Balancing Regulation and Growth

Happy Friday! Today, I explore recent efforts from the UK to make regulation more growth-oriented. While the costs of regulation should not be underestimated, and while there is a need to ensure regulation isn’t unnecessarily burdensome or innovation-restricting, not everything is about growth. For me, regulators’ primary mission must remain to protect real people and the environment.

Balancing Regulation and Growth

Photo by Emil Bruckner on Unsplash

The UK has been very active in regulatory reform in recent years. Under the Conservatives, we saw the Pro-innovation Regulation of Technologies Review by then Chief Scientific Advisor Sir Patrick Vallance (now Lord Vallance and Labour’s Minister for Science, Research and Innovation). This review included several reports looking at different emerging technologies, highlighting points of friction with regulatory approaches and where changes could help accelerate innovation.

Since Labour came to power, the emphasis has shifted away from innovation and towards growth in general as they pursue their “mission” to kickstart growth (though, as Mariana Mazzucato has argued, “Growth is not a mission! It’s the result of mission oriented thinking.”)

This week, the UK government published a new policy paper as part of this push: a new approach to ensuring regulators and regulation support growth.

Echoing some frequent arguments in Canada, it sets out how the UK’s

regulatory approach has become too risk averse. Incentives on politicians and regulators to avoid criticism when regulation fails to fully mitigate risks has encouraged excessive risk aversion in the system. Rules-based frameworks can limit regulator discretion making it difficult to strike the right balance between risk and growth and managing the risk of legal challenge. Regulators must be attuned to the challenges facing businesses and be able to adapt to new industries, the challenges posed by new technologies and avoid disproportionate risk-averse behaviour.

The vision articulated here is one that will create a regulatory system that “not only protects consumers and supports competition but also encourages new investment, innovation, and growth.” Furthermore, it aims to be targeted and proportionate, regulating only when necessary, transparent and predictable, and adaptable to keep pace with innovation.

It then discusses three actions to achieve this: 1. tackling the complexity and burden of regulation, 2. reducing uncertainty across the regulatory system, and 3. challenging and shifting excessive risk aversion in the system.

Regulatory costs should not be underestimated. Recent research from Statistics Canada estimated that the regulatory burden increased 37% from 2006 to 2021, reducing GDP growth by 1.7%, employment growth by 1.3%, and investment by 9.0%, all in the business sector.

However, growth alone isn’t the whole picture. Daniel Susskind has argued that “the relentless pursuit of growth has come at a huge price, with destructive consequences we do not yet fully understand.” For Susskind, “the great task of the present” is to:

redirect technological progress toward the other ends we care about — to grow the economy but also make the world fairer, greener, less dependent on disruptive technologies, and more respectful of place. We must do all we can to ensure that the incentives people face do not simply reflect their narrow concerns as consumers in a market but their deeper concerns as citizens in a society.

There are trade-offs here. It may be that Canada's 1.7% growth reduction is a price worth paying for better outcomes. In reality, it is likely a much messier picture. Some of that lost growth is undoubtedly preferable to unwanted environmental or societal outcomes. But other growth will have been squandered by genuinely maddening and pointless red tape and bureaucracy.

We must also beware of misdiagnosis when trying to accelerate growth. Canada’s 1.7% GDP growth reduction was over 15 years, not annually. regulatory reform will not open the floodgates of growth. As the Guardian’s financial editor has argued about the UK’s governments regulatory moves:

Companies like to grumble about regulators, of course, and there is always room for improvement. It’s just that the big stuff for growth is closer to the government: planning reform, the cost of energy for industry and consumers, the tax regime, the supply of skilled labour, business rates, housebuilding and so on. There’s no great harm in giving regulators a performative tickle, but, sorry, they do not have the power to conjure a 2% growth rate out of thin air.

Looking at Canada, there is no doubt a need to ensure that regulation is not unnecessarily holding back growth. Paperwork for the sake of paperwork serves no one well. However, the primary purpose of regulation is, and should always remain, protecting people, consumers, and the environment, not driving growth. The federal government and provinces should be working to develop innovation-supporting regulatory approaches (ideally in collaboration with each other to prevent new inter-provincial barriers to trade). However, we should always approach regulatory reform first from a lens of societal value and only then from a lens of economic value.

Reading Recommendations

We live in a dangerous world. Canada needs to bulk up — In this Policy Options piece, Steve Lafleur makes a pro-immigration case for responding to threats to Canada’s sovereignty. Lafleur argues that Canada needs to bulk up — in terms of our population foremost but also all the infrastructure to support that, including housing, transit, trade infrastructure, healthcare, universities, and defence. Lafleur acknowledges that while it wouldn’t be cheap to do this and would require some serious industrial policies to make it happen, it is worth the price.

Building a larger, more muscular Canada can allow us to become a bulwark against tyranny. With America stepping back, it’s more important than ever that Canada bulks up. That means getting more shovels in the ground, much faster. It’s time to build everything, everywhere, all at once so that we can grow our economy and population and reach our full potential.

As I’ve argued repeatedly, this is a transformative moment, and we need to treat it as such. It is a time for bold dreams like this and a time to reimagine what a fairer, more prosperous, more inclusive Canada can and should look like.

French researcher expelled for expressing "a personal opinion on the policies pursued by the Trump administration" — A news piece you may have seen from earlier this week where a researcher from the French National Center for Scientific Research (CNRS) was denied entry into the US for a conference because their phone contained critical exchanges with friends and colleagues about Trump’s research policy. This is another reminder of the US’s rapid slide into authoritarianism and targeting of academics, hot on the heels of Mahmoud Khalil’s arrest, the deportation of Brown University’s Dr. Rasha Alawieh, the detention of Badar Khan Suri, a Georgetown University graduate student, and the Trump administration’s wider assault on the academic freedom. Canadian researchers are also getting caught up in that assault, with the US sending a questionnaire to researchers funded wholly or in part by US federal agencies to vet their alignment with Trump’s political agenda.

Next generation public institutions — Finally, a piece by Geoff Mulgan on reforming public institutions and building state capacity. Mulgan makes the case that “Few of humanity’s biggest challenges – from shaping artificial intelligence and addressing mental health to managing energy transitions and industrial policy – are likely to be handled well without effective institutions.” Unfortunately, the institutions we have across much of the world have hardly changed in decades and aren’t up for meeting this moment. “Most are still pyramid structures, as they were a century ago, and are too often opaque and unresponsive.” If new institutions are created then they “are typically designed by committees of relatively elderly politicians or civil servants and tend to be siloed, hierarchical, and inflexible”. So far, so true for Canada as well as many other countries.

For Mulgan, we need to draw from biology as much as bureaucracy, replacing pyramids with branching networks. In another recent post, Mulgan also looked at architecture and its lessons for institutions, including how to embed values of lightness, openness, speed, and flexibility into their design.

As Mulgan concludes in the first piece, “We may be in an era of dismantling, disruption, and disorder. But history suggests that such circumstances eventually lead to rebuilding and reinvention. When that time comes, we will need to have already done the work of exploring better options.”

This is crucial. We have to imagine better futures and do the detailed work of mapping out how to make them a reality.