Diogo R. Coutinho

During the 1990’s liberalisation took the planet by storm. Following Thatcher’s privatisation and Reagan’s deregulation – economic policy reversals that flourished in the 80’s – countries around the globe rushed to sell off state-owned companies, induce competition and deregulate business. For most, the goal was to shed unnecessary assets and trim down the bureaucratic tasks burdening a mammoth state. The word of the day was “efficiency”. Market reforms also swept the developing world, particularly Latin America, which by itself accounted for more than half of the total privatisations in developing nations between 1988 and 1996.

For many observers the most significant outcome of market reforms is the rise of a regulatory state, an institutional paradigm in which operational and regulatory tasks are kept separate. The state is no longer an asset owner or entrepreneur, but can still intervene in markets through a variety of regulatory mechanisms ranging from intrusive command and control to attractive incentives. Regulation is generally defined as public (although not in all cases) stimulation, monitoring, influence, and oversight of organizations through administrative standards designed and enforced by regulatory agencies and related bodies.

The portrait of the regulatory state is not so easily drawn, however. It would be naïve to assume that the same institutional regulatory framework would evolve in the wake of liberalisation and deregulation in countries demonstrating varying levels of development. A glance at developing countries in Asia, Africa and Latin America shows that the characteristics of, and reasons for, liberalisation are to a large extent country and sector-specific. Grouping these nations together under the umbrella term “developing countries” is, in this sense, a simplification that necessarily disregards their individual characteristics. Yet a number of crucial features and challenges are common to the nations in question (and indeed may be considered as practically “universal” in the developing world) and therefore permit a general approach as adopted for the purposes of the ideas briefly discussed here.

Among the reasons why many developing countries opted for privatisation and deregulation of their industries and public services were the need for private investment for infrastructure expansion and governmental expectations of immediate cash raising. These two goals are difficult to achieve at the same time: the maximisation of companies’ value to obtain short-term gains and, on the other hand, attracting long term investments from buyers (an alternative that is instead likely to reduce the price being paid upfront in the bidding) is a good example of the trade-off between short-term goals and more diligent concerns with regulation. In many cases, the immediate gains that determined many privatisations burdened subsequent regulation. In other words, hasty liberalisation makes it more difficult to establish a public apparatus with appropriate regulatory capacity.

In this context, well known obstacles such as information-sharing and enforcement problems, capture risk, difficulties in introducing competition and the manifold formation of universal service obligations arguably acquire particular connotations in developing countries. Socio-economic background and present circumstances, developing deficits, political culture, bureaucratic ethos and legal structures are decisive factors in the design and implementation of a new regulatory regime. Furthermore, developing countries often carried out liberalisation and regulatory reforms in circumstances of political instability, high inflation, fiscal crisis, corruption and complex dependence on international markets’ moods. In this author’s country of origin, Brazil, privatisation was deeply intertwined with goals of macroeconomic stabilisation, public debt reduction and inflation control.

In this broader framework, some of the problems related to regulatory regimes in developing countries result from a reversal of (chrono)logical procedures. Many reforms were put into practice before they could be debated or their relative goals defined. Needless to say, it is difficult to design regulatory institutions and draft rules once privatisation and deregulation have already occurred.

The situation is complicated further when liberalisation and deregulation are performed with the rhetorical purpose of paving the way for so-called economic efficiency. Efficiency is a means rather than an end. Deregulated markets are not necessarily efficient when they fail to provide public services to the poor, for example. So what is the goal of regulation? Can regulatory policies serve several ends contemporaneously?

Balancing social, economic and political goals is a fundamental challenge for regulative regimes that raises the perhaps even bigger problem of accommodating opposed and frequently irreconcilable interests. In developing countries this difficulty is compounded by major deficits in terms of universal access to goods and services – i.e. the expectation that regulation should be inclusive. Whether regulation can or should be in part used as a tool to carry out distributive policies is a rather controversial topic. Many people would suggest that there are more efficient ways to redistribute wealth. But others see merit in regulation as a tool in developing nations where tax systems tend to be regressive, inefficient and/or corrupt, and where regulatory measures may be specifically designed to guarantee access to basic services.

Another important issue concerning regulatory policies in the developing world has to do with the difficulties in organizing and maintaining regulative apparatus (which include staff, rules, enforcement, compliance and accountability mechanisms as well as authority and reputation, among other requirements). A regulatory state is not necessarily weak, but its power is contingent on the level of investment in, and strength of, its institutional structures. It is thus reasonable to assume that countries with no welfare state track record and weak bureaucracies face harsher difficulties when it comes to establishing a regulatory regime and workable relationships with regulated businesses.

Originally designed for industrially developed countries in order to expand economic deregulation by removing entry and exit restrictions, increasing rivalry, reducing prices, enhancing the quality of services and thus boosting general standards of living, international experiences in regulatory reforms have been embraced wholesale by some developing countries as “one-size-fits-all” policies or as examples of best practices to be followed. But the implications of policy transplants must be carefully considered, and lessons must be drawn under the assumption that regulation does not guarantee a predetermined outcome. For this author, regulatory policies are more the result of a legal and institutional arrangement shaped by political options rather than a tool of “good governance”.

Still, a decade of liberalisation and regulatory reforms in developing countries – especially in Latin America – has served to resolve, at least in part, some long-standing problems. Money has been channelled into investments for telephone service, energy, water and sewage, gas and other basic infrastructures. Unexpected possibilities, of which perhaps the most dramatic are dynamic modern sectors like telecommunications, have opened up in previously unlikely contexts. But these policies have also exacerbated old problems, as well as created new ones: low rates of investment and productivity growth in many countries, slow employment generation and low quality of new jobs, and poor integration of the leading sectors and firms in domestic economies. Additional difficulties in introducing competition and setting up independent regulators are also now evident. In some cases general tariffs in public services increased while the affordability constraints affecting the population’s ability to pay higher bills were not properly taken into account. Many governments – like that of Brazil – have turned against regulators and are taking steps to weaken them.

Developing countries require regulatory policies aimed at simultaneously accelerating economic growth through increased investment and faster technological progress, and promoting social policies to expand equity and promote universal services. In order to achieve this, improved agency and regulatory dynamics management are essential. Solutions to cope with these complex challenges are neither obvious, nor instant. They require concentrated efforts with the purpose of establishing a careful regulatory framework in which short-term policies designed to face imminent problems are at least minimally compatible with long-term goals. While social, industrial, trade and stabilisation policies are essentially different from regulation, they can interact with it in creative ways. To sum up, the regulatory state must be carefully constructed. We better do it; the alternative is the storm of liberalisation ending up as an empty gust of wind, a sudden burst of market ideology with no correspondent gains, in terms of equity or efficiency, for the people.