Centre on Regulation and Competition WORKING PAPER SERIES

Effective and efficient regulation by government is important for economic development. Effective and efficient regulation promotes economic development, while vexatious regulation can cripple it. Many of the problems of developing countries are blamed on ineffective and inefficient government regulation. At the same time, however, understanding of the appropriate institutions and processes of the regulatory state in the context of developing countries remains underdeveloped. Studies to date tend to be of a case study nature and generalising the findings is restricted by the lack of a coherent theoretical framework. This paper attempts to develop a methodology for researching regulation in developing countries, drawing from the economics of regulation literature. The proposed methodology is deductive with empirical work used to refine and advance theory so as to develop over time a rigorous approach to researching regulation in developing economies. While there is a recognised need to ground research in the particular needs of each developing country, the paper demonstrates that the economics of regulation literature provides a useful departure point to develop such an analysis. INTRODUCTION In the 1990s 121 developing countries introduced private investment in infrastructure schemes in the public utilities (Gray, 2001, p.2). Traditionally the public utilities electricity, gas, water services, telecommunications and transport have been associated with economies of scale and scope in production that rule out competition in the market. For much of the last century state ownership of public utilities was the preferred option in most countries, including developing ones. Private-sector monopolies are not attractive given the possible threat of abuse of market power. More recently, however, in the face of evidence of ‘state failure’, the emphasis in public policy has switched from direct state ownership to private ownership but with state regulation. State regulation is the means by which the state attempts to affect private sector behaviour (Cabinet Office, 2000). Economic regulation by government is associated with righting