I have been thinking about deregulation. I find myself recalibrating priors.
There are perhaps two kinds of it we see globally. At one end is the loud, politically driven chainsaw approach of the likes of DOGE and Argentina’s Javier Milei. At the other end is the cautious tinkering at the margins (à la using the wood-splitting maul) that is the feature of deregulation efforts driven by bureaucracies.
The latter can only get you so far, and there is a need to strike the right balance, or sometimes even verge towards the chainsaw.
Before we dive deep, the FT has an excellent long read on Javier Milei’s extraordinary deregulation efforts in Argentina, which is now focused on freeing up the oil and gas and mining sectors to make them the engines of Argentina’s economic growth.
More specifically, he is intent on exposing the corporatist economic structure of Argentina, centred around Buenos Aires, and established by the populist policies of Juan Perón to a sharp burst of foreign competition.
First, on the nature of deregulation.
In April, Congress passed a law that could provide a major impetus to the mining sector by reducing what the government says were excessive restrictions on projects near the country’s many glaciers... Martín Pérez de Solay, head of the mining conglomerate Glencore in Argentina, says the country has seven mining projects under way that are “world-class” and believes the country could bring on new annual supply of 1.5mn-2mn tonnes of copper over the next decade — about a third of the output of neighbouring Chile, which is the world’s largest producer. The boom in oil and gas is already under way. The US government estimates that Argentina has the second-largest reserves of shale gas in the world, most of it in the Vaca Muerta formation in the Neuquén Basin in the south of the country. Investment is accelerating sharply, partly as a result of a new legal framework introduced in 2024 that provides tax breaks and other incentives. Wood Mackenzie, the energy consultancy, estimates that the pipeline of new projects now exceeds $100bn. “Argentina is on the cusp of a shale revolution,” it says, comparing the atmosphere to west Texas in the early 2010s, at the start of the US shale boom.
Exports in mining, energy and agriculture have already increased to record levels under Milei, beginning to ease the dollar shortage that has underpinned Argentina’s chronic economic instability. Federico Sturzenegger, the minister for deregulation and one of the architects of the plan to liberalise the economy, says that the cumulative impact of recent investments will allow Argentina to triple its exports in the next five to six years... Sturzenegger says that access to cheap energy from shale oil and gas will lead to a new “industrial boom”, which could include sectors such as fertilisers and petrochemicals.
And it could have profound long-term consequences, including shifting the geographical centre of the country’s economy.
The sectors Milei champions are in some cases more than 1,000 miles away — mining in the far north, or oil and gas production to the south in Patagonia. The government talks about millions of workers moving out from Buenos Aires to outlying provinces in the coming decades... Buenos Aires, where almost 40 per cent of Argentine voters live... In the long run, he estimates that about 4mn people will leave the Buenos Aires area over the next 30 years — with 2mn decamping to the oil and gas region in Patagonia and another 2mn heading for the mining region in the north. “In the second half of the 20th century, there was a big migration from the interior to Greater Buenos Aires at a time when Argentina was one of the most closed economies in the world,” he says. “This process is exactly the opposite; it opens up the economy and generates competitiveness from exports and the population gradually reverts to the interior.”
However, the deregulation, being more like a shock therapy, is also resulting in the hardships and problems its critics have long predicted.
The excitement among resources companies, however, is mirrored by rising pessimism among the domestic-facing industries that employ millions of Argentines. Manufacturing, construction and retail have all contracted or stalled under Milei even though economists surveyed by the central bank predict the economy will grow 2.1 per cent in 2026. According to government figures, about 3,400 manufacturing businesses have closed since late 2023 — more than 10 per cent of the total. In the formal labour market, over 240,000 jobs have been lost, a fall of nearly 4 per cent, although this drop has partly been offset by growth in the informal labour market where employees have minimal protections.
Textiles have been one of the hardest-hit industries, as Milei’s tariff cuts open Argentina to a flood of cheaper foreign clothing, including via Chinese e-commerce sites such as Shein and Temu... manufacturers... claim the currency is overvalued in order to curb inflation; others say Chinese producers are using Argentina as a dumping ground for their surplus output... The owner of a large textiles business in Buenos Aires says the government has set companies like his up to fail by opening them to competition from imports without dismantling the high taxes and cost structures put in place under the protectionist Peronist model... Martín Rappallini, head of the Argentina Industrial Union, says that Argentine companies face an annual tax take equivalent to 56 per cent of the formal economy, the highest burden in Latin America... Real wages have failed to fully recover from a sharp drop in 2023, when inflation surged into the triple digits. Disposable incomes have fared even worse as Milei has scrapped subsidies for energy, water and transport, falling 17 per cent in real terms since early 2023.
Clearly, Milei has bitten the bullet with deregulation. There are none of the standard hesitations of bureaucracy restraining the political choice that has been made. Frederico Sturzenegger, an economist-politician with considerable government experience, is carrying out the Milei mandate.
There will be costs, with its suffering and losers. Milei may not even survive to fight the next battle. But it can be legitimately argued that when a system is entrapped in a very bad equilibrium, restrained by powerful entrenched interests, it is unlikely to do any more damage than business as usual to break free and deregulate extensively.
India is not Argentina. But there are enough pockets of well-settled bad equilibria that survive only due to a systemic preference for the status quo arising from lack of political appetite and bureaucratic restraint, itself perpetuated by a lack of stakeholder demand and accountability and poor quality of public debates and actions on the associated issues. While bureaucracy gets the blame for all the ills, there are others equally or more culpable. Chalta hai at worst, tinkering at the margins at best, has been the norm.
I can think of a few areas where taking the chainsaw (as against the tinkering using a wood-splitting maul) is the need of the hour. These are just randomly picked top-of-head-recall examples, and there will be many others, even more relevant or important.
A first-order deregulation measure would be to prepare a negative list of activities from which the government should stay away. It was a leap of faith two decades back when state governments in India decided to stop purchasing their own vehicles, recruiting drivers and Class IV employees, and generally outsourcing services. They were brave decisions then. The same appetite, to a much higher degree, must now be summoned to exit other areas. What good can be achieved for government agencies to be entrusted with the development of land and real estate, or develop solar and thermal power generation, or use public funds to compete with private investors, or generally make anything that is widely available in the market? Pure public goods, demonstrated market failures, and strategic considerations must be the only reasons for governments being directly involved in activities.
One of the highest-impact areas for reform would be a wholesale deregulation of urban planning norms. This would involve significantly easing (or increasing) development control limits, allowing much greater flexibility to landowners and developers, generally avoiding micromanagement with tight prescriptions, and proportionality in regulation depending on the nature of the property and use. This would entail radical upending of the prevailing paradigm of urban planning, a task that goes far beyond the imagination of even the most progressive of domestic planners and policy makers.
On the ease of doing business, the real disruption can happen only when we make the process of starting, expanding, diversifying and closing a business, exporting goods, etc., essentially automatic unless a genuine public-risk threshold is crossed. This would entail essentially culling several gatekeeping rules, or at least confining the rigorous gatekeeping only to a small set of prioritised categories. Deregulate extensively for all but the subset of higher-stakes categories, thereby making life simple for the vast majority.
Another deregulation would be to dramatically reverse the inverted duty structure on inputs and outputs that inflicts serious costs on manufacturing and trade. This structure makes manufacturing and exports uncompetitive, entraps industries in bad equilibria, creates numerous perverse incentives, and also ends up creating distortions in areas like the utilisation of GST tax credits.
More specific areas of doing business in a globalised world deserve radical overhauls. In gatekeeping areas like food safety, product standards, communications security, etc., where our own regulatory regimes have struggled to keep pace, it may be more appropriate to embrace global standards through the likes of mutual recognition agreements. The only caution should be to ensure that they do not discriminate against domestic stakeholders.
Human resource management within the government is another area which requires radical deregulation. The tightly prescribed one-size-fits-all recruitment rules are a relic of a bygone age, and must be revised wholesale to be made fit-for-purpose in the age of AI and disruptive changes. Even with all its risks, the recruiting entities must be given significant flexibility to formulate these rules as per their requirements. In general, the procurement rules are aimed at the median circumstances and stymie the growing long-tail scenarios. It is precisely the opportunities lurking in these long-tail scenarios that have the highest transformative potential, which are now blocked out by these procurement rules.
Two specific industries where deregulation can have potentially transformational impacts are in the areas of clinical trials and other processes for drug development, and in oil and gas exploration. In both cases, the outcomes of all policy engagement to date have generally been disappointing. It therefore stands to reason that it cannot get any worse with deregulation.
Arguably the most disruptive deregulation would be to delegate functions, funds, and functionaries to local governments. Decentralisation across levels of government can be transformational. This will certainly create abuses and excesses, but will lay the foundations for positive long-term change.
More generally, as an agenda for those interested in taking forward effective and sustainable deregulation, here is a project.
I can think of six fundamental principles that are the heart of regulation, and the shift required in them. They involve moving from the process of permissions to one involving registration, ex-ante approval to ex-post accountability, one-size-fits-all rules to risk-based regulation, government inspections to self/third-party certifications and audits, protecting incumbents to protecting competition, and regulating inputs and processes to regulating outcomes.
Instead of expending energy articulating principles, holding workshops, and writing opeds, it may be useful for those interested in getting governments to deregulate to prepare drafts of specific regulations that incorporate these new paradigm principles and make them available in a transparent manner (indicating the changes as proposed) as the agenda for engagement with policymakers and for public debates. Thanks to the likes of Claude, the task becomes easier, though getting the details reasonably credible is still a painstaking process of discussion and iteration. In a large country like India, all it takes is for one among several governments to make the leap of faith on deregulation.
I’ll blog on this at a later occasion.
In all these cases, there will be an avalanche of protests and stiff opposition. There will be scaremongering of all kinds that would restrain even the boldest of bureaucrats. Hell might break loose in some cases. In electoral economies, the political economy of such costs can be daunting, as Milei is finding out.
For sure, the costs will be real when looked at from narrow and limited time perspectives. But it is the medium- and longer-term that should be of interest. There will be capture by vested interests, exploitation, corruption, wastage of public resources, and abusive practices. But they are unlikely in the aggregate to be worse than the slow-moving dysfunctional train that we have now.
In a famous essay, The Principle of the Hiding Hand, Albert Hirschman articulated the hiding hand principle as a form of beneficial ignorance that helps planners start projects they would otherwise have avoided due to uncertainties and risks. He points to the power of unseen creativity that would emerge to solve these unexpected challenges. Likewise, it is required to trust the hiding hand to make the leap on deregulation and be prepared to address the egregiously bad outcomes that invariably emerge.
While at it, it is pertinent that there are also areas where taking the hammer on enforcement is equally required. Tukaram Munde’s strident ongoing enforcement of food safety law is a case in point. Excesses and apparent disproportionality of enforcement are par for the course with such endeavours in ultra-permissive systems. Here too, the wood-splitting maul is inadequate, and the chainsaw is necessary for any meaningful dent in the problem, even with its collateral costs.
