Monday, October 13, 2008

Regulations in the era of Deregulation

The world-wide telecommunications revolution, which has enabled people all over the world to benefit from the use of mobile phones is not even 15years old. Along with the new technologies, band frequencies were deregulated, and competition permitted in countries that only had one phone company, usually owned by the state.

What that did to countries like Sri Lanka and for that matter to most of the world, was more people found it affordable to own a phone. CDMA and GSM technology made it much cheaper, and those who were in the forefront of the revolution, benefited most as they had a head start.

This free for all created an industry that did not exist before, and much like the internet and the growth of the lap top, allowed a lot of players in and now have come to the point that with competition, rates declining the previously high profit margins are also taking a tumble, being reflected in the share prices. For example within a year, where Dialog shares rose to Rs30, they are now Rs6/50 and falling wiping Rs100Billion of this company’s market capitalization in the space of a few months.

In much the same way, the banking industry was also allowed to create new products. Previous restrictions on some of their lending practices were lifted allowing them far more freedom, which was not properly understood by the regulators, creating the current crisis. When big money confronts governments, this is bound to happen. Rules are set aside and restrictions lifted. Money talks! US lawmakers are complicit in not being able to oversee the excesses, I believe in Sri Lanka we are in for a washout of the Telecom companies, as their viability in light of competition is questionable. Cartels are being formed to prevent more entrants that may threaten existing ones.

How much regulation should remain in the era of deregulation? There is no question that deregulation increases growth, but if that permits a cowboy culture with no sheriffs able to see reality due to their incompetence and lack of expertise, then, we have put a crime policemen in charge of traffic, so chaos is the result. It is the understanding of the issues involved that is required before the management of the problem. Only then can steps be taken to ensure that crashes and shocks don’t occur because as always it is human greed. Not just the banks but also the greed of the borrower is to blame for the present crisis that is also affecting legitimate borrowers.

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