TNN I was taught in college that market failure is so common that governments must intervene with regulations to protect the public. Actually, regulations are required even when there is no market failure. Competition needs to take place within a framework of rules, otherwise the mafia will triumph everywhere by virtue of competitiveness in violence. We do not want polluters, adulterators and crooks to have a competitive advantage over others. Hence every country has thousands of pages of legislation and rules, aiming at a multitude of objectives. The US, the supposed land of the free, has 78,000 pages of regulations in the Federal Register, enforced by 241,000 employees. It has 80 different regulations (mostly health-related) governing the making and selling of hamburgers. Too many, you might think. Yet you cannot get away from the fact that regulations and regulators are an inescapable part of any liberal democracy. A problem remains. Thousands of years ago Plato argued for the appointment of noble guardians to uphold laws and norms. But the question who will guard the guardians remains unanswered till today. Regulatory failure is as common as market failure. The same fallible humans who man businesses also man bureaucracies. If businessmen can be crooked, inefficient and callous, so can regulatory agencies (talk to anybody who has dealt with the Delhi Development Authority). Often you get an unholy alliance between crooked applicants and crooked regulators. A recent research paper (Bertrand, Djankov, Hanna and Mullainathan, EPW 2/2/08) examined one form of regulation which all reasonable people will agree is needed – giving driving licences only to those who pass certain minimal standards. If driving is completely unregulated, we will have more auto accidents that kill and maim innocents. So, regulating driving licences is a worthy public good. Read more from the same author Expect more: This year it is an Election Budget Emerging markets: Future safe havens Raise a toast for a happening India Inc Why intellectuals have no mass base Re has appreciated less than yuan Overvalued Rupee? Exports are booming ! But does the actual functioning of the Regional Transport Office (RTO) in Delhi or elsewhere actually achieve these aims? To test this, the International Finance Corporation financed a research project in which 822 people queuing up outside RTO offices in Delhi were recruited to participate in the research. One group, called the comparison group, was simply asked to report back after getting or not getting a licence. A second group, called the bonus group, was given Rs 2,000 per member to try and procure a licence within 32 days, by hook or crook. A third group, called the lessons group, was offered free driving lessons for up to 15 sessions in an accredited driving school. All participants were also paid a flat fee for participation. The results of the research vindicated the most extreme cynic. Corruption was rife, though not in the normally-believed sense of giving money to officials. Rather, the RTO was full of agents or touts, who expedited the process for a fee. So, applicants paid Rs 1,080 on average to get a licence, two and a half times the official fees of Rs 450. Worse, 59% of applicants did not even take the driving exam. Indeed, 54% of all those getting licences were found unfit to drive by a subsequent test administered by an independent evaluator. Clearly, a huge regulatory agency aimed at ensuring public safety is seriously dysfunctional. Few in cynical India will be surprised. However, few would have anticipated the research finding that actually bribing officials is rare. Indeed, research participants attempted in 14 cases to directly bribe an official, and on 12 occasions the officials refused! That might look like a pretty honest system. But looks can deceive. Corruption in the RTO is not a matter between individual applicants and officials. Rather, it is an organised racket where dozens of agents have long-term relation with several officials, with a complete understanding on payments for passing various papers without due scrutiny. This systemic corruption will escape surveys attempting to monitor individual bribes. The agents enabled applicants to evade most regulatory norms aimed at ensuring safety in driving standards. Of those who used an agent, only 23% were required to take the official driving test, compared with 89% of those without any agent. At the end of the project, the researchers gave an independent driving test to all participants who received licences. No less than 54% of those who used agents flunked the test, against 25% who did not. The lessons group – those offered free driving lessons – fared best. Now, the corruption of the agent system is no news. To correct it, directives are issued from to time banning agents. This ban is enforced more strictly at the New Delhi branch of the RTO than other branches. Yet many who live in New Delhi go to other branches, where agents are able to ensure that rules on residence are ignored along with all others. What was the experience of the three different groups in the research project? In the bonus group, 71% got driving licences against only 48% in the comparison group. That is, those given Rs 2,000 to bribe officials were far more successful. Naturally, this had nothing to do with higher skills. Indeed, 71% in the bonus group said nobody had ever taught them to drive! The figure was a dismal 49% even in the comparison group. Even in the lessons group – those offered free driving lessons – 17% said nobody had taught them. Clearly, many people are so uninterested in safety that they will not take even free lessons. Getting a licence is a long process starting with an application, going on to a provisional licence, and then ending with a final licence. At the start of the process, only 42% used an agent. By the final stage, 71% did so. What conclusions can we draw from this? We cannot give up and say let us have no regulations at all. How do we ensure higher standards? No easy answers emerge from the research. I suspect that the entire cultural ethos within which bureaucrats and the public operate has lent legitimacy to such low standards that it is very difficult to change expectations and behaviour. Many NGOs believe that the system can be improved with new systems in monitoring and oversight. Yet Plato’s age-old problem will come back to haunt us. Who will monitor the monitors?