Over the last few years, start-ups have been the key focus of innovation investment by many governments around the world, desperate to drive growth. However, little (if any) focus has been placed on the constructive role of regulation, institutions and governance. For a strong economy, conversations need to move beyond rhetoric of burning bureaucracy for unleashing free markets on the one hand, or banning/ limiting technology on the other.
We have always known institutional innovation and innovation by markets is interlinked, and increasingly this reality is not only being better understood but also better articulated. Yuen Yuen Ang’s brilliant book How China escaped the Poverty Trap clearly articulates the contribution of “weak” institutions to the Chinese growth story, and how these can lend more positive value than the traditional ‘strong and stable’ variety.
What can our developed economies and economies caught in the middle-income trap learn from this? How can we build a better capacity to manage the strategic role of regulation? In an age of exponential technological advancement, how can we better implement the strategic role of regulation for bringing in strong, future-facing economies?
For a strong economy, conversations need to move beyond rhetoric of burning bureaucracy for unleashing free markets on the one hand, or banning/ limiting technology on the other.
In many developed and developing economies, our current institutional infrastructure finds itself in the eye of the storm. Caught on the one hand by anaemic growth, we are seeing global tech’s passive capture of our societies (the Cambridge Analytica scandal a prominent recent example at the time of writing), and an ever increasing populist call for de-regulation to unleash markets. Developed and developing alike, economies are starting to feel exposure to the exponential scale and scope of technological development. Technological advances are starting to fundamentally overwhelm our regulatory norms, practices and means. When this reality is added to by public sector ‘austerity’ we have the perfect conditions for regulatory and innovation failure. Innovation is needed in the regulation space.
The shifting context and capability challenging our current presumptions of regulation and institutional design as strong, stable and simple can be summarised as: Regulatory Explosion; ‘burn-the-red-tape’ rhetoric; an entrenched top-down approach; an industrial era mindset, and a failure to understand the potential growth technology offers. Our 21st-century institutions and regulators will need to behave differently.
We live in an age – where Matthew Taylor of the RSA rightly argues – “hierarchical methods are too weak, individualist drivers wholly inadequate and solidaristic norms are as yet inarticulate”. Now is a pertinent time for us to re-examine both the relationship between regulation and institutions, and the innovation capacity of our nations.
11 PRINCIPLES FOR REGULATORY FUTURES FOR A STRONG ECONOMY
This is a future which requires a new suite of Regulatory Design behaviours. Thinking from the organisation I founded, Dark Matter Laboratories, is yielding the following 11 key reflections for better ways forward:
In moments of transition technology, we recognise innovation needs “weak institutions”. Too often this is interpreted by the free market as the dismantling of regulatory regimes and the weakening of institutional capacity (be it planning, zoning or financial governance). Instead what is required are more agile institutions and investment in growing the agile capacity of regulators to innovate. Regulatory Sandboxes, as developed by the FCA, are an initial foray into this future – creating the space for regulators to give clarification, exemption and interpretation to new technology and ventures.
- OUTCOME-FOCUSED INNOVATION
In moments of transition we must recognise institutional innovation is not only about innovating the methods and means of regulation offered by new technologies, but, most importantly, embracing new means of achieving outcomes. For example outcome-based planning driven by a real-time sensor economy, fundamentally challenges our land economy management models (something Dark Matter are working on). We need to start to reimagine how technology structurally reframes our means and places of regulation and thereby also the capacity for the market to innovate.
- GOVERNANCE NOT GOVERNMENT
In a complex, emergent world we need to grow institutional infrastructure for decentralised and distributed governance focused on the public interest. Technical regulation is a useful tool for certain public interest models, but increasingly we also need to rebuild and reimagine the role of professional bodies with their public interest accountability, i.e. doctors, architects, accountants and their Hippocratic oaths, and professional codes of conduct which theoretically drive professionals to work for the public good – regard- less of who pays them. The “Profession” economy theoretically creates the institutional infrastructure for the decentralised and distributed advancement of public good. The question is how, in this regulatory future, do we bring this economy into the 21st Century – with new models of peer-to- peer accountability and public governance.
- CAPACITY DEVELOPMENT
This transformation requires not the defunding of our institutional economy and its capacity – as has been tacitly argued and executed – but (counter-intuitively) this requires additional investment to drive research, development and innovation capacity. This does not mean driving better compliance (as would often be argued by the “left”), but, again counter-intuitively, re-imagining what compliance could mean in a real-time sensor-driven, smart-contract future.
In a complex world creating the conditions for innovation require us to decentralise and distribute the capacity for regulatory and institutional innovation to accommodate and address the real diversity and contextual particularity within nations. Devolution strategies therefore cannot just extend to investment decisions or tax-raising capacity, but must include the capacity for institutional and regulatory innovation.
- GOVERNING SYSTEMS
In this transition we must recognise we live in a time of fundamentally new models of agency, which transcend singular products or services. This is a future in which we need to unlock the value of inter-dependency whilst not undermining capacities for divergent thinking and agency, or encouraging passive centralisation/quasi-monopolistic behaviours.
- PRE_REG STATE
However good our capacity to create an agile institutional infrastructure, we will also need to recognise the importance of a pre-regulatory (Pre_Reg) domain of agency – a place for prototyping, and experimenting in the real-world prior to the development of viable new regulatory technologies/techniques.
- BACK TO THE FUTURE
Historic principles like “transfer pricing” in vertically integrated industries, give pathways to addressing some of our digital ecosystem industries. Let’s start experimenting with how these principles can be deployed in digitally-advanced economies. There is clear need and opportunity to materially re-interpret and experiment with regulatory principles in a fully digital world to help them become t-for- purpose – and good for society.
A weak or fragile institutional economy also creates the capacity for “darker” behaviours – from exploitation, to regulatory capture, to driving structural lock-in – especially in a world of very powerful global multinationals. Great care is required to prevent such strategies and lock-ins, becoming new means of exploitation and lowering standards.
- INFRASTRUCTURE DEVELOPMENT
Building this new digitally-advanced institutional economy needs us to build the infrastructure, the open API ecosystems, public registries that are readable/ writable by machine, smart policy – linked to real-time data feeds and API, code law precedence. The Open Bank APIs is a brilliant example of this infrastructure development – which needs to be scaled and replicated across other sectors. – Building this new digitally-advanced institutional economy needs us to build the infrastructure, the open API ecosystems, public registries that are readable/ writable by machine, smart policy – linked to real- time data feeds and API, code law precedence. The Open Bank APIs is a brilliant example of this infrastructure development – which needs to be scaled and replicated across other sectors.
- PUBLIC LEGITIMACY
Finally and perhaps most critically, it is essential we invest and build public legitimacy, consciousness and awareness of the challenges we are facing as a society. Without this – good intentions, capacity building and creativity will not be able to overhaul the deadly combination of legacy interest, lock-in and lethargy – to build the politics that are necessary for this future. Together, we believe, this proposed stack of intervention provides a framework for driving the structural, regulatory, and institutional innovation vital to achieving the scale of progress necessary both in terms of unlocking positive growth but also addressing challenges facing us in our survival as a civilisation. Our future cannot be made by ‘burning the red-tape’ but instead by making it agile and evolving it in all senses to make it t-for- purpose. This is a future in which we need to simultaneously design markets t for the 21st century and design for markets t for the 21st century – only in rapid synchronicity can we move forward.
Indy Johar is Partner at Jericho Chambers and Founder of 00 and Dark Matter Laboratories. This piece was inspired by a roundtable hosted by Go-Ahead Group and Jericho Chambers in February 2018, on the subject of radicalising regulatory thinking, part of a wider conversation series on Moving the City for Good. email@example.com