Regulatory Policy in Latin America: Post Privatization Realities

Manzetti, Luigi (ed.). Regulatory Policy in Latin America: Post Privatization Realities. Miami, FL: University of Miami Press, 2000.

Notwithstanding the general agreement among the scholars on the significance of credible regulatory institutions for the consolidation of market reforms in Latin America, literature on the subject has been sparse. While examining the issue of regulation vis-a-vis competition, the contributors to the volume intend to partially overcome the paucity of literature. In the words of the editor, "the main idea... to evaluate not only the progress made so far by trend-setting countries of Latin America to create regulatory institutions, but also the costs and benefits of different types of regulation" (p. 1). Accordingly, the contributors address a common set of questions related to creating competition through privatization and deregulation.

The volume under review is divided into two distinct parts - the first deals with the general themes associated with regulatory policies in the context of privatization, whereas the second part focuses on certain substantive issues, especially in the public utilities such as water, electricity and telecommunications, and financial sectors. The purpose is to study the challenges faced by the Latin American countries in creating regulatory decisions in vital sectors of the economy, which have been recently privatised and/or deregulated.

For most of the contributors, the best way to promote regulation is to introduce, prior to privatization, as much market-based competition as possible. When competition is hard to introduce, regulation must be present to safeguard investors' as well as consumers' rights. In fact, a transparent and politically neutral regulatory process is a sine qua non for the smooth functioning of the privatised economy. In the first chapter Arnold C. Harberger's points out how in the early stages of privatization governments frequently used regulatory policies as a means to garner more money for their own purposes. In fact, advances in terms of improvement in economic efficiency, reduction of government waste, better services to consumers, and more effective use of the taxpayer's money often seemed to be low priorities for governments whose main preoccupation was to use privatization revenues to bridge fiscal deficits. Thus, many of the public utilities were sold out without establishing the appropriate regulatory framework prior to transfer and the proceeds went to pay off debts: "Mexico... [dedicated] substantial amounts of its privatization proceeds to pay off its debt and using the rest to accumulate assets through a politically popular program called Solidaridad" (p. 16). Though Peter C. Schuck's deals with the regulatory reforms in the United States, it is of importance as much of the policy wisdom of the multilateral lending agencies is based on the American experience.

According to Antonio Estache and David Martimort the transaction cost theory could provide better insights to practitioners of regulatory reforms. While stressing actors such as autonomy, accountability, and independence in creating regulatory institutions, they propose forming incentive based regulations, structures and processes that affect regulatory outcomes. Manzetti amplifies the issues related to the importance of internal organization of government raised by Estache and Martimort. For Manzetti, privatization under monopolistic conditions leads to poor results when compared to divestiture policies that have introduced competition prior to sale. Drawing on the experiences of Argentina and Chile he avers, "Privatization, to live up to its promise, must promote competition and transparency... the task of the new regulatory state in the years to come indeed will be to find ways to protect such freedom without abusing its own discretionary powers" (p. 101 ). George G. Kaufinan's delineates the issue of financial regulation from a broad theoretical perspective. According to him, governments cannot replace market discipline with widespread regulations. He advocates the judicious mixing of regulation with marketdriven discipline.

The second part provides sector specific analyses to support many of the theoretical arguments stated in the first part. Mary M. Shirley's Reforming Urban Water Systems: A Tale of Four Cities interestingly compares attempts at privatization in the water sector in the four major Latin American cities, namely, Buenos Aires, Lima, Mexico City and Santiago de Chile. The scarcity of water, and the heavy subsidy involved in its supply, makes water the most difficult of all public utilities so far as its regulation is concerned. The governments are susceptible to harsh public criticisms in this sector as prices may rise under private ownerships. Asa consequence, very often water-related projects often have been delayed owing to renegotiation of contracts and increasing government interference. Out of these four cities only Santiago de Chile has been successful in have a working regulatory policy of water: "Santiago's water system is the best managed and regulated of the four and was so even before the 1990 reforms. Market coverage is 100 per cent, unaccountedfor-water is a low 20 percent, quality of water is high, and service interruptions are few" (p. 162). Estache and Rodriguez-Pardina examine the emergence of monopolistic conditions in the context of the distribution and transmission of electricity. Through a comparative study of two countries Argentina and Chile - they show that competition rather than privatization is the key ingredient for a successful transformation of the power sector.