI. However, against a backdrop of Dead Aid’s “anti-dependency” rhetoric , the chant for China appears odd. Let us be clear, China is not only bringing FDI to Africa but it has also brought concessional loans and long term dependency. Zambia’s external debt has now risen to about $2bn since the HIPC completion point, a significant part of that is through new agreements with the Chinese government and Chinese businesses.
A closer look at Angola reveals the same truth. Not only is China investing heavily in that country but in exchange it is tying Angola and other countries to China for a long time reducing their options to renegotiate in the future. That is not necessarily bad, but if the central worry is that dependency leads to ineffective governments with poor incentives we should be honest enough to consider the possibility that China’s closeness to many African governments (which are not all democratic) may have similar negative impacts as aid. In addition, a more refined assessment of the China – Africa relationship would reveal that the issues go far beyond simple FDI but also relates to military cooperation and sometimes creating instability in various parts of Africa (see Michael Sata’s paper). More recently we have witnessed General Nkunda during the recent upsurge of violence in DRC use the China-DRC deal as a pretext for his insurrection, part of the so-called Coltan wars.
Another glaring inconsistency relates to the preferred metrics of measuring the extent of Africa’s aid led failures relative to the assumed metrics for measuring the success of proposed solutions. In assessing the state we are in, Dead Aid relies on national indicators such as GDP, life expectancy, level of external debt and so forth. However when it comes to assessing the extent to which the proposed solutions might be useful the book does not always stick to a consistent set of measures. For example to support the argument for microfinance, we are told Grameen Bank has helped lift many poor people out of poverty through helping “bank the unbankable”.
I am a fan of microfinance and a strong believer that aid properly directed at providing the right sorts of incentives, like IFAD are pursuing in Zambia to boost rural finance through the NARBARD style model , can produce positive results. What is particularly puzzling about the Dead Aid position is that if the metric for judging the effectiveness of microfinance is “lifting people out of poverty” at the micro level why not use the same measure for aid? If we are going to argue that remittances help bypass bureaucracy and can be effective in tackling schooling, not necessarily increase national GDP, why can’t we accept that the metric of “school attendance” is just as good a measure for assessing the effectiveness of certain aid interventions? Conversely if we are to judge the failure of aid interventions on their inability to raise national GDP (all things being equal) why don’t we accept that no empirical study to date has demonstrated that large initiatives of providing microfinance (e.g. in Bangladesh) has led to increases in GDP? The underlying point is that Dead Aid too often moves around between inconsistent measures for the problem and suggested solutions. Incidentally the IFAD initiative is a good example of effective aid that is unfortunately ignored by Dead Aid.
Fourth and finally, the solutions proposed by Dead Aid are ineffective. This is not surprising because without a clear definition of the problem, it is inevitable that the solutions would not work. But even if one was to accept Dead Aid’s basic premise that aid is bad, its solutions come far short. In order to assess whether any proposals would present an overall improvement beyond the status quo, we need to define what happens in the counterfactual carefully and then judge that against proposed policy initiatives.
In our scenario the counterfactual is the situation where we continue with the current process. We know already that Dead Aid has not demonstrated that this situation would lead to more aid driven poverty . More importantly, evidence in recent years from Zambia, Uganda, Kenya Tanzania and other countries shows an improving picture in terms of economic performance. This doesn’t mean aid causes good performance, but it does suggest growth is possible in the presence of aid even for nations at the bottom. It is therefore possible that in the presence of aid we may witness an improving counterfactual over time.
Two important questions flow from the above discussion : (1) what would be the impact of turning off the aid tap on poor nations relative to the counterfactual?; and (2) would these developing nations be able to borrow on the international markets, as an alternative to aid?
On (1) there’s no doubt that the answer largely depends on the economic and political situation in relevant nation states. For those countries with 20 % – 50% of national budgets supported by donor partners the adjustment would be too difficult and politically infeasible within the suggested five year time frame. The failure to implement their budgets would significantly weaken the human and physical infrastructures rendering these states ungovernable. More importantly locally targeted aid that is spearheaded by many aid organisations divorced from budget support would dwindle, possibly leading to multiple failed states. Dead Aid misses the point that even without aid, the incentive for military coups and emergence of vampire states would be remain because of the lucrative mineral wealth that exists. So the incentives for seeking alternative funding through financial markets as a way of survival are not always going to be as strong. Simply put for some countries turning off the aid tap would lead to chaos and breakdown in the rule of law.
As for replacing aid with borrowing, dwindling international capacity following the credit crunch (likely to persist beyond 2011/12) means there is no immediate prospect of accessible markets with significant cash to spread around. Even if African governments had strong incentives to enter these sorts of arrangements and with good initial credit ratings (which is highly unlikely) the process may be too prolonged and the outcomes would be uncertain given prevailing global economic conditions.
In short on both theory and practice, Dead Aid falls far short of what is expected of a book advocating such a radical proposal of “turning off the aid tap”. If there’s any consolation in this assessment, it is that Dead Aid will hopefully not find any intellectual traction. The analytical consensus remains that aid is important and the challenge is how to make it smarter, better and ultimately beneficial to the poor. This question has never been more urgent given the limited aid resources around. Dambisa is certainly right that now is the time to examine these issues and we can certainly do better than the present.
Anyone who thought that the history of piracy was now something out of a Hollywood movie has had to think twice. The events in the Gulf of Aden lead us to wonder what differences there are between ancient piracy and the modern version. Perhaps if we examine the piracy that reached its peak between the end of the seventeenth and the early eighteenth century, and preyed on the major trade routes, we may get a clearer understanding of modern piracy. However, opportunity makes men thieves and the cleverly written and witty book by Peter T. Leeson, The Invisible Hook. The Hidden Economics of Pirates (Princeton University Press, Princeton, 2009), enables us to do so.
According to Leeson, pirates applied economically rational principles aimed at obtaining the maximum result with the least effort and above all minimum risk. They too, in other works, apply the rules of Adam Smith's invisible hand, or rather the invisible hook. Pirates were not cruel out of sadism but simply because by spreading terror they were able to increment their booty. Flying the infamous "Jolly Roger" served the purpose of generating what economists call the "announcement" effect: the potential victims were warned that any attempt to stave off the attack by a pirate vessel would lead to ferocious reprisals. If, on the other hand, the vessel attacked surrendered without any resistance, everything of value on board would be seized but the crew would be spared. The same applies to the pirates' widely publicized ruthlessness against prisoners: many of the latter were tortured, others forced to walk the plank. Also in this case the pirates' intention was to create what economists call the "reputation" effect. Prisoners might try to conceal information about valuable goods or about the routes followed by other trading or navy vessels and would be induced to reveal all their secrets by the terrible reputation enjoyed by the pirates.
Leeson gives credence to the economic interpretation of the pirates' behavior: mutineers were certainly attracted by high profits; in the early 18th century a sailor of a merchant vessel earned no more than 25 pounds a year, and a courageous pirate could earn as much as 300. But as well as borrowing from the trappings of economic theory, Leeson does not disdain also casting a penetrating glance at the social and political motives of these odd outlaw communities. Life on board ship, whether a merchant or a navy vessel, was regulated in an authoritarian and hierarchical fashion (and it might be added that things have not changed much since those times). The ship's commander had the power to inflict very severe corporal punishment, stop crew members' pay without good reason and demand that the crew perform work not envisaged in the original contract, and more besides. On board the captain had the power of life or death without any checks or balances. It is true that the sailors could sue for justice in the courts on returning home, although the latter usually sided with the commanders, also because the judges came from the same social class.
It is thus not surprising that, far beyond the reach of the dominant authority on land, sailors should set up a completely different social organization. And it is striking to see the extent to which this was based on principles of equality. In the first place, political equality. "Every Man has a Vote in the Affairs of the Moment" runs article one of the Code of Conduct on board the private vessel of Captain Bartholomew Roberts. Furthermore, it was the crew members who elected their own captain. Furthermore, the commander could be deposed by the pirates themselves if judged to be inadequate, corrupt or not bold enough, as happen to the famous Captain Edward England. In the rudimentary system of checks and balances characterizing the pirate republics, also a quartermaster was elected to look after the ship's management, and who had the power to avoid individual crew members being unjustly punished. Nor must it be overlooked that, in an era in which the European nations were getting rich from the slave trade, many pirate ships granted equal rights also to colored men.
The pirate communities were in other words far from being anarchic: indeed, they developed a democratic system opposed to the autocratic system prevailing in the other vessels. Pirates had even too many rules: their codes of conduct prohibited sailors from gambling and smoking on board, from drinking after sunset and from keeping lamps alight late at night. They were also prohibited from bringing women on board to avoid causing jealousy.
The distribution of the rewards was much fairer than the pay on merchant or naval vessels: the pay of the captain and the quartermaster was only twice as high as that of ordinary pirates. Moreover, in the case of accidents in the "working place", the pirates' republics had a much more highly developed welfare system than that applied on the other ships: they meticulously specified how much was due to any crew member who had lost a hand, a leg or an eye. On the other hand, desertion during a boarding operation was punished by death or marooning on a desert island.
If piracy offered so much more to its members than was available to other sailors, the question is not so much why there were so many (it is estimated that there were two or three thousand in the early 18th century) but rather why so many sailors did not become pirates. Perhaps it is because when captured they were almost always hanged: a count of executions between 1716 and 1726 indicates that about 400 were hanged, about 40 per year on average. But if we consider the high death rate among law-abiding sailors it must be concluded that the "announcement" and the "reputation" effects worked more for the scaffold than for the Jolly Roger.
In The Rule of Money I attempted to describe the main arguments in Karl-Heinz Brodbeck's recent book about money. He also deals at length there with the phenomenon of interest and this discussion piece adapts his chapter on Jeremy Bentham's Defence of Usury. The nub of Brodbeck's account of the social and psychological structure of money, which is key to his critique, is as follows.
Since the Israeli offensive against Gaza in 2008-2009, the cash flow situation has been aggravated to the extent that the economic cycle in the Gaza Strip has ground to a halt. Almost all economic sectors, mainly banking, trade and housing, have been entirely crippled. In effect, a suffocating humanitarian crisis in the wake of the war on Gaza is imminent.
Sami Abu Shamalla is a political and economic analyst in Gaza. He is a senior lecturer of economics at Gaza Community College of Applied Science, holds an MA in financial management and is enrolled in the PhD programme at Utara University in Malaysia. He is the former manager of the International Easy Forex in Gaza, and has written two academic books; the first in financial management and the second in business correspondence.If you happen to go into one of several banks in Gaza, you might see the following scene recur hundreds, if not thousands of times daily:
Customer : I want to withdraw five hundred dollars from my account
Bank teller: I can give you the sum in Israeli Shekel.
Customer: But my money is in dollars!
Bank teller: I am afraid we do not have any foreign currency in this bank.
Customer: OK, what is the exchange rate?
Bank teller: 3.76 per dollar
Customer: But in the market, it is 3:98
Bank teller: This is the rate in our bank
Customer: But this means I am losing 110 shekels, and this is not fair.
Invariably this leads to a heated argument between the customer and the bank which can only end in either an undesirable transaction for the customer or a big punch-up.
The cash crisis in the besieged Gaza Strip, as hinted above, is not an isolated phenomenon, but part of a crippling financial crisis intricately connected to other humanitarian crises the Gazans have been undergoing since the 2006 election. This is a problem that cannot be described let alone explained outside its context. In fact, the late Israeli offensive on Gaza was only one phase in what has been a comprehensive war on the Palestinian people and all the elements that are essential for a viable state to be established, together with a thriving Palestinian economy.
To the outside world, the 2008- 2009 war on Gaza was a mere military operation that ended up causing horrendous casualities, including the massacre of civilians, the destruction of thousands of houses, and eventually the displacement of hundreds of thousands of Palestinians. In fact the war on Gaza was a calculated stage in a systematic Israeli campaign against the Palestinian economy in general, and the economic life of the Gaza Strip in particular. In the wake of the war, lasting 22 successive days, the Gazan population opened their eyes to see the full scale of the catastrophe that awaited them. Apart from the shocking toll of fatalities and hopeless condition of thousands of badly injured people, the Gazans were shocked by the devastation of their economic life. Several public economic sectors were entirely paralysed. As a result, unemployment sharply increased, prices soared and commodities, essential as well as luxury, went missing from the local markets. The initial estimate of loss due to the destruction of the infrastructure and basic amenities came to 1.9 million American dollars (USD). However, the most recent report prepared by UNRWA has revealed that the real losses were much larger: final estimates according to this report amount to USD 4 billion. The banking and the construction sectors were the most badly affected, and the ongoing problems of liquidity and cash flow along with the unavailability of construction materials are reducing the Palestinian economy to a standstill.
Liquidity and cash flow problem
In fact the banking sector in the Gaza Strip has been assailed from three distinct directions. The first concerns liquidity and cash flow. The second has to do with the provision of credit. And the third is the increasing lack of credibility of the banking sector in the wake of the world financial crisis.The Israeli occupation has deliberately and systematically aggravated the first problem in several ways. As the Israeli shekel is the main currency Palestinians use in their daily transactions, the occupation has frequently and intermittently stopped the supply of the shekel, each time creating a real crisis in day-to-day transactions. Prices soar and the real value of foreign currency, mainly the dollar and the Jordanian dinar (the currency used by Palestinians for their investments and savings) accordingly plummet.
It is worth mentioning that the monthly requirement on the part of Gaza's banks for the Israeli shekel is 50-100 million shekels; these cover the salaries of public sector employees and the needs of the market. As for the other two types of currency, the Gaza market needs 6-8 million Jordanian dinar (JD) and 16-18 million American dollars per day. Six months ago, the Israelis simply withheld the supply of the shekel and would not allow it in unless the Egyptians and Ramallah's government intervened. According to the Palestinian Monetary Authorities (PMA), the Israelis have allowed only 450 million shekels and 94 million JD since the beginning of 2009. This, many Palestinian economists point out, has not helped in solving the problem of cash flow. Nowadays, however, the Israelis have switched tactics: they allow the shekel to come in but withhold any foreign currency. This problem has been significantly worsened by tunnel trading - a natural consequence of the blockade that has been imposed on Gaza since Hamas took over.
The deliberate shortages in either currency, and in effect, cash flow in Gaza banks and its marketplace do not lie within the jurisdiction of the Israeli financial authorities, but rather within the responsibilities of the military. The security cabinet and the so-called defence ministry are in charge of banning any foreign currency from entering a besieged Gaza. The Israeli pretext is that Palestinians are using this money to smuggle in commodities through their tunnel trading. So far, under the pressure of UNRWA and some NGOs working in Gaza, the Israeli authorities have allowed only limited amounts of foreign currency in. UNRWA has managed to bring in about USD 10-12 million on a monthly basis to cover the salaries of its employees, while the NGOs were able to secure USD 3-4 million to fund their humanitarian operations.
Another related reason for the scarcity of liquidity and cash flow is the drastic economic situation resulting from the 3-year siege imposed on Gaza by the Israeli occupation forces. The Palestinians in the Gaza Strip are totally reduced to consuming rather than producing. The economic cycle has been entirely suspended. There is neither production nor is there any export activity. Accordingly the scarce amounts of foreign currencies that were formerly allowed in have been spent on consumer commodities brought through the thousands of absurd tunnels that link the Gazans with their Egyptian brothers. In this sense hard currency travels one way. The estimated money spent on goods imported through tunnels is about USD 200 million per year. This factor, added to those mentioned above, spells the death of the banking system in Gaza.
Gaza banking services
Indeed the banks in Gaza are on their way to being totally defunct, only currently operating in shekels at 40 % of their capacity. At present, the total available foreign currency in Gaza banks is a mere two million Jordanian dinar and USD 5 million. This combination can keep the banks operating for about seven hours. Almost all Gaza banks are partially unable to provide the public with banking facilities. As a result, all the Jordanian banks operating in Gaza have totally suspended their banking services because of the high level of risk involved in any investment. Furthermore, most of the loans required by the Gazans are for consumer spending, and this in itself is a great risk to the banking sector. Their inability to extend their services to the Palestinian public in Gaza has greatly discredited these banks. They are unable to give loans, or even bring in money for the NGOs operating in Gaza. For instance, UNRWA asked for USD 181 million for humanitarian relief work. They wanted to compensate those whose houses were destroyed in the war and to provide the destitute with the wherewithal to buy food. They wanted to rehabilitate and fix up many of UNRWA's amenities and premises that were destroyed in the war. The dollar funds for such operations exist, but Gazan banks are unable to channel these funds to where they are needed.
Gaza banks and the international financial crisis
Gazan banks were greatly affected by the international financial crisis. Many Gazans and even Palestinian expatriates investing in Gaza have already withdrawn their assets for fear of collapse. As a consequence many of these banks are about to close down, leaving the Palestinians vulnerable to the crazy financial black markets. Then Palestinian investors have been dragged into the unruly business ventures called the tunnel trade. They were forced into this by the relentless closures of the border crossings into and outside Gaza. Of course such a situation will never help any effort to reconstruct post-war Gaza. All pledges, then, to reconstruct the Gaza Strip remain part of an international rhetoric which is awaiting breakthrough to lift the siege imposed on this small geographical entity - the most densely populated place in the world
New ideas for economic regulation are in the air today. In the wake of the economic downturn, for example, the Obama administration's Treasury Department this summer proposed a panoply of new regulatory agencies, including a consumer financial protection agency, a national bank supervisor, and a council of regulators, in addition to expanded powers for the Federal Reserve. It is not at all clear, however, that creating more agencies based on old regulatory models is what we need, for the financial crisis offers a stark reminder of how outmoded our regulatory structures have become. Very little creative thinking about how to establish public oversight over the economy has occurred for decades. When thinking about how the economy should be regulated more broadly, it is time for a fresh start.
Richard Rosen, Ph.D., is a senior fellow at Tellus Institute in Boston, where for decades he has been an energy consultant, often working with state public utility commissions.
We need new principles for an approach to democratizing the economy so that it serves the needs of the many and not the few. Foremost among these is the principle that private interests should fundamentally serve the public interest. In keeping with this, regulation should not only avoid harms, but should proactively ensure that all business and government activities serve the public interest. A second principle is that regulation should be an instrument for democratic decision-making. This means greater public review of decisions, greater transparency, and a wider range of stakeholder power over both corporate and government decisions.
When put together, these principles point to the fact that more democratic control is needed over a broad range of investment decisions - even those of for-profit corporations. It is investment decisions that shape the world of the future. Contrary to the claims of free market advocates, the public interest cannot be achieved without greater democratic control of the economy.
If this proposal seems radical or impractical, it is useful to recognize that such a model already exists. It is the American model of the public utility commission (PUC). PUCs are best known for rate-setting with respect to energy, telecommunications, and water. But more important is their little-known role in approving all major utility investments, and products for which they set rates. It is this authority that makes the PUC model particularly powerful. PUCs are given this authority because a large part of the cost of utility services provided to the public is the cost of paying off capital investments in plant and equipment.
An attractive feature of well-functioning state PUCs is that all decisions are based on evidence presented to commissioners through formal hearings that must comply with administrative legal procedures. This means PUC decisions can be appealed through the courts. Evidence is supplied by witnesses who testify under oath. While most witnesses are technical experts, non-experts also testify in order to bring a broad range of public input into decisions. Importantly, all witnesses can be cross-examined by attorneys, just as in courts.
In PUC proceedings, all parties are allowed to ask formal discovery questions - that is, to make information requests - of business being regulated. Thus the secrecy that often shrouds corporate and government decision-making is greatly reduced.
A wide range of organizations can be parties in PUC cases, including civil society groups. Sometimes the PUC orders the regulated company to pay the legal costs for stakeholders who lack sufficient income to pay these expenses themselves. This helps to ensure fair representation of all stakeholders. Finally, PUC commissioners can themselves be chosen from a diverse set of stakeholders, further enhancing democratic decision-making.
If the PUC model were to be applied to non-utility companies throughout all sectors of the economy, it would ensure that corporate and regulatory decision-making became more transparent and politically accessible. As it stands now in the U.S., many federal regulatory bodies - including the SEC, the Environmental Protection Agency, and the Federal Energy Regulatory Commission - merely solicit comments on proposals rather than holding evidentiary hearings. Under a PUC-like regime, undemocratic, back-room dealing would be far more difficult because PUCs must write formal orders explaining their decisions. Currently, most corporate decisions are totally opaque.
The public utility commission model could be spread by creating PUC-like industrial regulatory boards (IRBs) in each major industry, with the power to ensure that appropriate financial investments are made that achieve key social and environmental goals, instead of simply maximizing profits. Indeed, given how little time the world has to mitigate climate change, water and food shortages, and the associated human dislocation, it is inconceivable how unregulated and undirected corporate investments could ever put the world on a trajectory toward climate stabilization and sustainable development.
Industrial regulatory boards would work in the following way. Whenever businesses of significant size wanted to invest more than a specified minimum (say, $10 million) in a new production facility, or to create a new product, they would apply to their industry IRB for approval. If commissioners deemed it necessary, they would hold formal hearings to approve such moves.
Such a process might be useful in agriculture, for example, where the social and environmental impacts of genetically engineered seeds have not been deliberated in an open, democratic process. Or imagine how such a process could work in the chemical industry, where thousands of chemicals are manufactured that have never been tested for safety. An industrial regulatory board could make the precautionary principle a reality.
Regulation has long been defined in terms of damage control. In coming decades, this focus should expand to include proactive principles for achieving society's goals. With rare exceptions, all regulatory board proceedings and deliberations should be made public, and should rely on evidence collected broadly from all relevant stakeholders, under the powerful mechanism of administrative law. Civil society participants should be eligible for funding mechanisms, to ensure diverse voices are heard. The guiding principle should be whether or not major new investments or products seve the public interest. This is a simple, powerful framework for how regulating the economy can be rethought from a clean slate.
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