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Seeing red over regulation?

15 January 2007 Gareth Stokes

The prices on certain clothing lines could be hiked by as much as 20% in 2007. Major clothing retailers say this is the inevitable result of governments two-year Chinese textile import quotas... Recent headlines are already playing on our sympathies, decr

In recent years, government has pushed through a number of 'controversial' amendments to the law. Those that have evoked the largest public outcry include the system for transparent pricing of medicines, import quotas on Chinese textile products and a demerit system for drivers.

A double-edged sword

And here's the rub. While government 'regulations' are intended to help the end user of a product or service, or to boost the local economy, they often do exactly the opposite.

The quotas on clothing imports from China are meant to revive a struggling local textile industry by boosting employment in the sector. Government assumes that local clothing retailers will replace their Chinese imports with locally manufactured clothing, thus solving the problems of an industry that has been in decline for many years.

In reality, the affected retailers will simply shift their foreign purchasing allegiance (in instances where local equivalents cannot be found) or up the prices to maintain their profit margins. Dr Pierre Rabie (a Democratic Alliance MP) states: "There exists no rational basis on which to assume that the trade restrictions on their own will benefit local clothing and textile manufacturers or that they will create jobs; and, the consumer will definitely not benefit."

Similarly, the Department of Health's decision to pursue the Single Exit Price (SEP) strategy for dispensing medicines was vehemently opposed by the pharmaceutical industry. The consensus was that this pricing policy would lead to a number of smaller pharmacies being forced to close. The result is less pharmacies to service the end consumers, who receive only a moderate price benefit.

As an FAnews Online reader, you are most likely affected by some form of industry regulation. Given this fact, we pose the questions: Should government regulate industry? And how can government improve the regulation process?

A necessary evil

The answer to the first question is a definite "yes". Modern business cannot operate without regulation- particularly in the areas of insurance, healthcare and retirement. Government is obliged to take an interest in these areas as they ultimately contribute to fulfilling government's social responsibilities. This is part of the reason weve experienced such an increase in publicity for various financial and insurance ombudsman in recent years.

The issue of improving government's regulation of industry is more difficult to address. Of great significance is the fact that most recent regulatory changes have been met by fierce resistance from the affected industries. Problems seem to stem from governments insistence on implementing partially formulated solutions and their tendency to legislate regardless of possible flaws.

Reluctant participants need a friendly nudge

We understand why government has to fast-track some regulations. Deadlines have to be met and there is a point where reluctant participants have to be bullied to concede on certain issues. Any negotiation should involve a bit of give-and-take from both parties.

What is clear, however, is improvements will have to occur during the planning and communication phases. Government needs to include all parties early in the process and be prepared to accept more of the recommendations made by the leading industry players.

A further problem with government imposed regulation relates to inadequate infrastructure to implement the proposed legislation. In the Administration and Adjudication of Road Traffic Offences (AARTO) Act 46 of 1998 government proposed a Demerit System for Drivers (this proposal is discussed in the FA News magazine, October 2006). The reality is South Africa is nowhere near ready to implement such a system, even on a trial basis. A quick look at the chaos in the vehicle licensing centres in the Johannesburg and Tshwane municipalities would confirm this view.

In short, government needs to pay more attention to the views of business and the public. It also needs to pay attention to the feasibility of implementing proposed solutions. Infrastructure intensive solutions should be put on hold until the required assets and manpower are in place to implement them. Business objections should not be viewed as insurmountable obstacles, but rather as potential stumbling blocks that have to be removed before proceeding.

"Too much of a good thing is bad"

An intervention which is not properly negotiated tends to have a negative impact on the functioning of the free market economy. The end result is that both the service provider and the customer are worse off than before the intervention. The service providers profits are trimmed while the customer receives a lower level of service, or pays a higher price for the final good.

We need to focus on providing solutions that benefit all South Africans. There' no point in implementing a resolution or passing a Bill simply to get it off your 'to do' list!

Quick Polls

QUESTION

The South African authorities are hard at work to ensure the country is removed from the global Financial Action Task Force grey-list by February or June 2025. What do you think about their ongoing efforts?

ANSWER

But what about the BRICS?
Compliance burden remains, grey-list or not.
End-2025 exit is too optimistic.
Grey-list is the new normal.
Too little, too late.
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