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Three Cheers for Regulation

Contrary to the simplistic view that regulation is inevitably bad for business, there are three important channels through which regulation can benefit an economy. The question is not whether regulation is good or bad, but whether it is well or badly designed.

CAMBRIDGE – One of the striking changes any rich-world traveler to low-income countries cannot fail to have missed during the past decade or so is the rapid spread of mobile phone use, followed now by expanding mobile Internet access. Mobile communications are playing the same role in social and economic development in Africa, Asia, and Latin America that the spread of fixed-line communications did in countries like France and the United Kingdom in the 1970s. Family and social connections, as well as business and educational opportunities, are being transformed.

A key contributor to this technological transformation was a mandatory EU technical standard enforced in 1987. The regulation created a continent-wide market for hardware and services, one large enough that the standard – called GSM, after the Groupe Spécial Mobile committee that had codified it – was adopted globally. By 2004, there were more than a billion subscribers to GSM services worldwide. The global reach of the regulation implied huge economies of scale in the manufacture of handsets and network hardware, so prices fell rapidly, and interoperability between networks and across countries was much easier to achieve.

Many regulations play this standard-setting role. Contrary to the simplistic view that regulation is inevitably bad for business, there are in fact three important channels through which regulation can benefit an economy.

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