Deregulation: Definition, Purpose, Rules, Principles, Implications

Deregulation – When a policy has been officially passed, it will not be long before the policy will begin to be tested or enforced in the public. Even though it has gone through a rigorous formulation and analysis process, sometimes a policy experiences discrepancies in the field. This often happens because many external factors affect its implementation.

Input, criticism, and suggestions that arise during the implementation of a regulation or policy will be accommodated by the institution or party that issued it. Various solutions will be formulated to find a way out of the discrepancy. This is the process of a policy change.

One of the steps that can be taken so that the implementation of a regulation provides or receives maximum benefits is through deregulation. Deregulation is one part of policy change. Usually, the originator of the regulations will eliminate several points of the regulations that are considered inappropriate, inefficient or burdensome. This process is then called deregulation.

Definition of Deregulation

The term deregulation is closely related to economic activity. The reason is because deregulation is often carried out on regulations related to the economy. In other words, deregulation decisions depart from the economic situation and will also have an impact on economic activity.

According to Erwin P. Geiger in the book Privatization and Deregulation: Needed Policy Reforms for Agribusiness Development , deregulation is eliminating all unnecessary rules or all redundant rules and regulations that are proven to impede or slow down productive economic activities. Erwin considers that the majority of regulations originating from a centralized economy refer to development theory. The theory of economic development emphasizes the evidence of the success and failure of economic development in countries that are currently carrying out economic development.

Unfortunately, regulations based on this theory of development often lead to market failures. Many of these regulations close doors or economic opportunities thereby ignoring or inhibiting market forces.

As a result, the government adopted more regulations, hoping to regulate the economy the way politicians wanted it to. This resulted in hampered economic activity. Whereas the market economy is a pillar for the economic growth and prosperity of a country. To create a productive market system, many pre-made regulations must be eliminated.

Deregulation is the consequence of a critical reassessment of existing regulations. The form or action taken in a deregulation depends on the nature of the market, for example changing or liberalizing price controls, controlling both domestic and international markets, or redefining competition policies for deregulated markets.

Deregulation and its Implications

Basically, humans cannot live without rules. In fact, we recognize that rules are necessary for markets to function properly. The market economy is a system that must be developed and preserved with great care. Because complete neglect can also lead to economic collapse and market failure. However, the very dynamic development of the times demands that all regulations or policies be formulated that do not conflict with the principle of freedom.

These regulations are often based on legal requirements which are then expanded and reinterpreted by bureaucrats. Often they become redundant, unnecessary, even obsolete. Such rules often have implications for:

1. Increase fees or rates charged to individuals and companies.

Complex regulations will certainly require extra performance to implement them. This results in a large use of time and energy. The costs incurred by business actors—both individuals and companies—are also increasing because they have to implement policies that are not lean.

2. Increase the burden on state administration.

Not only business people, the state will also suffer losses if it has to apply multiple layers of policies. The administrative process carried out will certainly burden the state because it requires additional time and effort.

3. The creation of distortions in the market.

Market distortion is a situation when the market experiences an imbalance. From the point of view of deregulation, market distortions occur due to the creation of unhealthy or uncompetitive markets due to policies that are usually burdensome for small business actors. In this condition, only business actors who are well-established or have large capital can access the market and even dominate the market.

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4. Inhibit and reduce competition.

Referring to the previous explanation, if deregulation is not carried out, it will be impossible to create a competitive market. The large costs incurred to implement regulations—taking care of business licensing for example—will be burdensome for small entrepreneurs. The market will also be dominated by big business players and usually old players.

5. Prevent people from starting businesses.

Not only is it a matter of cost, convoluted regulations will also discourage novice businessmen for reasons of time and effort. Even though they have adequate capital, the long duration of time is also another obstacle for prospective business people. Likewise the problem of resources which often becomes an obstacle when a prospective businessman is required to invest time and energy to take care of business licensing that is not one door.

Under these threats, it is difficult for investment and long-term expansion to take place. This obstacle is also very detrimental to economic growth. To overcome this situation, the government needs to simplify regulations, reduce or eliminate them.

The aim was to rationalize formal requirements, eliminate duplication and allow easier access to new markets and economic activities, as well as limit state interference. This action does not mean the abolition of all regulations and controls, but selection through evaluation of regulations based on predetermined rationalizations.

The Exception Principle in Deregulation

There is a rationalization shift towards a rule that previously started from the premise that everything is prohibited unless expressly permitted, shifting to the principle that all activities are permitted to be carried out, unless there are rules that expressly prohibit it. In the case of a market economy, certain regulations are still needed to ensure the continuity of the market because the market functions imperfectly. In addition, the market is also demanded to be free from regulations that create obstacles for economic activity.

Even so, there are several exception principles that can be ignored in a deregulation process. This can mean that regulations become stronger, stricter, even more explicit as awareness of the following exclusions increases:

  • Protection of human health (control of food);
  • Public safety and security;
  • Protection of the environment; And
  • Uphold quality standards.

In certain cases, the regulations concerning these principles are far more detailed and detailed. All rules and exceptions must reflect the country’s established laws and international agreements. In many countries, deregulation needs to be accompanied by the abolition of privileges and exclusions that concern the interests of many people.

To determine which regulations will be automatically evaluated, the criterion is to eliminate all regulations that are not essential to the public interest. Likewise, regulations that are maintained or tightened must be related to the public interest. Again, deregulation must represent a general administration principle.

Rules in Deregulation

The following are general rules that should be applied when re-evaluating regulations.

1. Eliminate excessive formalism.

Deregulation can also occur when the formal requirements that employers must comply with become less demanding. Formalism is often a complaint or obstacle to many regulations in Indonesia. When applying for a permit, we often have to go through complicated procedures because we adjust to existing regulations. In fact, some procedures should be simplified or skipped. For this reason, deregulation is needed to cut regulations that are too formal but not essential.

2. Eliminate unreasonable deadlines for requirements.

There is a waiting time that is often applied to some regulations. This time duration is often considered unreasonable because it is too long to distract from the target or focus on the needs of other things. Deregulation needs to simplify waiting times so that efficiency, especially in managing business, can be realized.

3. Set rules for “administrative silence”.

This last point means that an application or registration document can be considered automatically approved if the competent authority does not respond within a certain time.

In order to ensure that progress is being made in these areas, the government needs to establish special oversight commissions, for example the Commission to Promote Competition established in Venezuela and Costa Rica.

Purpose of Deregulation

There are several goals that can be achieved from deregulation.

1. Resource Efficiency

By deregulating, the state will eliminate regulations that are considered burdensome to support a more competitive market for companies. This will support the efficiency of resources so as to open or increase competitiveness. Creating healthy competition will also have an impact on developing product innovation and reducing prices.

2. Opening Business Doors for Newcomers

Various obstacles or obstacles in opening a business will fall during the deregulation process. Newcomers can be more intrigued or motivated to enter the business world if the requirements are simple.

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3. Creating Multiple Choices for Consumers

Deregulation opened up healthy competition for companies in the market. They will compete with each other to create competitive products both in price and quality. This happened because deregulation also resulted in shorter work processes and cost savings for companies so that funds could be allocated to increase the selling power of products. Consumers also benefit from a competitive market because it provides a wide choice of products and services.

4. Open Freedom for Companies in Competitive Markets

Deregulation is closely related to eliminating or reducing state intervention in the financial sector, including in services, markets and/or products. This gives companies the freedom to determine strategies or business processes to obtain maximum profits.

5. Strengthening the National Economy

The requirement to become a developed country is to achieve an entrepreneurial ratio of at least 4 percent of the total population. The entrepreneurial ratio is important for a country because business is one of the factors that can strengthen the national economy. If consistent deregulation is carried out, many economic opportunities will open up, especially from the business sector, such as financing, capital or investment.

Disadvantages of Deregulation

Deregulation can also cause several disadvantages if it is carried out without supervision and is too massive.

1. Decreased Product Quality

There is a tendency for companies to continue to be able to optimize profits from the business they manage. Meanwhile, companies are given the freedom to innovate in creating products that can win the hearts of consumers by creating a competitive market. Because it saves production costs, the process of producing goods or services often ignores crucial elements that can result in a decrease in commodity quality.

2. Lack of Protection for Consumers, Employees, and the Environment

The less government intervention in market sustainability, the less supervision and protection of consumers. The main cause is the difficulty that the government has in controlling all businesses. This occurs because of an imbalance between the number of human resources in government and ongoing business.

3. There is potential for consumer losses

To be able to obtain maximum profit, companies or business people often eliminate important elements to cut costs. Without strict supervision from the government, consumers have the potential to be harmed by products that do not meet standards.

4. Employee Safety Risk

Not only consumers, cost savings also often make a company ignore employee safety. Establishing and ensuring safe work patterns for workers clearly requires extra costs and maintenance costs.

5. Threat of Environmental Damage

Efforts to make maximum profits also often have a bad impact on the environment. For example, to decompose factory waste or at least guarantee a sustainable disposal system, of course, requires a lot of money. Minimal government oversight resulted in the threat of environmental damage.

6. Open Space for Fraudulent, Predatory Activities, or Illegal Business

Nowadays, it is common for us to encounter news related to fraud suffered by consumers. This is one of the impacts that often occurs as a result of loosening regulations by the government. The difficulty of controlling every existing line of business opens up opportunities for fraud—such as trading in imitation products—which has the potential to harm consumers. Apart from that, deregulation also opened the door for illegal business to enter; drug trafficking, modern slavery, online loan services (financial loans) that do not meet the requirements, etc.

Conclusion

Deregulation has become a popular trend or phenomenon carried out by governments in both developed and developing countries in order to build a solid economic foundation. The main reason is to create a competitive business climate. This is because a strong economy must be supported by healthy business continuity. The market does need to be protected by regulations, but the government must also guarantee freedom for business actors in establishing market mechanisms.

Just like other decisions taken by the government, deregulation also proved to have negative and positive impacts. Measurable deregulation can provide benefits to the business climate. Not only creating a competitive market, deregulation also led to efficiency in the market. Deregulation also supports the opening of various economic opportunities that may come from both within the country and abroad.

Even so, deregulation must be carried out with great care, with careful calculation and planning. This is because excessive deregulation will actually have a negative impact on the business climate and other external instruments that accompany a business.

Apart from that, there is an exception principle that the government must also keep in mind when deregulating. Basically, the evaluation that is applied to a regulation must think about the interests of the people or the general public. Reduction of regulations must not harm the public and must benefit the public. The same principle also applies when the government wants to maintain or tighten a rule.

One of the steps the government can take in carrying out deregulation is not to relax its supervision of the continuity of the market. The government also needs to form a special commission to guarantee fair business competition. Through this unit, the government can launch a complaint service if the public finds fraud or fraud that causes losses.

Author: Anendya Niervana