Regulation: Why Rules Exist (and Who Bends Them)
On April 24, 2013, an eight-story commercial building called Rana Plaza collapsed in Savar, a suburb of Dhaka, Bangladesh. The building housed five garment factories that produced clothing for brands sold in Europe, North America, and around the world. The day before the collapse, large cracks had appeared in the building's walls. An engineer inspected the structure and declared it unsafe. The building was evacuated.
The next morning, the factory owners ordered their workers back in. The building's owner, Sohel Rana, assured everyone that the structure was safe. Workers who refused to enter were threatened with the loss of a month's wages. Most went in. They had children to feed.
At 8:57 a.m., Rana Plaza collapsed. The entire building pancaked into a pile of concrete and twisted steel, with thousands of people inside. The rescue operation lasted seventeen days. When it was over, 1,134 people were dead and over 2,500 were injured. Most of the dead were young women — garment workers earning roughly $38 a month, stitching clothes for consumers who would never know their names.
The building had been constructed illegally. Three additional floors had been added without permission. The building was originally designed for shops and offices, not the heavy vibration of industrial sewing machines. The owner had political connections that shielded him from enforcement. The factories inside had never been properly inspected. The safety regulations that existed on paper had never been applied in practice.
Rana Plaza was not a failure of markets. It was a failure of regulation — of rules that existed but were not enforced, of inspectors who could be bought, of a system where the cost of cutting corners was borne not by the factory owners or the clothing brands but by the workers who died.
This chapter is about regulation: why it exists, what it is supposed to do, what happens when there is too little of it, what happens when there is too much, and the eternal question of who actually controls the regulators.
Look Around You
Look at the packaged food in your kitchen. On the label, you will find information mandated by regulation: ingredients, nutritional content, manufacturing date, expiry date, the FSSAI (Food Safety and Standards Authority of India) logo and license number, the address of the manufacturer. Now imagine none of this existed. How would you know if the food was safe? How would you know what was in it? How would you know if it had expired? Every piece of information on that label exists because a regulation required it.
Why Rules Exist
The most basic reason for regulation is that markets, left entirely to themselves, produce outcomes that are unacceptable to most human beings.
Without food safety regulation, companies can — and historically did — adulterate food with cheap substitutes, some of them poisonous. In nineteenth-century England, bread was routinely adulterated with alum, chalk, and plaster of Paris. Milk was diluted with water and colored with lead-based dyes. Sweets were colored with copper and arsenic. People sickened and died. The Adulteration of Food and Drink Act of 1860 was passed not because the government wanted to interfere in the bread market, but because the bread market was literally poisoning people.
Without labor regulation, employers can — and historically did — work people to death. Children as young as five worked in coal mines and cotton mills in industrial England. Workdays of sixteen hours were common. Safety equipment was nonexistent. Workers who lost limbs in machinery were simply dismissed. The Factory Acts, beginning in 1833, did not emerge from bureaucratic overreach. They emerged from the visible suffering of human beings who had no power to protect themselves.
Without environmental regulation, companies can — and routinely do — dump waste into rivers, spew pollutants into the air, and degrade ecosystems. The Cuyahoga River in Cleveland, Ohio, was so polluted with industrial waste that it caught fire thirteen times between 1868 and 1969. The river literally burned. It was the 1969 fire — photographed and broadcast nationally — that helped catalyze the American environmental movement and the creation of the Environmental Protection Agency in 1970.
Without financial regulation, banks and financial institutions can — and did, in 2008 — take risks that bring down the entire global economy, destroying the savings and livelihoods of millions of people who had no part in the risk-taking.
The pattern is always the same. An unregulated market produces harms — to workers, consumers, the environment, or the broader economy. The harms accumulate until they become intolerable. The public demands action. The government passes regulations. Life improves. Then, gradually, the memory of why the regulations existed fades, and powerful interests begin lobbying to weaken or remove them.
"Regulation is written in the blood of those who suffered without it." — A common saying among occupational safety professionals
The Regulation Spectrum
Too little regulation and too much regulation are both disasters. The challenge is finding the right amount — and the right kind — for the specific context.
THE REGULATION SPECTRUM
Too Little Too Much
◄──────────────────────────────────────────────────────────────►
ANARCHY LIGHT EFFECTIVE HEAVY PARALYSIS
TOUCH REGULATION REGULATION
─────────────────────────────────────────────────────────────────
No rules. Few rules, Clear rules, Many rules, Everything
Might makes mostly well enforced, complex, requires
right. voluntary. regularly overlapping, permission.
Workers die. Markets updated. slow. Nothing
Rivers burn. self-police Protects Business happens.
Food is (sometimes consumers, spends more Innovation
poisoned. works, workers, time on dies.
often environment. paperwork Corruption
Example: doesn't). Balances than work. thrives
Unregulated protection (bribes to
Bangladesh Example: with Example: get permits).
factories. Pre-2008 efficiency. India's
US financial License Raj Example:
markets. Example: (1960s-80s). Soviet-style
Singapore, central
Scandinavian planning.
countries.
┌──────────────────────────────────────────────────────────────┐
│ THE GOAL IS NOT "LESS REGULATION" OR "MORE REGULATION." │
│ IT IS "BETTER REGULATION" — clear, enforceable, and │
│ suited to the context. │
└──────────────────────────────────────────────────────────────┘
Let us look at both extremes.
Too Little: Bangladesh and the Cost of Absent Rules
Bangladesh became the world's second-largest garment exporter (after China) through a simple formula: extremely low wages, minimal regulation, and easy access to global markets. Western clothing brands — H&M, Zara, Walmart, Gap — sourced from Bangladeshi factories because the clothes were cheap. The clothes were cheap because the workers were paid almost nothing and the factories spent almost nothing on safety.
Before Rana Plaza, there had been warnings. In 2012, a fire at the Tazreen Fashions factory killed 117 workers — many were trapped because fire exits were locked. In 2010, a factory collapse in Dhaka killed 25. In 2006, a series of factory fires killed 85 workers. Each time, there was outrage. Each time, the outrage faded. Each time, the factories continued operating largely as before.
The regulations existed. Bangladesh had building codes, fire safety standards, and labor laws. But enforcement was virtually nonexistent. The government's inspection force was tiny — a few hundred inspectors for over 5,000 garment factories. Inspectors were poorly paid and easily bribed. Factory owners had political connections — many were members of Parliament or major political donors. The Western brands that sourced from these factories claimed they could not be responsible for conditions in their suppliers' factories, even though their purchasing practices — demanding lower prices, faster turnarounds — made safe working conditions economically impossible.
After Rana Plaza, international pressure forced change. The Bangladesh Accord on Fire and Building Safety, signed by over 200 brands and retailers, established independent inspections, remediation plans, and worker complaint mechanisms. Over 1,600 factories were inspected. Tens of thousands of safety violations were identified and, gradually, corrected. Fire safety improved. Structural standards were enforced. Worker deaths from building collapses and fires fell significantly.
The lesson: regulation that existed only on paper had saved nobody. Regulation that was actually enforced, with genuine consequences for violations, saved lives.
What Actually Happened
After Rana Plaza, the Bangladesh garment industry underwent significant safety improvements. The Accord's inspections identified over 130,000 safety hazards across 1,600 factories. By 2020, over 90 percent of identified hazards had been remediated. Fire-related deaths in garment factories fell dramatically. But wages remained extremely low — among the lowest in the global garment industry. The improvements were real but limited: physical safety improved, but the fundamental economics of the industry — rock-bottom wages, intense pressure from global brands, and the absence of meaningful labor organizing rights — changed far less. Safety regulations addressed the symptom. The underlying power imbalance remained.
Too Much: India's License Raj
At the other extreme lies the cautionary tale of India's License Raj — the system of industrial licensing and regulation that governed Indian industry from the 1950s to the 1990s.
After independence, India's leaders — Nehru chief among them — believed that the state should guide industrial development. The Industrial Policy Resolution of 1956 reserved key industries for the public sector and required private companies to obtain government licenses for virtually everything: starting a new factory, expanding production, changing the product mix, importing raw materials, importing machinery, setting prices, hiring workers above a certain number, firing anyone.
The intent was not malicious. The idea was that in a poor country with limited resources, the government should ensure that investment went to priority sectors rather than being wasted on luxury goods for the rich. The Industrial Licensing Committee, which allocated licenses, was supposed to direct the economy toward socially optimal outcomes.
What actually happened was different.
The licensing system created an enormous bureaucracy. To start a factory, an entrepreneur needed licenses from multiple government departments — sometimes dozens. Each license required visits to government offices, filling out forms, waiting weeks or months, and — increasingly — paying bribes. An industry joke captured the absurdity: "In India, you need a license to get a license."
The system stifled competition. Established companies, which had already obtained their licenses, faced no new competition because potential competitors could not get licenses. The result was inefficiency, poor quality, and high prices. Indian consumers had limited choices — the Ambassador car, produced by Hindustan Motors with barely any design changes for decades, was virtually the only car available, because no competitor could get a license to produce an alternative.
The system bred corruption. When a government official has the power to grant or deny a license that determines whether a business worth crores can operate, the temptation to sell that power is overwhelming. The License Raj became synonymous with corruption — the "inspector raj," where government officials extracted bribes at every level.
Innovation was penalized. A company that wanted to expand production — say, because demand for its product was growing — had to apply for a license to increase capacity. The application could take months or years. By the time the license arrived, the market opportunity might have passed. Entrepreneurs learned that it was easier to navigate the bureaucracy than to innovate.
"The License Raj did not create a socialist paradise. It created a bureaucratic jungle where the main skill required was not entrepreneurship but the ability to navigate government offices." — A common observation among Indian business historians
The 1991 Reforms: Dismantling the Excess
When India liberalized in 1991, one of the most important changes was the dismantling of the licensing system. Industrial licensing was abolished for all but a handful of sectors related to security, health, and the environment. Import controls were relaxed. Foreign investment was welcomed. The private sector was freed to invest, produce, and compete without asking government permission for every decision.
The results were dramatic. New companies entered markets that had been closed to competition. Products improved. Prices fell. Choices expanded. The Indian economy, which had grown at a sluggish 3.5 percent for decades, began growing at 6, 7, even 8 percent. The middle class expanded. Exports surged. India went from being a minor player in the global economy to one of the world's fastest-growing major economies.
But — and this is important — the lesson of 1991 is not "regulation is bad." The lesson is that the wrong kind of regulation is bad. India did not become a regulation-free zone after 1991. It created new regulatory institutions: SEBI to regulate stock markets, TRAI to regulate telecommunications, the Competition Commission to prevent monopolies, the Food Safety and Standards Authority to ensure food quality. The shift was from regulation that restricted economic activity (licensing) to regulation that enabled it (market oversight, consumer protection, competition policy).
This distinction is crucial. Good regulation does not prevent business. It creates the framework within which business can operate fairly, safely, and sustainably. Bad regulation does not protect anyone. It simply creates opportunities for corruption and stifles productive activity.
Think About It
When you hear someone say "we need to reduce regulation," ask: which regulation? The rule that requires your food to be labelled? The standard that ensures your building won't collapse? The law that prevents your employer from making you work twenty-hour shifts? Or the bureaucratic requirement that forces an entrepreneur to visit seven government offices before opening a shop? Not all regulation is the same. The question is always: what specific rule, for what specific purpose, with what specific effect?
Regulatory Capture: When the Fox Guards the Henhouse
There is a phenomenon in regulation that is as widespread as it is dangerous, and it has a name: regulatory capture.
Regulatory capture occurs when a regulatory agency, created to act in the public interest, comes to be dominated by the industries it is supposed to regulate. The regulated become the regulators. The fox guards the henhouse.
How does this happen? The process is insidious.
The industries being regulated have enormous stakes in the outcomes. A pharmaceutical company has billions of dollars riding on whether a drug gets approved. An oil company has billions at stake in environmental regulations. A bank has billions depending on financial rules. These companies invest heavily in influencing regulatory decisions — through lobbying, through hiring former regulators (the "revolving door"), through providing the "expert information" that regulators rely on, and sometimes through outright corruption.
The public, by contrast, has a diffuse interest. Each citizen benefits a little from good regulation but does not have the time, expertise, or incentive to closely monitor what the regulator does. The result is an asymmetry: the regulated industry pays close, constant attention to the regulator. The public does not.
Over time, the regulator begins to see the world through the industry's eyes. Its staff socialize with industry executives. They attend the same conferences. They read the same publications. When they leave government, they take jobs in the industry they regulated. When industry experts join the regulatory agency, they bring industry perspectives with them. The regulator does not consciously decide to serve the industry over the public. It simply drifts in that direction, pulled by the gravitational force of concentrated interest.
The 2008 financial crisis was, in large part, a story of regulatory capture. The Securities and Exchange Commission (SEC) and the Federal Reserve in the United States were staffed with people who shared Wall Street's worldview — that financial markets were efficient, that complex derivatives reduced risk, that banks could be trusted to self-regulate. When warning signs appeared, the regulators ignored them, because their mental model — shaped by years of proximity to the industry — told them there was nothing to worry about.
In India, regulatory capture is visible in multiple sectors. Mining companies influence environmental regulators to weaken pollution standards. Real estate developers influence municipal authorities to change zoning laws. Pharmaceutical companies influence drug pricing authorities. The process is rarely as crude as direct bribery (though that occurs too). More often, it works through appointments — the government appoints industry-friendly people to regulatory positions — and through information asymmetry — the industry provides the data and expertise that the regulator depends on.
"The history of government regulation of industry is a history of the regulated capturing the regulators." — George Stigler, Nobel Prize-winning economist
What Actually Happened
In 2010, India experienced one of its worst environmental scandals when a government-appointed committee — known as the Shah Commission — investigated illegal mining in the Bellary district of Karnataka. The commission found that iron ore worth tens of thousands of crores had been illegally mined, with the active connivance of politicians, bureaucrats, and regulatory officials. Mining licenses had been granted in violation of environmental rules. Forest land had been illegally diverted. Pollution norms had been ignored. The regulatory apparatus — from the state mining department to the pollution control board — had been captured entirely by the mining companies and their political patrons. The case eventually led to a Supreme Court ban on mining in the district and criminal charges against several politicians. But the billions in illegally extracted resources were gone, the environmental damage was done, and the communities that depended on the forests and water sources had paid the price.
The US Progressive Era: When Regulation Saved Capitalism
Sometimes regulation does not constrain capitalism. It saves it.
In the late nineteenth and early twentieth centuries, the United States was in the grip of what Mark Twain called the Gilded Age. Industrialization had created enormous wealth — for a few. Rockefeller's Standard Oil controlled 90 percent of American oil refining. Carnegie's steel empire dominated the industry. J.P. Morgan's banking interests controlled vast swaths of the economy. These "robber barons," as they were called, wielded power that rivaled the government's.
For ordinary Americans, the results were grim. Workers labored twelve to sixteen hours a day in dangerous conditions. Children worked in mines and factories. Food and medicine were unregulated — patent medicines contained cocaine, heroin, and alcohol, marketed as cures for everything from headaches to tuberculosis. Meat processing plants were so unsanitary that Upton Sinclair's 1906 novel The Jungle, which described conditions in Chicago's stockyards, caused a national outcry.
The Progressive Era (roughly 1890-1920) was the political response. A wave of regulation swept the country:
- The Sherman Antitrust Act (1890) and Clayton Act (1914) broke up monopolies and prohibited anti-competitive practices.
- The Pure Food and Drug Act (1906) created the Food and Drug Administration, requiring accurate labeling and prohibiting adulteration.
- The Meat Inspection Act (1906) mandated federal inspection of meat processing plants.
- The Federal Reserve Act (1913) created the central banking system to regulate money and banking.
- Labor laws established maximum working hours, minimum wages, and prohibitions on child labor.
- Environmental regulations began to address the worst abuses of industrial pollution.
These regulations did not destroy American capitalism. They saved it — from itself. By preventing the worst abuses of unregulated markets, they preserved public faith in the system. By breaking up monopolies, they restored competition. By protecting workers and consumers, they created a more stable and prosperous society.
The lesson applies universally: regulation is not the enemy of markets. Bad regulation is. Good regulation is the immune system of a market economy — it fights the infections that would otherwise kill the patient.
The Right Amount: It Depends
After all of this, the natural question is: how much regulation is the right amount?
The answer is unsatisfying but honest: it depends. It depends on the sector, the country, the institutional capacity, and the power dynamics at play.
A pharmaceutical industry needs strict regulation because the consequences of failure are death. A software industry needs lighter regulation because the consequences of failure are a glitchy app. An industry in a country with strong institutions and low corruption can be regulated with clear rules and self-reporting. The same industry in a country with weak institutions and endemic corruption may need more intrusive oversight, because the rules will otherwise be ignored.
Context matters. India's post-1991 experience shows that reducing regulation in areas where it was stifling economic activity — industrial licensing, import controls, price administration — produced enormous benefits. But it also shows that creating new regulation where it was needed — securities market oversight, competition law, food safety standards — was equally important.
The ideological positions — "all regulation is bad" versus "more regulation is always better" — are both wrong. The pragmatic position is to ask, for each specific regulation:
- What problem is it solving?
- Is it actually solving that problem, or just creating paperwork?
- Who bears the cost, and who receives the benefit?
- Is it being enforced, or is it just words on paper?
- Could the same goal be achieved in a simpler way?
These are not exciting questions. They do not lend themselves to slogans or rallying cries. But they are the questions that distinguish functioning societies from dysfunctional ones.
Think About It
Consider two regulations: (1) a rule requiring all restaurants to display food safety grades (A, B, C) on their front doors, and (2) a rule requiring all restaurants to submit weekly reports to a government inspector detailing every ingredient used. Both aim to improve food safety. Which is more likely to work? Which is more likely to lead to corruption? Which costs more to enforce? The answer reveals something about what makes regulation effective.
The Bigger Picture
We started at Rana Plaza, watching a building collapse and bury a thousand young women whose only crime was showing up to work in a factory that had never been properly inspected. We traveled to India's License Raj, where regulation strangled the economy it was supposed to nurture. We met the robber barons of America's Gilded Age and the reformers who tamed them. We watched the fox guard the henhouse — regulators captured by the industries they were supposed to oversee.
What have we learned?
First, that regulation exists for a reason. That reason is written in the blood of workers who died in unsafe factories, in the suffering of consumers poisoned by adulterated food, in the devastation of financial crises caused by unregulated banks. The question is never whether to regulate but how.
Second, that too little regulation and too much regulation are both destructive. The absence of effective regulation leads to exploitation, pollution, and crisis. The excess of bureaucratic regulation leads to stagnation, corruption, and the suppression of productive activity. The goal is not a specific quantity of regulation but a specific quality — clear, enforceable, purposeful, and regularly reviewed.
Third, that regulatory capture is real and pervasive. The industries that are regulated have enormous incentives to control their regulators. Eternal vigilance — by the press, by civil society, by informed citizens — is the only reliable defense against capture. And even that defense fails more often than we would like.
Fourth, that the right amount of regulation depends on context. A country with strong institutions, an independent judiciary, a free press, and an engaged citizenry can regulate with a lighter touch, because the system provides multiple checks on abuse. A country with weak institutions needs more robust regulation — and, paradoxically, has less capacity to implement it. This is one of the central dilemmas of development.
And finally, that regulation is never neutral. It is always the product of a political process, shaped by power, interest, and ideology. Who gets regulated and how strictly? Who gets exemptions? Who enforces the rules, and against whom? These questions determine whether regulation serves the public or the powerful. They are, in the end, questions about democracy itself.
The workers who died at Rana Plaza did not lack regulations. They lacked the power to make those regulations matter. That is the deepest lesson of all.
"The only thing that saves us from bureaucracy is its inefficiency." — Eugene McCarthy
To which we might add: the only thing that saves us from unregulated markets is the memory of what happened last time.