The Efficiency-Growth Dilemma: An Analysis of Regulation’s Impact on Short and Long-Term Development

Please cite the paper as:
Fernando B. Meneguin and Tomás T. S. Bugarin, (2017), The Efficiency-Growth Dilemma: An Analysis of Regulation's Impact on Short and Long-Term Development, World Economics Association (WEA) Conferences, No. 1 2017, Public Law and Economics, 1st June to 30th June, 2017

Abstract

In the midst of an ongoing recovery of economies worldwide, a growing concern regarding competitiveness and efficient regulations has arisen. Countries have taken different paths in the hopes of procuring higher growth rates, be it through austerity or expansion of State expenditures. Nonetheless, a common concern pertains to installing appropriate incentives, via regulation, in order to expedite desired results. The term “regulation” is used in a broad sense, insofar as governmental initiatives, under different forms and issued from all three branches, directly impact the main objective of instilling economic growth. To this end –namely the analysis of regulations’ adequacy to reach their assumed goals–, a Law and Economics framework is of great utility. This paper seeks to investigate efficiency under an intertemporal perspective, rather than the traditional static angle. Our premise is that, amongst several functions of norms, is the potentialization of expected returns and impairment of undesired results. In this sense, although several studies involving immediate impacts on efficiency fomented by means of regulation, legislation, or jurisprudential interpretations already exist, a careful analysis considering the dynamic gain in efficiency remains lacking. In some cases norms generate initial reductions of social welfare, widely compensated by future gains. The contrary may also occur, when regulations apparently produce a momentaneous raise in social welfare, followed by long lasting losses. In the present text, using the framework provided by Law and Economics, particularly the Welfare Overtaking Theorem, the efficiency of legal provisions and judicial rulings is analyzed, in a short and long-term perspective. To this end, an initial outline of the referred theorem is exposed, highlighting important matters that can be better addressed through its teachings, such as the offset of initial inefficiencies due to sustainable growth and the correlation between (in)equality and economic development. In sequence, a brief review of important Law and Economics literature is disclosed in the interest of (a) exemplifying the complexities that surround this debate and (b) furthering the current stance of academic reflections. Mainly in pursuance of the latter, various Brazilian case studies are invoked, such as provisions in the bankruptcy act, an emblematic Supreme Court ruling, and welfare programs instituted by government. The conclusions show that in drafting regulations, laws, and rulings, previous considerations of present and future costs and benefits must be acknowledged, including impacts on society’s dynamic efficiency. The findings focus on the Brazilian context, but are undoubtedly replicable in numerous other countries.


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4 comment

  • Renny Reyes says:

    First, I would like to congratulate you on your research, particularly the analysis of various regulations at different points in time. I am interested in particular in your conclusion, where you state that regulations and public policies must consider an intertemporal framework, a statement with which I agree. However, in the particular cases that you analyzed, it was not clear to me if the lack of consideration for intertemporal effect was a conscious or involuntary decision. In case the future impact of the regulation cannot be foreseen at the moment of its enactment, could a ex post evaluation solve the intertemporal issue you refer to?

    • Fernando B. Meneguin says:

      Hi, Renny.
      Thank you for your comment!
      What we usually see is that there isn’t a good legislative impact assessment for new legislation and, because of this lack, sometimes we get bad regulation. When it happens, I agree with you that an ex post evaluation is the solution to correct problems.
      Best regards
      Fernando

  • Patrick Haughey says:

    Regulations need to be measured not just in cost to growth. Growth at all costs in an of itself is not an unquestioned good, contrary to economic belief. Clean water, air and land however is common good. This paper encourages less regulation, and that means more poison for profit. I wish economists would take a history class.

  • Joé Rieff says:

    Dear Fernando, dear Tomas,

    First of I have to congratulate you on a very well-written paper and interesting research project. The application of economic theories to existing legislation and proposal is very insightful. The insights from the cases you study shows, how policies might fail to provide the intended incentives to reach their respective goals. Therefore I think that your study has a lot of potential. In the following, I try to give you some ideas and feedback which hopefully help to improve your analysis.

    I first observation is that in the abstract and in the introduction, it does not exactly become clear to the reader where you want to go with regard to your methodology applied. To my understanding, you want to study what the impact of regulations on economic growth is. Your central argument is that efficiency (i.e. efficient allocation of resources and efficient coordination of producers and consumers) is supposed to lead to more economic growth. This argument is made at page 4 (efficiency leads to growth). Here it would be nice to see additional explanations and sources and also some more empirical evidence for this argument. With regards to intellectual property right (patent rights) Vincenco de Nicolo has done considerable research which might be worthwhile to look at. With regards to your arguments and reviews of fiscal federalism, you might want to have a look at the work of Timothy Besley, Stephen Coate and
    Jonathan Rodden (who did some work on the redistributive effects of federal grants, which you raise in later parts of the paper).

    Overall you present different strains of Law and Econ scholarship: Tort Law and Econ, IP Law and Econ, Fiscal Federalism (in later parts of the paper). I found it sometimes a bit confusing to follow how each are linked to each other. Maybe the paper could be improved by focussing on only a few areas. Also, at some point there is a discussion about equality, which I think is difficult to reconcile within a paper focussing on economic efficiency. At least some more literature is needed to make this discussion more clear. At page 15, where you discuss the links of econ. efficiency and minimum wages (etc) some empirical evidence would be nice.

    Additionally in the beginning of the paper, on page 4, you argue that all Monopolies lead to inherent inefficiency. That is not entirely correct. With regard to natural monopolies where fixed costs are high, granting a monopoly to one producer might decrease the per unit cost of production and therefore increase consumer (and producer) welfare. Also for your argument about patents which do lead to less innovation than would be efficient, it would be nice to see some more empirical evidence.

    A last observation is that in your respective case studies you present, the link to the respective theories could be done in a clearer and more consistent way.

    Overall the paper and its underlying ideas have a lot of potential. I think limiting its scope and reducing the number of perspectives you take would allow to be more precise and to elaborate more on the respectives arguments. I hope these ideas will be helpful to you.

    Best wishes,

    Joe

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