Transcript jcbmodule world bank

Raising the Bar on Products and
Process Standards:
Economic Principles
J. Christophe Bureau
Institut National Agronomique, Paris
The World Bank, 2003
Overview





Definitions
Economics of standards
The political economy of standards
The role of standards in the process of
market integration, trade and economic
development
Conclusion
Definitions





Standards, technical regulations and other
terms
Types of standards
Examples of standards
Different roads leading to a standard
International standards and standardization
bodies
Standards, technical regulations
and other terms



"Standard" ("norme"): broad meaning in the
general language
More restrictive meaning in official and
technical languages: refers to something
voluntary
Mandatory standards are called "technical
regulations" ("réglements techniques")
Standards, technical regulations (2)


Standards provide "rules guidelines, or
characteristics for activities or their results,
aimed at the achievement of the optimum
degree of order in a given context" (ISO)
Standards include various layers of "quality
insurance
institutions":
rule
making,
conformity assessment, accreditation
Standards, technical regulations (3)




Rule making: development of technical
specifications
Conformity assessment: ensures that one
complies with requirements
Accreditation/recognition: ensures that the
conformity assessment works
Labels and conduct codes are special cases
Definitions





Standards, technical regulations and other
terms
Types of standards
Examples of standards
Different roads leading to a standard
International standards and standardization
bodies
Types of standards

Various typologies including according to:


Area addressed: technical, environmental,
sanitary and phytosanitary, labor standards,
etc.
Economic impact: Compatibility (network
effects), minimum quality and interface
(information), variety reduction (minimize
wasteful proliferation), information and
measurement (compatibility and risk of
litigation) standards
Types of standards (2)



A distinction particularly relevant in trade
issues: Product standards vs Process and
Production Methods standards
Specific treatment of process standards in
multilateral trade agreements (GATT)
However, hazy area between products and
process standards often causes trade
disputes
Definitions





Standards, technical regulations and other
terms
Types of standards
Examples of standards
Different roads leading to a standard
International standards and standardization
bodies
Examples of standards

Technical standards include:


standards sanctioned by an accredited
standards body
“de facto” standards (Microsoft Windows; Video
cassette recorders)

“ad hoc” standards“ or “consensus” standards
(widely used by mutual agreement; non
proprietary Digital Video Disks standards)
Examples of standards (2)

Sanitary and phytosanitary standards:


Protection of human health, animal health, flora
and fauna
Bans, quarantine regulations, inspection of
products, specific treatment or processing of
products, maximum allowable levels of
residues, etc.
Examples of standards (3)

Environmental standards



Some mandatory, but many voluntary
Some international (ISO 14000, Forest
Stewardship Council, etc.)
Many national standards (Canadian Forest
Management System Standard; New Zealand
Forest Accord; Finnish Certification Standard;
Living Forest Project in Norway, etc.)
Examples of standards (4)

Labor standards




Typically a process standard
No international agreement, but a core of
United Nations standards; Often poorly
enforced
Can lead to the exclusion of certain countries
from international agreements (Myanmar)
Pressures may create a de facto standard (child
labor in garments in Bangladesh)
Examples of standards (5)

Broader ethical standards


Reflect new concerns of citizens
Combine environment, labor, and possibly other
ethical values (SA8000)

Animal welfare standards (e.g. EU regulations)

Fair trade standards (Max Havelaar)

No international agreement, source of disputes
between countries
Definitions





Standards, technical regulations and other
terms
Types of standards
Examples of standards
Different roads leading to a standard
International standards and standardization
bodies
Different roads leading to a
standard



Mandatory standards often government
defined; Voluntary standards have public or
private origin
Manufacturers, users, research
organizations, government, consumers,
work together to create standards
National standardization bodies coordinate
standard setting
Different roads (2)

Examples:






American National Standards Institute (ANSI)
British Standards Institution (BSI);
European Committee for Standardization (CEN)
German Institute for Standardization (DIN)
French AFNOR;
Standards Australia, etc.
Different roads (3)



Widespread use of voluntary standards
sometimes makes them mandatory
National and international regulations rely
on voluntary, sometimes private, standards
Private standards may use public or non
profit association standards (electric
standards using fire hazards codes)
Definitions





Standards, technical regulations and other
terms
Types of standards
Examples of standards
Different roads leading to a standard
International standards and standardization
bodies
International standards and
standardization bodies




Growing importance of international
standards because of globalization
International institutions setting standards
(Codex Alimentarius)
Coordination in international fora (APEC);
mutual recognition
International federation and management
of voluntary standards (ISO)
International standards (2)

The ISO:



Non governmental; Worldwide federation of
146 national standard bodies
Promotes standardization to facilitate trade
2937 technical bodies; Staff of 500; 30000
experts participating a year
Overview





Definitions
Economics of standards
The political economy of standards
The role of standards in the process of
market integration, trade and economic
development
Conclusion
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
Useful economic concepts



Quality includes several product attributes
(Lancaster). Valued with different weights
by consumers
Lack or economic operability of the concept,
leads to distinguish vertical and horizontal
product differentiation
Quality refers to vertical, horizontal refers to
"variety"
Useful economic concepts (2)

"Socially optimal quality" balances costs of
higher quality and benefits for consumers


Example of product safety, when marginal cost
of risk reduction increases. Defines of optimal
level of safety (Antle, Viscusi)
"Optimal environmental quality" based on
equalization or marginal pollution abatement
costs and marginal damage provides an
economic basis for setting a standard
Useful economic concepts (3)

Economies of scale. Internal (e.g. fixed costs)
and external (e.g. cluster of industries)

Network economies


The value of a product for consumers increase
with the number of consumers of compatible
product (fax machines)
The value of the base product is enhanced as
the variety of compatible products increases
(CD player and CDs)
Useful economic concepts (4)



Imperfect information: search goods,
experience goods and credence goods
Moral hazard and adverse selection
(important for safety standards, standards
ensuring fairness of trade)
Social costs of imperfect information
generating market inefficiencies
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
Desirable economic effects of
standards


Standards define the technology; Enhance
innovation
Change in use of inputs; Changes in modes
and forms of organisation in production
(quality management standards)

Increase skill requirements; "race to the
top" in terms of quality requirements
Desirable economic effects (2)

Ensure product compatibility (compatibility
and interface in information technology)


Division of labor; Improves coordination of
production and distribution
Reduce transaction costs, between firms
and with consumer, and lowers risks,
including risks of litigation
Desirable economic effects (3)



Economies of scale (components). Larger
market essential in industries with large
fixed costs
Standards create credibility, focus and
critical mass in markets for new
technologies
Increase globalization of markets (mutual
recognition, harmonization)
Desirable economic effects (4)

Provide information to consumers (minimum
quality standards)

Generate trust (safety standards; voluntary
process standards for credence goods)

Increase consumer awareness and concerns
(environmental standards; ethical standards)
Desirable economic effects (5)

Overall, significant economic impacts on:



Macroeconomic growth, in spite of lack of precise
measurement (German study: 0.9 points out of
3.3 of GDP)
Integration into a global market (electronics in
South Asia). Obviously a necessary but not
sufficient condition
Quality improvement (accessing countries to the
EU)
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
Potential problems with
standards

Standards not always well defined (standards
that involve a negative environmental balance)


Can drive the whole economy into technical
errors (fire hazard standards and asbestos)
Can be set at a level that is not socially
optimal (environmental standards, under
uncertainty on costs and damages)
Potential problems (2)

Can limit market coverage


Minimum quality standards, or de facto
requirements (airbags) may raise product prices
May prevent a fringe of some consumers to
access lower quality but cheaper products (cars
in Europe)

Can impose a particular burden on small
enterprises
Potential problems (3)

Proliferation of standards inefficient. Lack of
"standardization of standards" costly (US
estimates of costs associated to complying to
various national standards between bn$ 20 and 40
a year)


Like patents, standards may have a
dissuasive effect on innovation
This may involve costs for consumers
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
Strategic use of standards



Standards can lead to strategic behavior
and can be used as barriers to entry against
competitors or foreign firms
Standard setting can provide opportunities
for collusion (Shapiro)
Governments may use standards to favor
domestic firms
Strategic use of standards (2)

Case for strategic use of standards firms
well documented in academic literature:




Standards can serve to segment markets
Strategic incompatibility of standards can be
used for organizing market power
Variety reduction standards may facilitate
oligopolistic coordination within a cartel
Standards used by an oligopoly to discipline a
potential competitor
Strategic use of standards (3)


Academic literature shows complex
interaction between competition and
informational effects of standards. Strategic
standard setting may backfire
Shapiro and Varian: "Winning a battle of
standards depends on intellectual property rights,
control over and installed base of users, ability to
innovate, first mover advantages, manufacturing
abilities, strength in complements and on brand
name and reputation..."
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
Economic rationale of
government intervention

The regulator has to arbitrate between
imposing standards in order to :



address informational market inefficiencies
impose a socially optimal quality to an oligopoly
that would not do so spontaneously
And the risk that the standards imposed
limit competition, be eventually detrimental
to consumers
Government intervention (2)

Antitrust bodies have frequently ruled
against strategic standards setting that is
detrimental to the society as a whole (US
macaroni in the 1960s to recent computer
standards using patents)

However, in some cases the trade-offs
betwen the "bads" and the "goods" of a
standard is not obvious (e.g. governments
hesitations on GM food in Europe)
Economics of standards






Useful economic concepts
Desirable economic effects of standards
Potential problems with standards
Strategic use of standards
Economic rationale of government
intervention in standard setting
The role of market forces
The role of market forces



Self control of quality can be based on
market forces
Reputation may be a powerful instrument
that can replace command and control
instruments in case of product safety (e.g.
brand name)
Voluntary standards, codes of conducts,
certification can be effective tools for
ensuring that products are of high quality
The role of market forces (2)

Informational instruments can be a good
substitute for mandatory regulation
(unpasteurized cheese)



Market based regulation is often less costly
than command and control regulation
It can also be more relevant (firms have
more information on processes and costs)
Voluntary and informational instruments
leave consumers freedom to chose
The role of market forces (3)


Rather than costly inspection and control,
liability can be a powerful way to ensure
that firms do not sell hazardous or tainted
product
The issue is however linked to the existing
legal system (e.g. the existence of punitive
damages)
The role of market forces (4)


However, market based instruments are not
appropriate in all cases. There are many
cases where mandatory standards are
needed or useful
Consumers trust implicitly come from the
knowledge that the government will not
tolerate tainted/hazardous product to be
sold
The role of market forces (5)


Reputation based instruments are not
effective for credence goods, or for
experience goods where a damage appears
much later in time (cancer inducing residues)
Self discipline through liability runs into
organized insolvency (judgment proof). Less
effective for imported goods (environment,
GM crops)
Overview





Definitions
Economics of standards
The political economy of standards
The role of standards in the process of
market integration, trade and economic
development
Conclusion
Political economy of standards



Driving forces behind standards
Growing interactions in standard setting
Interest groups influencing standards
Driving forces behind standards

Socio-economic changes (urbanization and
relationship to agriculture/food)




Increase in income: risk less accepted
Globalization: less familiar products on the
shelves
New concerns (ethics, environment, animal
welfare, etc.)
All these factors are leading to a demand of
more standards, regulations
Political economy of standards



Driving forces behind standards
Growing interactions in standard setting
Interest groups influencing standards
Growing interactions in
standard setting


Increasing interaction of the various
stakeholders in standard setting
Public and international standards rely on
industry standards and vice versa (e.g. ISO
and EU directives)

Non governmental organization standards
serving as a basis for voluntary / private as
well as mandatory / public standards
Growing interactions (2)


Mandatory / public standards are becoming
less constraining that voluntary standards
Voluntary standards de become de facto
mandatory because imposed



by firms to suppliers (Ford and ISO 14001)
by retailers (animal welfare in the UK)
by consumers (dolphin safe tuna in the US)
Political economy of standards



Driving forces behind standards
Growing interactions in standard setting
Interest groups influencing standards
Interest groups influencing
standards



Scientists and engineers still play a major
role in standard setting
However, even in public and international
institutions, scientists are subject to growing
economic and political pressures
Typically the case in food when Codex
Alimentarius standards became the
reference for solving commercial disputes
Interest groups (2)

Firms influent in public institutions of
standard setting (Codex Alimentarius
committees)

Unions lobbying for standards (work safety
standards)


Consumers more present in standard setting
vociferous (food safety)
Environmental groups develop significant
activity of certification (organic, forestry)
Interest groups (3)

Other NGOs on ethical issues (animal welfare,
human rights, fair trade)

Shareholders concerned by public image
(environmental standards)

Pressure of citizens echoed by governments
standards (mandatory disclosure, accounting,
environmental reports)
Interest groups (4)




Concerns of appropriation of standard
setting by vested interests
NGOs criticizing choice of standards
favorable to firms rather consumers or
environment (Codex; ISO)
Pressure for protectionist standards
Concerned consumers' demands converging
with protectionist interests make the issue
difficult to unravel (child labor)
Overview





Definitions
Economics of standards
The political economy of standards
The role of standards in the process of
market integration, trade and economic
development
Conclusion
Standards, market integration,
trade and development



The trade facilitating role of standards
Harmonization and mutual recognition
Standards as non tariff barriers
Trade facilitation




Standards have a major role in facilitating
exports and in the global market
Product compatibility make trade possible
Standards restore trust of consumers on
quality of unfamiliar imports
Standards reduce international transaction
costs
Trade facilitation


By raising requirements, quality standards
on the world market pull the general level of
the industry. This is an indirect, but
considerable, effect of participation to the
world market
However, the cost of complying to
international standards is a selection
instrument, between countries and firms
Trade facilitation

However, the standards that enhance trade
are mainly:



Product, rather than process, standards
International standards
In other cases, standards may actually act
as a barrier to trade
Standards, market integration,
trade and development



The trade facilitating role of standards
Harmonization and mutual recognition
Standards as non tariff barriers
Harmonization and mutual
recognition


Harmonization of standards at the
international level is a major drive for trade
Estimates (Moenius): 1% rise in shared
standards between the US and trading partners
would raise U.S. trade by $6 bn


Full harmonization often too costly
Mutual recognition is an alternative (basis of
EU standard policy)
Harmonization (2)

If lack of international harmonization /
recognition: standards may impedes trade




Design of products for a given market, difficult
to export is standards differ
Conformity assessment may be a large barrier
to trade (administrative costs, delays, etc.)
Particularly a problem for some developing
countries lacking skilled labor and capital
Particularly a problem for small enterprises
Standards, market integration,
trade and development



The trade facilitating role of standards
Harmonization and mutual recognition
Standards as non tariff barriers
Standards as non tariff barriers



Some countries seem to use deliberately
domestic standards in order to restrict
imports
Several international disputes brought to the
World trade organization, especially in the
agricultural/food sector
There are ongoing problems such as the
EU-US disputes on GM standards, and the
EU-Australian dispute on sanitary standards
Non tariff barriers (2)


Since 1994, a more efficient mechanism for
dispute settlement relyies on scientific
elements and international standards
through the SPS and TBT agreements
Because it is difficult to distinguish genuine
protection of citizens, flora and fauna from
protectionist measures, there is still scope
for disagreement
Overview





Definitions
Economics of standards
The political economy of standards
The role of standards in the process of
market integration, trade and economic
development
Conclusion
Conclusion


Standards can have a considerable role of
facilitating trade, make market integration
possible and contribute to growth
They can be beneficial to consumers by
lowering production costs, facilitate trade
and reduce informational market
inefficiencies
Conclusion (2)


However, the standard setting procedure
can lead to poorly defined standards,
strategically set standards, or standards that
protect vested interests, including
protectionist standards
This can result in costs for consumers
Conclusion (3)


Market based standards can me more cost
effective than mandatory public standards,
but the latter are necessary in some cases
Trade facilitating standards tend to be
international (rather than domestic)
standards, and product (rather than
process) standards