Towards 2005: Profits, People, and the Future of the Regulatory State in the Free Market Model

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There is a growing awareness of why and how institutions are important for economic development. In fact "institutional economics" is gaining a growing importance in understanding the necessary underlying conditions for developing and transitional economies to achieve sustained economic growth. The "rule of law," for which legal institutions are central, has proved to be essential for creating wealth and attracting foreign investment. Nevertheless, globalization has brought not only unforeseeable opportunities, but also unexpected challenges. As the recent Asian crisis has shown, interdependence is creating new demands on the political and economic institutions of emerging and transitional economies. Old political arrangements and economic practices are crumbling under the pressure of more open and free markets, exposing formerly neglected institutional shortcomings. Corruption is the most compelling case of institutional decay, unsustainable in an open and competitive international environment. And as we foresee the future into the next century, a new "state" must be constructed: the Regulatory State.

Beyond the role of legal institutions, what are the other challenges to overcome global vulnerability and institutional feebleness in the design of the new order? Is it possible to talk about a regulatory state within the traditional concept of national sovereignty? Or are we approaching a transition toward an international regulatory system of the kind recently advocated by the British Prime Minister Tony Blair? This is a question open to discussion. I will concentrate on how to develop the salient non-legal elements necessary to construct the future slim and strong regulatory state.


Weak institutions are a common denominator in many of the emerging democracies and newly converted market economies in the developing world, as is the case in Latin America. The recently released Corruption Perception Index (CPI) by Transparency International in Berlin makes this general point.(1) Corruption is perceived as one of the most serious obstacles to the development of most Latin American countries and their ability to attract investment.

To focus on people and profits as points of reference in trying to construct the future new regulatory state is extremely appropriate because both people and profits are commonly neglected in the design of new institutions. With democracy and free markets in place, people and profits have become the core around which future political and economic institutions will revolve.

Regulation, therefore, has to be constructed with real people and profits in mind. Regulators may be exercising a government monopolistic prerogative in performing their mission, while haunted by a widespread and ingrained culture of corruption. How do we confront the future of the regulatory state with the threat of corruption? What could we do to prevent the corruption of regulation and therefore of the state, beyond the provisions already in place--a legal system that has criminalized corruption, yet is still unable to prevent it?

Focusing on people's rational economic behavior--appropriate for a modern free market society--and recognizing the profit motive as the underlying force that moves the system, I will attempt to suggest some institutional design guidelines that may shelter the emerging regulatory state from corruption, the symptomatic illness of weak institutions.


In a world of free markets and globalization I see very clear limits to the existing legal institutions as we know them today. Latin America has been over-legislated and under-regulated. The compliance with the spirit and the letter of the law has been minimal. Legal systems remain weak and over-dependent on the partisan political process. …