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The premise of this volume is that business regulations are expected to grow in the near future as a consequence of the emergence of a “(world) risk society.” Risks related to terrorism, climate change, and financial crises, for example, will penetrate all conditions of life. Increasingly, the decisions and actions of some bring about risks for many in this era of globalization. Controlling these risks implies managing the world through high-quality regulation, with a particular emphasis on businesses and financial institutions. Central to this approach is the argument that a major, if not the primary, aim of regulation is to internalize externalities, or in a broader context, to repair market failure. Such repair can only be accomplished when the costs are smaller than the welfare gains. Featuring contributions from researchers and policy analysts from the fields of economics, management, law, sociology, political science, and environmental policy, this book focuses on three major topics: • Social risks and business regulation • Preconditions for better business regulation • Theoretical issues related to better business regulation Collectively, the authors demonstrate that the easier it is for regulated businesses to comply at the lowest costs possible—without jeopardizing the related public goals—the greater the degree of compliance. When successful, the net result is a balance of individual and collective net benefits, and by further implication, sustainable business practice and economic growth.



Chapter 1. Introduction

The premise of the book is that the quest for regulation is expected to grow in the near future as a consequence of the emergence of a (world) risk society (Beck 1992, 1999, 2008). As an illustration, one may think of how risks related to food, drugs, infectious diseases, climate change, and financial crises have steadily been penetrating all conditions of life in recent times. One of the most immediate consequences of a world risk society is that the decisions, acts, and omissions of few entail risks for many. A major source of these emerging risks entailing large societal damage can be traced to the growing complexity and connectivity brought about by an ever more global economy. As a result, small adverse shocks can have catastrophic consequences (Boin 2010). More formally stated, the complexity and connectivity resulted in risk distribution functions with fat tails. Institutional efforts to manage risks have triggered different attempts to regulate several risk-related activities. Businesses, business’ products, and services are an integrated part of most conditions of life and, as such, involve different risks. That is why business regulation must be an integrated part of this stock of risk-based regulation.
Alberto Alemanno, Frank den Butter, André Nijsen, Jacopo Torriti

Social risks and business regulation

Chapter 2. Risk Governance: Concept and Application to Institutional Risk Management

The chapter addresses the requirements for a risk governance framework that is inspired by the works of the International Risk Governance Council (IRGC). Risk governance is exposed to three major challenges that result from a lack of knowledge and/or competing knowledge claims about the risk problem: complexity, scientific uncertainty, and sociopolitical ambiguity. To deal with these three challenges, the chapter illuminates a risk governance model that augments the classical model of risk analysis (risk assessment, management, communication) by including steps of pre-estimation, interdisciplinary risk estimation, risk characterization and evaluation, risk management, as well as monitoring and control. This new risk governance model also incorporates expert, stakeholder, and public involvement as a core feature in the stage of communication and deliberation.
Ortwin Renn, Andreas Klinke

Chapter 3. Regulating the European Risk Society

This chapter examines how the European Union is addressing the challenges brought about by the emergence of a “risk society.” After reconstructing the genesis and evolution of EU risk regulations, i.e. regulations aimed at the protection of health, safety, and the environment, it identifies the main features of the EU approach towards risk. Although the EU institutions have not adopted a harmonized and consistent analytical approach to risk, notably to scientific risk assessment—given that it is conducted by different bodies following diverging methods—it is possible to discern some common and distinctive features in the risk analysis framework that has been gradually adopted to manage an ever-wider range of societal risks (such as food safety, chemicals, pharmaceuticals, medical devices, crop protection, and GMOs). The chapter argues that, by subscribing to a progressive ideal of regulation based on expertise, an embryonic European risk regulation model is taking shape and developing today. Yet a tension between the necessity for a rational, evidence-based decision-making and the wider demand for a flexible, precautionary-oriented regulatory approach represents the defining feature of the EU decision-making paradigm of risk regulation.
Alberto Alemanno

Chapter 4. The Prospects for Global Climate Change Reform After Copenhagen

International efforts to contain climate change resulted in the adoption of the United Nations Framework Convention on Climate Change. Legally binding measures to implement the convention were later embodied in the Kyoto Protocol, the first commitment period of which will come to an end in 2012. Negotiations have been underway to establish a long-term and comprehensive cooperative framework. The Copenhagen conference, which was widely and perhaps unjustifiably expected to produce a legally binding long-term and comprehensive cooperative framework, only resulted in a framework political agreement. This chapter reviews the form and substance of the current and emerging global climate change regime.
Mulugeta Mengist Ayalew, Yacob Mulugetta

Chapter 5. Eight Commandments for Securing Competitive Food Supply Chains in the European Union

The objective of this chapter is to identify the main legal barriers to the competitiveness of the European food industry and to suggest ways to improve the legal system. Prior studies by Wijnands et al. (2007, 2008) and Poppe et al. 2008) have shown that competitiveness of this industry is under pressure. In the light of the above, we propose a second overhaul of European food law, after the tremendous legal efforts which have been made as a response to food scares at the turn of the century. This reform consists of eight improvements of European food law and aims at empowering stakeholders upstream in food supply chains. These improvements would not only contribute to the competitiveness of the EU food supply chains through alleviation of various forms of administrative burdens, but also restore the power equilibrium between stakeholders within the food chains as well as between businesses and consumers, and reduce the burdens connected to pre-market approval of food and feed and zero-tolerance standards. These focal areas partly overlap, as the improvement of one area may positively or negatively affect another. Within the proposed second overhaul of European food law, the interests of all stakeholders should be considered, while at present consumer concerns seem to eclipse all other existing interests.
Bernd van der Meulen, Harry Bremmers

Chapter 6. The Costs of State Intervention in the Financial Sector

We analyse costs and benefits of banking regulation and supervision to determine whether more supervision is always better for the functioning and stability of the banking sector. Whilst the motives for additional regulation are well understood, their social costs are not and hence net social benefits of additional regulation remain unclear. We emphasize that also in regulatory terms there is no free lunch; regulation—much like taxation—creates social costs and these may exceed the benefits so that society is actually worse off with than without (additional) regulation. And our argument is more intricate than that, suggesting that if the layers of regulation in place before the crisis have given poor incentives to those in the financial industry and their clients a revision or even reduction of regulation might generate a more stable financial system that is more friendly towards its customers. Financial regulation proposals should ultimately align the behaviour of financial institutions with social preferences. That strongly implies that the political discussion on regulatory proposals should reflect a full overview of relevant benefits and costs. The current situation is far from this theoretical optimum in our opinion. Politicians voice the public outrage over financial institutions that are supposedly at the root of the global financial crisis and often seem most intent to increase consumer protection and reduce taxpayer exposure.
Wim Boonstra, Allard Bruinshoofd

Preconditions for better business regulation and international coordination

Chapter 7. The Perspective of Public Sector Economics on Regulation: Transaction Costs and the Agency Model

Public Sector Economics teaches us that a major reason for government regulation is internalizing externalities. Examples are environmental and safety regulations, prescriptions on working conditions and various types of permits which prevent businesses to make decisions at the costs of others. A common characteristic of all of the different types of government regulations is that they entail implementation costs, which, like taxes, distort efficient allocation in the ideal general equilibrium. These costs can be quite substantial but tend to be overlooked in the discussion and development of government policy. By applying the perspective of transaction costs economics, this chapter considers the costs arising from regulation in a principal/agent model. Three types of transaction costs can be distinguished, namely (1) monitoring costs of the regulator (principal); (2) bonding costs by the regulated private economic entities (agent); and (3) the costs of residual loss in case the result of the regulation is not in compliance with the targets set by the regulating authorities. These latter costs can be regarded as cost to society due to e.g. miscommunication on the aims of regulation, and are, of course, hard to quantify. Bonding and monitoring costs consist of both “hard” and “soft” transaction costs. Hard transaction costs are direct costs and are easy to quantify. Soft transaction costs are indirect costs and are hard, or even impossible, to quantify. The costs of residual loss are welfare losses and can be typified as soft transaction costs. The main benefit of regulatory measures is the avoidance of societal costs that would occur in a situation where regulation is meagre or absent. Therefore, it may be welfare enhancing if regulations are fashioned in such a way that net benefits are optimized. From that perspective the chapter looks at the possibility to select optimal regulation by means of a cost/benefit analysis.
Frank den Butter

Chapter 8. Against the Tide? On the Development of Regulative Costs Over Time in Times of Crisis and Its Possible Impact on Economic Development

From the 1980s onwards, more and more countries have chosen for an economic policy, in which the role of the government should be reduced. With less government, i.e. lower tax and premium rates, lower deficits, and lower debts, with less regulation, and with less compliance costs, markets would function better and economic development would prosper. The revival of the US and UK economy—and later that of many other economies—seemed to support the rightness of this approach.
But with the Internet crisis around 2000 and the dramatic financial and economic crisis of 2007–2010, the whole picture has changed once again. Is this reliance on market forces really such a good thing and are less government, less rules and regulations really the right alternative to realize the most desirable pattern of economic development? What is the relationship between the level of compliance and the pattern of economic development? Has this approach helped countries to better deal with the impact of the recent economic crisis? These questions are dealt with comparatively, both between countries and over time, using data from World Bank and OECD. The results are contrary to what long was the ruling ideology: Less regulation has not been beneficial for economic development and also has not made countries better able to deal with the recent financial and economic crisis.
Even though these analyses have been rather rough and preliminary, the results produced in this chapter do show that a reduction of regulation has not been as beneficial to the economic performance, as many have believed so far.
Kees van Paridon

Chapter 9. Internal Pressures–External Safeguards: A Systemic Approach for Burden Reduction in the Netherlands

This chapter addresses the complementarities of culture (bottom-up) and structure (top-down) for the reduction of regulatory burdens. It specifically looks into the case of the Netherlands. Dutch policies on better regulation aim at a cultural shift and structural safeguards. It is found that besides a supportive culture within ministries, it is necessary to establish adequate structures on reducing regulatory burdens. A sole reliance on internal pressures leads to unpredictable outcomes.
For a consequent application of routines and procedures that ensure that administrative burdens are accounted for structural safeguards must be in place. Such safeguards comprise of a separate conduct of scrutiny, accountability (and/or transparency of the effects) and the attribution of responsibility and, consequently, problem ownership. It is found that a real separation of scrutiny function and legislation function is necessary. Both tasks may comprise of different skills, values, loyalties and responsibilities. This calls for an enduring structure of checks and balances to ensure the attention for regulatory burdens in the policy process.
Jeroen van Bockel, Jaap Sleifer

Chapter 10. Trust, the Pharmaceutical Industry and Regulators in the UK

In recent years trust has been employed in academic, industry and policy circles as a common buzzword to describe some of the most complex issues underpinning the relationship between industry and regulators in relation to risk. The ongoing perception of a trust crisis in the pharmaceutical sector is the starting point for analysing how institutional trust is construed by the pharmaceutical industry. Through evidence collected from a set of interviews to individuals working in the pharmaceutical sector, this chapter examines what is meant when the industry talks about trust in respect to regulators. The chapter reviews the three broad functions of trust in relation to institutions as identified in the vast literature on trust; it details the role of the media in relation to trust vis-à-vis regulators and the industry; it defines which applied functions of trust were identified from the interviews; it considers the problems associated with operationalising trust from an industry perspective; and speculates on what can be learned for other sectors. Five typologies of trust which coincide with the diverse roles this plays for the various constituents are derived from the interviews.
Jennifer M. O’Connor, Jacopo Torriti

Chapter 11. From Better to Best Regulation: Towards Competitiveness by Cross-Border Consistency

This chapter gives from the perspective of the risk society and based on the outcome of recent research, a number of examples of loss of competitiveness resulting from non-transparent, non-streamlined, ineffective, double, or non-­harmonized legislation and enforcement between Member States and regions in Europe.
From this perspective we find that the lack of cross-border consistency—in this chapter also called “cross-border barriers”—lead to serious costs and burden for business.
Furthermore we learn that these costs and burdens have been out of sight during the more than 20 years of so called “better regulation initiatives” in Europe. The subsequent better regulation initiatives were basically Member State oriented and focused on European and national legislation separately. An integrated cross-border approach to control cross-border consistency does not exist neither at the EU- nor at a national level.
Introduction of a new multilayer approach in which assessment covers not only national and European impact but also cross-border effects is presented as a possible solution to this system failure. As part of the European Regulatory Impact Assessment (RIA) procedure, this approach could lead to a new legislative principle of “cross-border consistency” and furthermore to the development of a practical “cross-border consistency check” to transform the existing EU legislative procedure from “better” to “best regulation”.
Such a new legislative principle could beforehand draw attention to possible ways to avoid adverse effects of differences in legislation and procedures. Solutions could be found by more harmonization or streamlining but also by more transparency and overview over the existing differences.
Furthermore the question is explored whether and how such a new principle of “cross-border consistency” fits into the existing EU as a Union of “conferred powers” based on the classical principles of legality, subsidiarity and proportionality. From the historical perspective is looked at the dualistic and Member State oriented approach of a growing Union. Its various methods and principles of regulation were aimed neither at harmonization cross-border nor at cross-border co-operation and transparency. From this historical perspective is concluded that cross-border consistency cannot be achieved by the Member States separately. To counter act the adverse effects of cross-border inconsistency the only solution seems to be to complement the Member State orientation of the past with a cross-border orientation of the future. A persistently greater focus on the cross-border context of European legislation, enforcement and supervisory procedures seems therefore highly advisable. A community based approach seems needed to reduce and remove cross-border inconsistency, to reduce its costs and burdens for business and improve competitiveness.
Comparatively, attention is paid to the United States of America (US) and—very briefly—also to Japan.
Given the American model with substantial differences in legislation between basically autonomous US states, similar costs and burdens for business as in Europe arise from non-consistent and non-transparent interstate regulation and not complementary enforcement procedures.
Unlike Europe and the US, Japan has not the same problems of non-consistent regulation between regions as in Europe and the US. Nevertheless Japan is not seen as role model for cross-border co-operation. But as Japan seems to be moving towards a more federal, less centralized and unified system, it can learn from the experiences in Europe and the US to be alert on cross-border consistency.
Jooske Marijke Vos

Chapter 12. World Trade Organization and the Global Risks

The world economy has become important for economic development of countries and as a business environment for operation of global companies. In the last few decades the cooperation between countries concerning trade has reached unprecedented volumes but the rise in international trade has been followed by the rise in global risks. Apart from traditional commercial risks, countries and global companies are faced with wide variety of non-commercial risks, like political, societal and ecological risks.
In order to decrease risks in international trade countries have agreed to establish an international economic organisation as an important international legal instrument. In the area of international trade the most significant international intergovernmental organisation is the World Trade Organization (WTO). The basic principles of WTO guarantee non-discrimination and predictability in trade relations of WTO member countries. The WTO agreements establish the legal framework for international trading and these agreements have been put in place to decrease the risks of unpredictable acts of WTO member governments. But the most important achievement of the WTO is consolidation of tariff rates and elimination of risks from tariff escalations. Risk analysis is embedded in WTO regulations since some WTO agreements request that a scientific proof should be acquired when introducing some border measures in international trade.
In spite of the great efforts of countries to eliminate global risks, new risks constantly appear. Unregulated non-tariff barriers in the WTO framework are examples of risks to free movement of goods and services between countries that are still present. A new round of multilateral trade negotiation in the WTO must be successful in removing these obstacles to international trade. But ecological risks and competition for scarce natural resources between countries will represent significant risks in the future compared to commercial risks, and this has to be taken into consideration by the WTO.
Predrag Bjelić

Theoretical and measurement issues related to better business

Chapter 13. Regulatory Policy at the Crossroads: Mapping an OECD Agenda for the Futures

Over the past 15 years, the Organisation for Economic Co-operation and Development has played a pioneering role in bringing the issue of regulatory reform to the fore. Much has been achieved over the years, with many countries benefitting from the potential offered by quality regulation. Still, the recent crisis exposed massive flaws in regulatory activity, as well as in supervision and enforcement. Other phenomena are also testing the limits of regulatory frameworks. Regulatory policy is currently at the crossroads, and it needs to integrate a broader governance perspective to address current and future challenges. The chapter takes stock of the current debate and discusses possible pathways to address the future–i.e. restoring trust in government through effective regulatory governance. This involves a tighter integration between the organisation and the management of reform. It also requires completing the policy cycle, closing the loop between regulatory design and evaluation of outcomes, with evidence-based approaches to support proportionate decisions, policy coherence and better assessment of the benefits of regulation.
Lorenzo Allio, Stéphane Jacobzone

Chapter 14. SCM 2.0: An Argument for a Tailored Implementation

The present Standard Cost Model (SCM) is a policy instrument for measuring the compliance costs of legal information obligations from businesses, institutions and civilians to government and governmental institutions. The main function of these information obligations is to allow government monitoring the compliance. Since 2003, the first generation of the SCM—SCM 1.0—spread very quickly over more than 20 countries. Yet, now that the use of SCM has proliferated and many practical experiences are available, time has come for a further discussion. Such a discussion could provide further thoughts for improvement and elaboration of the model towards a new generation of the SCM, the SCM 2.0. Looking from the perspective of a risk society, it appears that a strategy of deregulation should be replaced by a strategy of better (business) regulation. After all, better regulation is one of the corner stones for effective risk management. How could a SCM 2.0 fit in such a strategy? Strong features of the SCM are its capacity to reduce complexity—standardisation of compliance—and its flexibility. These features fit quite well to the main stream theories on policymaking: bounded rationality of the “administrative man”, mixed scanning, incrementalism and non-sequential policy stages. The big challenges for the next generation of the SCM—SCM 2.0—are to add modules for standardised financial and substantive compliance costs and standardised benefits. In addition, a safeguard against compromising political rationality should be constructed, inspired by the technical rationality, the means to achieve the public goals of the risk society. The SCM 2.0 could be helpful in this respect.
André Nijsen

Chapter 15. A Tax Regulatory Laffer Curve

In this chapter, attention is drawn to the regulatory costs of taxation. From an economic point of view, tax regulatory costs are discussed. First, a theoretical Laffer-curve for tax regulatory costs is developed. Next, an overview is given of literature on tax regulatory costs. Finally, some remarks are made about the incidence of a tax regulatory Laffer curve.
Saša Drezgić, Peter Pronk

Chapter 16. Sunset Legislation: Theoretical Reflections and International Experiences

The chapter gives an overview about the use of sunset legislation in three countries, namely, USA, Australia, and Germany. Based on theoretical reflections of policy termination and evaluation, the empirical experiences on how sunset legislation can foster different policy goals are analyzed, and in conclusion the possibilities to connect sunset legislation to risk-based decision-making are discussed.
Sylvia Veit, Bastian Jantz

Concluding Part


Chapter 17. Conclusions

At the beginning of this book we set out the “why” and “what” questions associated with global risks and regulation. The book addresses these two ambitious questions in a number of different ways.
Alberto Alemanno, Frank den Butter, André Nijsen, Jacopo Torriti


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