Philip Cross is a Senior Fellow with the Macdonald-Laurier Institute
Knowing the extent and location of regulation in our economy is important because regulation has been found to stymie innovation, depress productivity, raise prices, and lower living standards. However, while several studies have measured the cost of complying with the regulatory burden, until now there has been no attempt to measure the extent of Canada’s economy subject to regulatory control and which sectors are most affected.
In a broad sense, all sectors of the economy are subject to regulations covering health, occupational safety, and the environment. The focus of my paper released Thursday by the Macdonald-Laurier Institute is on regulations that are intended to control the price or output of a specific industry. Examples of such regulatory control are utilities that require government approval of prices, supply management boards that control entry into farming, or restrictions on foreign competition in communications and banking.
The results show that 10.1 per cent of the Canadian economy was subject to regulatory control in 2010. Almost 80 per cent of this control was concentrated in utilities, agriculture, finance and communications.
Regulation in these four industries goes back decades, often rooted in the original motivations for regulation – the problem of natural monopolies in utilities, the preservation of a sound banking system, and protection for Canada’s culture industries.
That the rationales for regulation in key industries are long-standing is a major problem for the future of regulation. Justifications that were valid decades ago may no longer apply, particularly given the pace of technological change. What is the usefulness of regulating media for Canadian content after the arrival of the Internet? Similarly, firms and households can buy financial services anywhere in the world, skirting the efforts of regulators in Canada to control risk.
Regulation is concentrated in the consumer sector, although it rarely takes the form anymore of direct control of prices for energy, air travel and rental units that proliferated in earlier decades. Governments learned that these types of regulations over time ending up choking off new supply and innovation, ultimately harming consumers.
Instead, regulation is implemented through the granting of monopolies in industries such as liquor sales or the post office or insulating domestic firms from foreign competition. This type of regulation is made in the producer’s interest, and against the consumer who pays higher prices and has fewer choices. Rarely is regulation anymore about protecting consumers from market failure, but more often is the result of rent-seeking by producers.
Regulations are far less common outside of the consumer sector. In particular, governments usually avoid regulating export industries because they have to compete in the global marketplace. This implicitly recognizes that regulations lead to inefficient producers and higher prices. Regulation thrived in domestic industries that were sheltered from foreign competition, such as banking and culture. The transportation industry demonstrates this dichotomy, with less regulation in areas which face some foreign competition (such as air travel and truck transport), while urban transit and taxis can be regulated because they are insulated from import competition.
Outside of industries directly regulated, all industries bear a cost of complying with regulations. The OECD estimates this costs the Canadian economy about 12 per cent of its GDP. While this is slightly below its high in the 1980s, it is significantly more than the 8 per cent of GDP that regulations cost the United States. One estimate conducted for the federal government is that the larger regulatory burden in Canada lowers all our incomes by an average of 2.2 per cent. This does not include the unknown cost to taxpayers of supporting the regulatory bureaucracy.
Globalization and the Internet are already undermining the monopoly of traditional domestic suppliers. Similarly, technological change threatens the traditional monopolies of utilities, while efforts to liberalize trade are intensifying the pressure to end the tariff walls that protect marketing boards. In the early 21st century, where adaptability to rapid change is paramount, regulation increasingly seems a quaint relic of the 20th century.