Are regulatory moats Canada’s form of corruption?

And what can we do about them?

I was inspired by an article in the Globe and Mail the other week about an old classmate of mine, Shoeb Mohammad, and an academic study he did with his colleagues Jie Yang and Irfan Butt. In their paper, they surveyed the universe of research done on the interesting question of whether corruption harms innovation or helps it. By greasing the wheels of bureaucracy, perhaps corruption makes doing business easier, helping to unleash full innovative potential. 

Not surprisingly, they find that lots of research points to corruption as bad for innovation. It allows for monopolies and dominant business to take root by hampering competition, which is not ideal for creating innovation. 

Like with many things, I think a lot of Canadians would smugly believe that we don’t have the same amount of corruption issues here like in other countries. Although we are certainly not immune. But Shoeb makes a very good point in his Globe interview that just because we may see less of the classic forms of corruption, like passing envelopes of money to bureaucrats, it may be more that corruption just looks different here. 

In his dissertation, he defines corruption as “misuse of a position of authority for private or personal benefit”. And I think when businesses lobby for regulatory moats, this behaviour could certainly fall within the realm of corruption. 

Regulatory moats are regulations that protect businesses from competition because they make it harder for new business to enter the market. As a result, there are fewer competing businesses in the market, which harms consumers and workers. A great example of a regulatory moat in action is Toronto’s licensing regime for ride hailing platforms, which is currently being reviewed by the City following a public consultation opened in June. I’m writing a piece on this topic at the moment with the folks at MetStrat which I’ll be sharing soon :)

In about 2014, Uber entered the Canadian market and began lobbying the City aggressively for regulations that were distinct from the regulations governing taxis and limos. One of the key wins for Uber was that it was given the responsibility of applying to the City for driver-for-hire licenses on behalf of drivers. These licenses were specific to the platform. So, if a platform driver wants to drive for another platform, they need to apply for a second license. This approach is different for taxis and limo drivers, where the driver applies for the license and can take that license with them to different brokers. 

The consequence of the current system for licensing platform drivers in Toronto is that it makes it harder for drivers to switch platforms. This situation hurts drivers because they cannot easily move on if they are treated badly by a platform. But it’s also bad for new businesses that want to enter the market and compete because it is harder for them to compete for the platform drivers they need. 

But Robin, are regulatory moats really corruption, or are you just being melodramatic? 

These moats can be a reflection of too much corporate influence over Canada’s policy makers, but that is not the only factor at play. I think another key factor that can lead to regulatory moats is that many policy makers don’t even know to even think about the impact regulations may have on competition and business fairness, let alone what things to consider when making policies that preserve competition. 

The Competition Bureau has been tuned into the fact that policy makers often don’t know to think of competition when crafting policy. That’s why they put together a competition toolkit for policy makers that walks users through how to design policies that preserve competition. 

When policy makers lack knowledge about how policies can negatively impact competition, this only makes regulatory moats more likely. If policy makers don’t know what goes into a competition-friendly regulations, then how are they supposed to know when lobbyists of big business are trying to pull the wool over their eyes? 

So while corruption can be a driving force behind regulatory moats, I think the core of the issue is policy maker awareness and knowledge of how regulations can shape competition. 

So, what can be done? Answer: educate and build awareness 

The Competition Bureau’s toolkit and competition advocacy work are important. But businesses that are facing regulatory moats also have an important role to play. They need to speak up, because if they don’t governments won’t know that change is needed.

Public awareness is important too. Regulatory moats hurt entrepreneurs and new entrant businesses. But consumers and workers are also harmed by the lack of competition by suffering higher prices and lower wages. Businesses that are impacted by regulatory moats also need to educate the public on the negative impacts of lack of competition, especially when policy makers are not tuned into the importance of competition or if policy makers are captured by dominant corporate interests. 

It’s not really fair that entrepreneurs or businesses looking to enter new markets are saddled with the task of educating government officials and the public about regulatory moats and their negative impacts. But this is why I think the educating work that the Canadian Anti-Monopoly Project does is so important. This broad-scale advocacy can go a long way in supporting businesses that want to compete, but these businesses will also need to take the initiative to communicate their experiences to government decision makers and the broader public. By stepping up, these businesses can turn the tide against entrenched interests and pave the way for vibrant, inclusive markets. 

And lastly, if you have any examples of regulatory moats, please let me know! I want to start compiling a list of examples. We do not have a sense of how much of a problem this issue is in Canada, but the first step is to collect data.