Meaning Of Deregulation
Deregulation is the act of repealing existing industry-specific regulations in an advanced industrial economy. The removal of inefficient laws reduces government control over the industries, allowing businesses to operate more freely in the international market.
Its purpose is to increase competition, enhance industrial efficiency, reduce service costs, and spur economic growth. Aside from the government, consumer groups can also seek deregulation to remove barriers to industrial expansion. The repeal process can be started by an executive figure (such as the President), lawmakers, or federal agencies.
Table of contents
- Deregulation meaning refers to eliminating government restrictions on particular industries, which diminishes their obligations toward the state. It gives them greater freedom in business operationsBusiness OperationsBusiness operations refer to all those activities that the employees undertake within an organizational setup daily to produce goods and services for accomplishing the company's goals like profit generation. and decisions.
- It leads to increased competition, especially against foreign corporations, as businesses will not have to comply with rules that cost them financially.
- Although it is initiated by the government more often, revolutions in the industry can also trigger deregulation.
- In industries like finance, airlines, and energy, deregulation helps companies invest in research and innovation, provide low-cost consumer services, and increase consumer choices, leading to market growth.
How Does Deregulation Work?
Governments from all around the world regulate markets in some way. It is a way to prevent unfair business practices that can hurt both society and the economy. In simpler words, it is often the response to a looming financial crisis.
A great example of this would be the Securities Exchange Acts of 1933 and 1934, introduced after the Great Depression of 1929. To follow the law, financial companies had to disclose more information to regulators than they did before. As such, the legislation in this sector was essential to establish more transparency in the market and prohibit scams.
However, discourses about regulations change as time passes. The main reason is that some laws become inadequate and burdensome over time. Therefore, they need to be deregulated depending on the current global market trends.
For example, in its policy response to the COVID-19 crisis, former US President Donald Trump waived many regulations acting as hurdles to access health care, especially telehealth. For instance, the administration deregulated rules requiring licensing for doctors to use telehealth systems, limiting coverage for remote care for all Medicare beneficiaries, and obtaining a written request from a doctor for COVID-19 testing.
Now, coming to what is deregulation. The parliamentary body or the President or a federal authority proposes to repeal the inefficient existing laws regulating a specific industry. By decreasing regulatory oversight, businesses can increase their competitiveness at much reduced operating costsOperating CostsOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.. It helps industries adapt to the latest global market trends and make profits.
With that said, it is still a highly debated practice. The proponents of the concept believe that it promotes industrial productivity and economic activity by increasing investment opportunities. But its opponents claim it causing social concerns like economic uncertainty, environmental damage, and constraining monopolies.
Here are deregulation examples from three industries to better understand the concept.
#1 – Deregulation of Banks
The financial industry is one of the most regulated industries in the world. However, this trend shifted in the last few decades.
For example, a post-depression law called the Glass-Steagall Act of 1933 prohibited banks from investing in risky stock funds. Also, they were not allowed to participate in activities like commercial and investment bankingInvestment BankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.. It remained unchained for over 50 years, but banks in the United States started to lobby against it during the 1980s.
In 1986, the United States government decided that investment banking must account for at least 5% of a commercial bank’s revenue. Though the limit was raised to 25% in 1996, the banks got rid of the law in 1999 finally.
During the 2000s, deregulation increased heavily in the banking sector and kept moving in this direction until the subprime mortgage crisis of 2007Subprime Mortgage Crisis Of 2007A subprime mortgage is a loan against property offered to borrowers with a weak or no credit history. Since the risk of recovering is high, the interest rate charged on such mortgages is higher so that the lender can recover a maximum amount at the beginning of the loan., which led to the Global Financial CrisisGlobal Financial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors. of 2008.
After that, the tide of deregulation stopped. In 2010, the passage of the Dodd-Frank Wallstreet Act required banking institutions to hold more money in safe investments and prohibited them from offering subprime mortgage loans to avoid sudden collapse.
#2 – Deregulation of Airlines
Another famous case of deregulation happened with the airline industry in the United States. During the 1960s, the Civil Aeronautics Board set pretty strict rules for airfares, flight routes, and entry of new airlines. As a result, traveling became very expensive, and new flight routes sometimes took a long way to get approval.
Airlines saw this as a significant issue, which only changed with the Airline Deregulation Act of 1978. With the act, companies got more flexibility to set rates in a free market and decide their routes. It resulted in cheaper airfares and increased competition. It also helped smaller airlines enter the market, even without the initial capital to make significant changes. Even though safety rules were still regulated, airline companies had a say in how to operate.
Unfortunately, deregulation was not without issues. Without the requirement to serve all cities equally, some places that were not so profitable started to get fewer flights.
#3 – Spontaneous Deregulation
As per spontaneous deregulation definition, it happens when innovation disrupts an industry, and a new business starts without prior regulation. There is no better example of that than ride-sharing service Uber.
It disrupted the highly controlled taxi market in most cities with its groundbreaking way of connecting drivers and passengers via a smartphone app. It was impossible to enforce the same rules because of the different business structureBusiness StructureBusiness structure is the legal framework adopted by a company to execute business activities in compliance with the corporate rules and regulations. An organization can be a sole proprietorship, partnership, limited liability company or corporation. of Uber compared to the classic taxi model.
In this case, however, a regulation may occur as a response from the government to the industrial disruption. Uber is still in a long-running legal battle with various governments over its lack of regulation, especially concerning how to classify its drivers.
Pros and Cons
Fewer regulations can lead to increased profits, stimulated growth, and enhanced competition, but they also have a few drawbacks. Let us understand how:
- Deregulation removes barriers for new companies to enter an industry and allows them to compete with established ones.
- Increased competition lowers the cost of services for consumers and improves industrial efficiency.
- Companies can operate globally more freely, which benefits the economy of the country.
- It can increase the business profits as companies may not be required to use their capital to adhere to government regulations.
- Some parts of the population are underserved, for companies may not find it profitable to provide services to this group without a law that requires them to do so.
- It encourages speculation, for example, by allowing banks to invest in riskier assets.
- It decreases the quality of the final product or service offered to the consumer.
- Lack of government control makes consumers vulnerable to scams and frauds.
- Deregulation gives rise to social concerns, such as environmental pollution and damage.
This has been a guide to Deregulation and its meaning. Here we discuss how it works along with examples (banks, airlines and spontaneous) and pros & cons. You may learn more about financing from the following articles –