Silviase/jgov_v1.4_full_ann huggingface dataset:
5. According to Perl’s paper, the frequent fliers program and the hub-and-spoke system are not so serious a problem to competition. But they could be interpreted as economies of scale, economies of scope maybe, network externalities or so. So we should further discuss on this subject.

6. Finally I would mention the strength of vested interests. If a price cap scheme is adopted in Japan, there might be conspiracies between regulatory agencies and industries about setting the level of X.

KATO:

1. In the U.S. there is a basic understanding that the benefit of deregulation is for the sake of consumers. In Japan, one of the advocates for deregulation is Keidanren which consists of major companies of Japan. They believe that regulation is taking away new business opportunities, thus it gives a very negative impact on their business. Another force for deregulation is the foreign governments, or Gaiatsu. Japanese consumers and Japanese people at large are not very enthusiastic or interested in deregulation.

2. Perl pointed out that the state level opposition serves as an obstacle to deregulatory efforts. We have a similar situation in Japan. In the U.S., in case the Federal government is promoting deregulation while there is a strong opposition on the part of the State level, what sort of adjustment is taken?

3. Economists are expected to analyze the result of deregulation and to estimate regulatory costs.

(3-1) One way of estimating the regulatory cost is to examine the efficiency loss caused by regulation. This should be analyzed by comparing the situations before and after deregulation. However, in Japan the situation under regulation is often compared with that in unregulated sectors. Two questions emerge. First, without demand expansion, released labor and capital as a result of efficiency gain must be fully utilized in other industrial sectors. People opposing to deregulation is much concerned about unemployment. Second, to what extent the released production factors show efficiency increases in other sectors depends on the industrial structure at work. Economists who say “yes” to these two questions can exaggerate the actual conditions. Japanese consumers may intuitively distrust such estimated gains of deregulation.

(3-2) The second argument is that regulation causes a loss of business opportunity. They estimate to what extent the business could be enhanced as a result of deregulation. However, if there is a justifiable reason for regulation, the argument should be whether the present regulatory regime is not appropriate, and whether a more efficient regulatory regime exists.

(3-3) The third argument is the price distortion. They say consumers are victimized because of high cost structure, but it is very difficult to clearly estimate the gains in terms of price that consumers could obtain because of deregulation. We have to measure one by one the impact of deregulation on the economy as a whole.
4. One of the reasons why Japan is lagging behind in terms of deregulation is bureaucracy, which strongly opposes regulatory relaxation. In the U.S. the top or senior posts of bureaucracy are mainly political appointees. Is there any relationship between deregulation and political appointment system in the U.S.?

## ROBINSON:

1. We may be forgetting what an awful state U.S. regulation had reached by the 1970s. Regulation of the U.S. sort contained the seeds of its own destruction. The kinds of distortions Dr. Perl has explained may be endemic to that kind of system.

Originally people thought that regulation in the U.S. was for the “public interest”, but in practice it was very poor in protecting any kind of public interest. George Stigler wrote that regulation was acquired by the industry and was designed and operated for its benefit. Regulators tend to restrict entry into an industry, enabling producers to raise prices in their own monopoly realms. Under the U.S. system with a short tenure, regulators have to look to their future employment in distributing those gains.

Within regulation there turned out to be some very strong pressures to deregulation. One was the pressure from the producer pressure groups, which either suffered from high prices or were potential entrants to regulated industries. Consumers are unorganized, and policy making is dominated by producer interests, but producers have inputs as well as outputs and so they have a consumer role.

Another pressure was the change in the intellectual climate, which revealed that regulation was being operated in the interest of various pressure groups. That stimulated to deregulation.

In the U.S., the states have different regulatory systems, which gives an incentive to footloose consumers to choose the states to locate. That seems to have been an important influence, for example, in the deregulation of electricity in California.

2. Regulators in general do not have the information they require. If knowledge derives essentially from market processes, it is logically impossible to reproduce the results of a competitive market by regulation. So regulation should be confined to natural monopolies, though even there it can be dangerous because it may entrench present ways of doing things and obstruct technology development.

In Britain the regulators have been given specific duties to promote competition in the transition away from monopolized markets towards competitive markets. That reduces the chances of regulatory captures by other interest groups.

3. In principle, price caps have significant advantages over rate of return regulation. Indeed, in Britain, when regulation was being devised, we were very intent on avoiding the rate of return type of regulation. But there is some tendency for the two regimes to converge.

There is a great difficulty in setting the X-term in the RPI-X formula. Because of the absence of relevant information to regulators, British governments in the early days allowed
our regional electricity companies to make very big profits from the first Xs they set in electricity distribution. When resetting X the regulators had to look at profits because of public pressure. Unless price caps actually provide a more stable regime, they may not be so different from rate of return regulation because one of the main determinants of the size of X is the profitability of the industry concerned. If one keeps on revising the price cap in response to public pressure, you do end up with something which is very similar to rate of return.

4. One point becoming important in the British regulated industries, particularly in electricity, is the capital market mechanisms. If there is a natural monopoly, by definition the company is protected from product market competition, but it isn't protected from capital market competition. Earlier this year the British government abolished the so-called Golden Shares in the regional electricity companies, which stimulated a number of takeover bids for these companies. In other words, the market for corporate control began to operate. Not only did it put pressure on the management concerned, it also provided information for the regulator.

### 2. SPEAKER'S REACTIONS

PERL:

1. Morrison’s paper on airlines provides the clearest evidence that there are enormous efficiency gains to be achieved from deregulation. In the other two sectors, the newness of the change makes it more difficult to come to firm judgments on the basis of the empirical evidence, but ultimately we will find there have been enormous gains in those sectors as well.

It is easy for academics to argue that the gains from deregulation that occur through rate rebalancing could have been done without deregulation at all. But without some form of dramatic regulatory reform or deregulation there won't be rebalancing. It is only fair to attribute those gains at least in part to regulated reform.

2. Bureaucratic opposition to the reform by the regulators is a universal truth. Airlines in the U.S. perhaps constitutes the major exception. Whether the bureaucrats are appointed or elected doesn’t make a great deal of difference.

3. I share Robinson’s view of the deregulatory imperative, and the failures of the existing system being the ultimate cause of the reforms. The unfortunate reality is that at least in electricity and telecommunications the future does not seem to be deregulation but regulatory reform. That is, important sectors of both of those industries remain in need of regulation despite the fact that other sectors of the industries lend themselves to rather substantial competition. So, I don’t think we escape the dilemma of how to institute some reform that will enable us to capture the benefits of competition in the sectors where it is feasible, while restricting the industries where it is not.

4. Price cap regulation is a distinct improvement over rate of return, particularly in
areas where it is a mixed mode. I share Robinson's concern that the two systems are rather closer together in practice. I think maintaining a sensible price caps regulation is going to be a more difficult process than most academics anticipated when the reforms began.

### 3. FLOOR DISCUSSIONS

## NAMBU:

1. Prof. Kato’s view that general public is not for deregulation is totally wrong. Those disadvantaged through deregulation are only a small portion of the general public, but they have a stronger voice. My intuitive understanding is that people of Japan are supporting deregulation.

2. The unemployment problems would have to be addressed. But it is not right to say that, because we cannot find answers to the tackle with these problems, we cannot go ahead with deregulation.

3. In the U.S., deregulation was promoted in a piecemeal manner. You did not have to get a unanimous support of all ministries and agencies in order to promote deregulation. The U.S. has a decentralized system. The Department of Justice and FCC may have different approaches and different stance, and different Administrative agencies may take different approach. It is easier for the U.S. to move and take certain path, and ex-post-facto checking will function.

HARRIS: The process of deregulation/privatization in the U.K. was largely a tops-down process, or a manifestation of Thatcherism. The U.S. deregulation was a bottoms-up process. It required a decentralized system of regulation in which there were many loopholes and many limits on the regulatory regime. The force of deregulation was not from public policy makers, not from politicians, it was from entrepreneurs.

MCI was started by a couple of entrepreneurs who figured out that there was nothing in the law that prevented them from entering into that business. They did so in opposition to the regulators of the day. They went to the courts and the courts upheld their right to enter that business. In airlines there was no entry at the federal level, but there was a tremendous loophole in airline regulation. The new entrepreneurs entered an unregulated intra-state market.

I totally agree with Perl about the economic changes, the technological changes and the distortions in the regulatory system, but it was the entrepreneurs, not the regulators, that made it happen. Entrepreneurship revealed the inefficiencies of the existing regulatory system. It is new companies that find ways to exploit these new technical capabilities, and then ultimately public policy makers must react and change regulations after the fact.

## ROBINSON:

In Britain, different from the U.S. Because the utilities were state owned, people were prohibited by the state from entering the industries. So, the political process had to play more
of a part than did in the U.S.

## SAKAKIBARA:

1. In the U.S. the free enterprise system means enterprises are free unless regulated by the law. In Japan, there is so-called administrative guidance, which are not by the law but nobody challenges, because if you did that there might be dreadful retaliation by the government.

2. The cost of building infrastructure is so expensive that it is very hard to liberalize the market. The land is so expensive that a new airport is more economical to be built on the sea than on the land. Furthermore, we do not have the concept of the MM domain. So you have to negotiate with all the related hundreds of people, to build one kilometer of highway. How can you achieve consensus on this?

PERL:

1. One of the most observable aspects of deregulation in both the U.S. and U.K. is the dramatic decline in employment in the traditionally regulated sectors, such as in local exchange companies. And yet, no one has seen any consequence of this on the aggregate employment level in the US economy. Unemployment rates are surely lower in the post-deregulatory era than in the prior era. The average length of time unemployed by a worker displaced in a regulated industry is short, about six months. The replacement rate is also high with people's salaries after displacement averaging 80 to 85% of pre-displacement. So, it is not reasonable to oppose deregulation on the grounds of macroeconomic employment effects.

2. Many of the same economic incentives which would bring forth entrepreneurship in Japan to break down regulatory barriers seems to be moving much more slowly. In the U.S. CATV is a very viable competitive force that may make all regulation of telecommunications obsolete. Cable's growth in Japan is very slow. Also in the U.S., if an electric company shows to go into the communications business, it would have the right of interconnection with the existing local exchange companies, as an absolutely established principle. In Japan electric companies which would serve local exchange companies have no right to interconnection, making that an unfeasible form of competition. Is the regulatory enterprise more ubiquitous and therefore more difficult to find loopholes?

3. Very few of the effects of regulation were anticipated at the time of the changes in the reforms. In telecommunications, having instituted competition in the toll part of the market, we now find that it is going to flow into the local market. At the time of airline deregulation the regulators anticipated more competition on trunk routes, but none of them would have thought that the hub and spoke system was going to be the outgrowth. Breaking down some regulatory barriers will inevitably have much more dramatic effects throughout the economy than can ever be anticipated. If before any reforms one must study in great detail all of its ramifications, it will never occur. And if Japan achieves some demonstration effects in some portions of the economy, it becomes an unstoppable force. In the U.S., the
success of airline deregulation made the telecommunications deregulation much easier. Electricity deregulation would go much more easily because of the telecommunications experience.

NAMBU: In Japan now the entrepreneurship is lost. I think we have some kind of Japanese disease. When we look back to the 1960s there existed true entrepreneurship. At that time the MITI was a great regulator, but there existed the challengers in such industries as automobiles, steel and synthetic fiber, which never surrendered to the order of MITI. Only 30 years later, entrepreneurs are so gentleman-like and they wish some kind of agreement with the government before starting something.

KOJIMA: I would emphasize that the deregulation movement was an inevitable process rather than a historical accident.

1. One is the tide toward deregulation. The regulation policy was based on the belief that regulators know better than the market. At some period in history this sounded correct, but the break-even point was reached in the 1960s or 1970s when people realized that the regulators don't know everything. Sometimes there was a flaw, that is, the regulator became regulated. Eventually that led to the collapse of the extreme form of regulated economy, that is, centrally planned economy. This is one general historical trend.

2. Japanese consumers and corporate managers have noticed the differentials between the domestic and international prices and have chosen the cheapest shop. That is why there is price destruction. As to entrepreneurship, there are some companies like Yamato Transportation, a door-to-door parcel transportation service, whose owner is one of the rare species of true entrepreneurship. He struggled with the Ministry of Transportation and the local vested interests for many years. The problem in Japan is that he belongs to the rare species by now, but I am not too pessimistic to consider that the entrepreneurship is completely extinct from Japan.

3. About the international competition, the cost of Japanese tradable sectors are affected by intermediate input of non-tradable sector products. If we preserve the high cost non-tradable sectors, then eventually the Japanese industry would go down. So the sectors treated here are not limited to these sectors themselves but related to the national economy as a whole. Although we know there is tremendous difficulty in making any slight change in the system, still we have to advocate the regulatory reform.

KATO: I mentioned the likely opposing forces in Japan. The unemployment issue is totally unrelated to the deregulation, but people still have a concern over possible unemployment which might arise as a result of the deregulation.

In Japan there aren't many people who are really for deregulation. They are not openly opposing the deregulation, but in their real intention they are still the opponents to the deregulation.

HARRIS: It is true that there are very vast interests to oppose deregulation, but there
have been countervailing interest who have organized to support deregulation in the U.S. Alliance of manufacturers pushed through a trucking deregulation, for example, over the total opposition of all of the companies in the trucking business. They have been influential. The banks especially have been influential in telecom deregulation. Why wouldn't Keidanren take the leadership on this issue? I believe the reason is they have the most to lose from it. Because once you start the process of deregulation, it has a tendency to spread, and it feeds on itself.

PERL: Harris' observation is very important. Deregulation was never a popular movement among regular consumers. At the time of the break-up of the telecommunications system, most consumers viewed it with great bitterness that this ubiquitous telephone network was being broken up and now you didn't know who repaired the phone and where you got the phone. It is business consumers in the U.S., not the average consumer, that has been the driving force. Perhaps there are countervailing forces in Japan that make industrial consumers less enthusiastic than perhaps they were in the US about deregulation.

## (END OF SESSION 1)
Session 2: Privatization and Deregulation in the U.K.

Chair: Tsuruhiko NAMBU

Paper: George YARROW

### 1. DISCUSSANTS' COMMENTS

## YAMAUCHI:

1. On the RPI-X regulation, how has the X in each industry been determined? In the early stage of privatization, the formula was introduced on the ground that there was not enough information on the company cost. But this recognition has changed now. If X is determined by other factors than productivity gains, such as the rate of return on capital, simplicity of the scheme, one of the most important features of price cap regulation, may be lost, and there will be no difference between the rate of return regulation and RPI-X regulation.

2. i) The U.K. policy makers insist that they have practically introduced competition, even in the case of duopoly. However, there is no clear theoretical linkage between imperfect competition and the economic efficiency. ii) Regarding the ownership transfer itself, Chicago School economists propose the property right economics, in which the behavior of a firm should be influenced by the ownership. But in the U.K. the ownership transfer itself does not seem to bring about clear effects on the operational efficiency. Sales price of state-owned assets in the United Kingdom were much lower than what it should have been. If this is a kind of redistribution policy, what were the implications of such hidden redistribution measures on the efficiently?

3. In the U.K. regulators are expected to regulate the field where monopoly is likely to dominate and to promote competition where it is possible. The “public choice theory” suggests that the regulator does not always behave ideally and the regulation can go toward a wrong direction. According to Bernstein, there is a life cycle in regulatory bodies’ behavior. A regulator in the infant or youth stages acts vigorously, but in the older stage they were captured in the industry favorite.

## KAHN:

1. Capital markets provide a regulatory function through the takeover mechanism, but as a practical matter in these very large industries takeovers may well only be feasible from external foreign capital. In the U.K. one U.S. electric utility already made a successful bid for a distribution company. Especially in capital intensive industries like electricity, the number of players in the market for corporate control is really only large when you look at the international factor. Many governments are averse to foreign ownership of infrastructure.
It’s quite important to realize that there is no mandate for the regulators to use RPI-X regulation when resetting price controls. The regulators are free to choose whatever form of regulation they think best suited to the circumstances. Now, in electricity, as with all the other price resettings that have occurred, the Xs have been tightened by the regulators, and that indicates that the initial price settings of privatization were relatively lax. When the reviews came up for renewal, Professor Littlechild tightened the price controls very considerably.

3. Regarding the accountability of the regulators, in the electricity and the gas markets there is going to be full competition in gas and electricity supply for domestic customers by 1998, and the regulators are charged with setting in place arrangements to make that widening of competition a success. Prof. Yarrow thinks there are not sufficient checks and balances on the regulators' action in the U.K. system. There is room for improvement, but there is also quite a danger of moving too far in one direction or the other, either to government direct control or towards the U.S. system. The U.K. system is very open. All of the companies who operate in the industries are licensed. They have their obligations and constraints set out in their license. The duties of the regulators are set out in Acts of Parliament and those duties limit the discretion of the regulators, and independence from government is established by the fact that the directors-general of the offices are appointed for fixed terms of five years and usually cannot be removed.

4. We shouldn’t overlook the successes associated with privatization and deregulation in the U.K. It is true that there have been considerable job losses in the industries as they became more efficient, but this has actually been managed in the U.K. very well. The efficiency savings are showing through in the returns to shareholders, but also the customers have benefited, and there are many more benefits from the further promotion of competition and tighter regulation.

### 2. SPEAKER'S REACTIONS

YARROW:

## (On Yamauchi's comments)

1. There is no standard procedure for the determination of X. It varies from industry to industry. In water there is considerable attention paid to cash flows in determining X and attention is paid to the investment requirements of the companies for environmental purposes. At the next stage of gas regulation, there is an argument about whether one should move to a cash flow basis or take a simple return on capital. There is no requirement to use RPI-X regulation at all. My own view is it should be kept as simple as possible.

2. About a new theoretical base for regulation in cases of imperfect competition, I am very skeptical about the ability of economists to do that with any sort of generality at all. For example, in the electricity industry at least some of the work on game theory on the U.K.