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Telecom regulation: lessons from independent central banks

This article argues that the key to the success of independent banks and utility regulators is proper governance

By Jon Stern and Francesc Trillas . 01 December 2001

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Consumers do not choose their preferred central bank base rate in the way that they buy, say, telephone services from one of a number of competing companies: independent central banks (ICBs) and utility regulators have different tasks.


However, those concerned with the emerging field of utility regulation can still learn much from research on ICBs, not least because, for historical reasons, there is much more of it. The authors of this article argue that the key to the success of both ICBs and utility regulators is proper governance arrangements. They reject the arguments for procedures that are totally rule-based with little or no discretion. Within clear rules, they say, both ICBs and regulators should be given discretion combined with high accountability.


The history of utility regulation is not yet long enough to provide data that conclusively prove that one type of regulation is better than another. We can already demonstrate, particularly in developing countries, that disaster usually results from regulatory arrangements with poor governance, including that bad outcomes arise from wide, non-accountable discretion. But the experience of utility regulation is not yet sufficient to prove the positive.


The research on central banks is more conclusive. The history of national monetary institutions, including independent central banks (ICBs), goes back several hundred years. Even today, some countries like New Zealand have ICBs but not independent telecom regulation. Those with independent telecom regulatory agencies usually also have ICBs operating monetary policy and the latter usually preceded the former – often, as in Germany, by many years. The UK is a rare exception: the telecom regulator Oftel was established in 1984 but the Bank of England was given responsibility for operating monetary policy only in 1997.


Both the historical understanding and formal testing of the effects of the independence of central banks (and monetary policies) on macroeconomic outcomes are therefore much better established than for independent utility regulation. The results uniformly show that where ICBs operate monetary policy, inflation is lower and less variable. They also show that ICBs with better governance arrangements outperform those with less good governance arrangements. Whether the relationship is causal or related to underlying policy choices is still unclear. However, the results are encouraging for the supporters of independent utility regulation, and for the types of governance arrangement that provide genuine independence and accountability.


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