Why do Politicians Delegate Regulatory Competences to Independent Regulators

The late 1970s and 1980s saw the decline of the Positivist State and the emergence of the Regulatory State, whose primary attributes are privatisation, welfare reform, liberalisation and deregulation (Majone, 1997, pg.143). However another important feature of this regulatory mode of governance is the increase in the creation of autonomous or semi-autonomous independent regulatory agencies (Thatcher, 2002. Matti & Buthe, 2005. Gilardi, 2001). An independent agency usually displays the following characteristics; it is headed by unelected officials, these officials have a long term of office, they are usually appointed for their technical skills, and the dismissal of the unelected heads on purely political grounds is almost impossible. In other words, it is situated outside the democratic chain of accountability (Gilardi, 2001, pg.8). So why would a politician consider delegating powers to an agency that is organisationally detached from government? Principal-Agent Theory argues that there is a trade-off between the state actor and independent agency when policy-making authority is delegated; this trade-off is between the costs of internal policy production and external costs of delegation (Matti & Bluthe, 2005, pg. 4).If the costs for the political principal of developing the policy are high, economically or politically, in comparison to the cost of delegating, then delegation can be favourable. Delegation is where the principal (the state actor) conditionally grants authority to another actor (the regulator in this case) to act on the principals behalf; the principal establishes the agent and the agent governs through their delegated powers (Thatcher, 2002). I will analyse three functional problems that face politicians that make it favourable not only to delegate powers, but to delegate to an independent actor; making credible commitments ,increasing complexity and technical nature of regulatory decision making, and the the shifting of responsibility (Buthe, 2006). The credibility of government actions is highly important for getting the optimal response from private actors. Government policy lacks credibility for two reasons; time inconsistency and the

democratic nature of policy making (Keefer & Stasavage, 1998, pg.2). The problem of time inconsistency lies in the danger of the government reneging or deviating from a policy in the near future because there is no binding commitment holding them to the original plan. The deviation could be a reaction to new or unforeseen circumstances which make it disadvantageous to stick the current policy (Gilardi, 2001).Secondly, the Electoral and partisan aspect of the democratic system creates segmentation and unpredictability in policy making. The changing nature of democratic society makes it clear that just because a policy is favoured by one government does not mean that it will be carried on by the next successive government. A politician may also favour short term decisions that will benefit his career rather than long term ones whose success will not become apparent until after an election (Majone, 1997, pg.2). In other words, a politicians policy commitments tend to change over time, hence it is difficult for political executives to credibly commit themselves to a long-term strategy (Majone, 1997, pg.2). The 1990s saw more central banks become independent than any other decade and the resolution of commitment problems is usually given as the reason for this independence (Mcnamara, 2002). Political involvement created a problem with inflation. The electoral aspect of politics meant that politicians tried to purchase votes by stimulating the economy just before an election. In the long term this can cause inflation and produce cycles of high growth and recession (McNamara, 2002). Delegating to an independent agency will prevent the politician, along with government, from intervening and obstructing in the implementation of a certain regulatory policy (Larsen, 2006). This is because agencies are independent, they have no time frame on their authority and they have a clear goal that will not be tampered with.

A politician may also delegate regulatory powers to take advantage of expertise of an agency that can assist in regulating a complex industry; financial sectors, social sectors, or other administrative activities where expertise, flexibility and reputation are the key to greater effectiveness. (Majone, 1997, pg. 2). The growing complexity of regulation in intricate and difficult sectors means that 2

politicians, who are not specialists in the area, are participating less effectively in decision making. According to Matti & Bluthe the delegation to an expert can be an effective substitute for the acquisition of one primarily because governments will find the requisite expertise more costly to acquire and maintain than private actors (Matti and Bluthe, 2005, pg. 402). This is especially relevant in complex and technical sectors where maintaining expertise involves keeping up with complex developments in that specific field which can be overly expensive for public actors. Accounting Standards are instructions given to publicly traded companies in how to calculate and disclose information to the public and shareholders. This information includes; profits, costs, assets, liabilities, and revenues. (Matti and Bluthe, 2005, pg. 400). In the U.S the Financial Accounting Standards Board (FASB) is an independent regulator whose board members are either experts in a relevant field or are public accountants and none of them are elected officials. But why would a politician delegate these responsibilities to an independent regulator? For 2 reasons; the sector has become more complex making it explicitly costly or simply impractical for the government to regulate. But why should this agency be independent? The setting of accounting standards for regulatory activities would make it difficult for governments to find solutions that benefit both the shareholders, public and potential investors. This clash of interests makes it attractive for a politician to delegate to an independent agency; a kind of blame shifting (Matti and Bluthe, 2005).

Blame Shifting is the last functional explanation for delegation to private regulators which is useful primarily in sectors where things have been going wrong or the decisions made will be unpopular. The Food Standards Agency (FSA) was established in 2001 as a response to the widespread public perception that government was taking decisions on food safety to the detriment of public health which was the result of an apparent fragmentation and lack of coordination in the regulation and administration of UK food safety policy (Select Committee on Agriculture Fourth Report, section 73). The report called for the FSA to become a non-departmental public body with executive powers which meant it was to become an independent regulator. An acceptable standard of food safety is 3

expected by the public which means the benefits are outweighed by the potential costs; delegation is attractive to the politician. Another example is the establishment of the Commission for Racial Equality in Britain which allowed governments to pursue ethical policies that had popular public opposition at the time. It also allowed governments to delegate the difficult job of enforcement of these policies that promoted gender and racial equality to independent actors (Thatcher, 2002).

The functional explanations of delegation explain only the general pressures on politicians but they do not account for the cross-national variations of the levels of independence granted by politicians (Thatcher, 2002). We should also take into account two contextual factors that mediate functional explanations; coercive isomorphism and State Structures.

Politicians can be coerced into delegating through coercive isomorphism. This can be shown in EC legislation that makes it a prerequisite to delegate. For example, Thatcher highlights the Maastricht Treaty which insisted that central banks be independent as a pre-condition for entry into a single currency. (Thatcher and Sweet, 2002, p.13). Politicians may delegate because they are coerced by larger institutions.

The delegation to an independent regulator by a politician can also depend on the state structure. For example, In Germany and Austria there is no electricity regulators, which is unlike nearly all other European nations (Gilardi, 2001. Larsen, 2006). Thatcher and Sweet point out that delegation in Germany has to meet a lot of legal obstacles whereas, in Britain, it is much easier due to fewer constraints on the politician and no entrenched constitution (Thatcher and Sweet, 2002, pg. 13). The difficulty with which the politician can delegate is dependent upon the nation he is in which, in turn, can affect whether the politician will delegate; it is more attractive and likelier if it is easier. This is because, according to the balancing of costs in the principal-agent theory, the harder it is to delegate then the higher the costs of implementation will be. This lowers the advantages of delegation for the politician.

We have seen that there are several functional reasons why politicians choose to delegate regulatory authority to independent regulators; the need for credible commitments to gain optimal performance from private actors, the requirement for expertise because the sector that needs regulation is to complex and regulation by the state would be overtly costly and impractical, or to shift blame in areas where the gains from regulation are not so big but the losses are potentially huge. However there are certain contextual factors that mediate where and when delegation is made. It can depend upon coercion from large institutions (for example the EC) or on the structure of the state, which can help or hinder the act of delegation.

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