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Life in the hot seat

Beatriz Boza knows she has enemies. As president of Indecopi, the Peruvian antitrust and consumer protection agency, Boza is continually in the cross-hairs of companies that have been fingered by her staff."Each time we expose a price-fixing scheme by a group of companies or an advertising campaign that isn't fair and transparent, we get complaints," she says. Then there are the even dicier cases involving public officials. Like the municipality in a coastal province that was illegally charging people for access to a public beach. Or the case involving improper export restrictions imposed by the Ministry of Agriculture.

Boza says her agency has successfully imposed sanctions on anti-competitive practices by government entities on numerous occasions, without ever suffering reprisals. The reason, she readily concedes, is that "we are independent. We can't be captured by any interest group."

Just five years after it was created to consolidate regulatory functions scattered throughout numerous ministries, a reputation for impartiality has turned Indecopi into a popular resource. According to Boza, companies and consumers file 40,000 complaints with the agency each year. They range from the trivial --a consumer complaining that shoes from a particular manufacturer fall apart when wet-- to the politically explosive, as when complaints alerted the agency to an effort by local bus companies to fix fares with the tacit approval of the Ministry of Transportation. The successful resolution of every case, however, depends on the degree to which Indecopi officials are perceived to be impartial and immune to political and economic pressures.

In this respect, Boza's job is similar to that of hundreds of other officials in Latin American countries that are giving independent regulators increasing authority to broker the conflicting demands of companies, consumers and the government. Whether they oversee competition policy, environmental protection, health standards or the activities of utilities, banks, or the stock market, regulators are the target of intense lobbying by interest groups who stand to gain or lose from particular interpretations of the law.

Banking sector supervisors, for example, come under fire from companies who want easier access to credit from national banks. But foreign investors and multilateral development banks typically want the same supervisors to enforce tough controls in order to prevent banks from overextending themselves and making bad loans. Environmental regulators must weigh the interests of logging companies, who want permission to harvest native forests, against those of environmental groups, who want to expand protected areas. Oil industry regulators are caught in a perennial battle between consumer groups who want the lowest possible price for gas and energy companies who want to raise rates in order to improve profits and finance expansion.


Where regulators are perceived as favoring one group over another, the fairness of the market system itself is often called into question, as citizens conclude that the rules of the economic game are rigged in favor of those with the most political and financial clout. Because of this, regulators often regard complaints from all quarters as a sort of quality seal--evidence that they are properly balancing the concerns of all parties. "If everyone is unhappy and everyone is protesting my decisions, then I consider myself to be doing an efficient job," says Claude Besse general superintendent of Bolivia's General System for Sectoral Regulation (SIRESE).

As straightforward as these principles might seem, truly independent regulators are rare in most Latin American countries, and particularly in those where the executive branch of government has broad discretionary powers over economic policy. Paternalistic political systems that emphasize party loyalty and patronage can also work against independent regulation. In such systems, newly elected governments tend to hand out crucial regulatory job assignments as "rewards" to friends and political supporters.

While these shortcomings make little difference in state-dominated economies, they become glaring problems in countries where market forces are allowed to determine prices and how resources are allocated. In Latin America's recently liberalized economies, legislators and citizens' groups are consequently engaging in heated debates about how to guarantee the independence of regulators and other officials--such as judges--who are increasingly called upon to safeguard fairness and equity in the marketplace. "Up until recently, the focus in many countries has been on attracting foreign investment," says William Savedoff, an idb economist who is studying regulation in the water sector. "Now attention is shifting to how you can design credibly autonomous regulatory entities."


Despite the different legal and regulatory traditions of the region's countries, a number of criteria can be used to gauge the independence and credibility of regulators in many sectors (see below).

The most basic factor is the quality of the law establishing a regulatory entity and defining its powers and responsibilities. If the law is drafted hastily or by presidential decree, the resulting regulatory entity will tend to have less credibility than if the law is forged within the give-and-take of the legislative process. If the law does not clearly delineate boundaries between their jurisdiction and that of cabinet ministers and the judicial system, regulators' decisions are likely to be ignored by players who appeal to other authorities.

The law should also clearly define how regulators are appointed, what qualifications they must have, how long they serve and how their activities are financed. According to Bolivia's Besse, these last factors are crucial. "Our political independence comes from the fact the president must select each of the regulators from candidates that have been approved by two-thirds of the senate," he said. "Regulators serve five or seven years, in periods that don't coincide with elections, and they can't be removed unless they fail to carry out their duties."

Financial autonomy is also critical for protecting regulators from political pressures that would hurt their credibility and destroy their effectiveness. SIRESE's operating budget, for example, is covered by a small tax on the revenue of the companies it regulates. Around 70 percent of Indecopi's operating expenses are generated by fines paid by sanctioned companies and fees collected for patent and trademark applications. Such "self-financing" provisions ensure that regulators' operating budgets are not dependent on annual congressional appropriations that are susceptible to political meddling.

To be effective, however, regulators must also be subject to rules that limit their powers. In addition to the limits on regulators' jurisdictions that are spelled out in the law, most countries allow regulators' decisions to be appealed. Typically, appeals that are not resolved within the regulatory agency itself are passed on to the judicial system, where a court issues an independent judgement.

Most countries also impose restrictions on the professional activities of regulatory officials in order to prevent conflicts of interest. A banking regulator, for example, should not be allowed to perform consulting activities for financial institutions, nor should she be tempted by employment offers from banks who could capitalize on her contacts and expertise. To prevent these abuses, many countries place restrictions on the jobs that regulators can perform during and immediately after their periods of service. Other rules limit the number of consecutive years that one regulator can remain in the same post.

Ultimately, however, the competence and impartiality of regulatory officials depends on the vigilance and interest of society. In true market economies, as in a high-stakes soccer game, such vigilance is all but guaranteed. "When you have three different players with different agendas, it's no longer possible for a president to appoint a friend with a third-grade education to run a regulatory agency," said the idb's Savedoff. "Somebody is going to complain."

* David Mangurian contributed to this article.

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