PRESIDENTIAL CONTROL AND REGULATORY COMMITMENT OF LONG RUN: THE ROLE OF THE REGULATORY IMPACT ANALYSIS By Alexandre Gheventer Advisor: Ernie Englander The Minerva Program – Spring 2009 Institute of Brazilian Business and Public Management Issues – IBI The George Washington University Washington - DCPage | 2 Table of Contents Introduction 3I. RIA`S Implementation In Brazil: Current Position 5a. The Brazilian Regulatory Reform 5b. RIA`s Implementation Project in Brazil 8II. What is Regulatory Impact Analysis (RIA)? 10III. Theories of Regulation 16a. Normative Theory of Regulation 16b. Capture Theory 18c. Economic Theory of Regulation 19IV. Regulatory Commitment or Regulatory Exploitation: a Decision Model 23V. The Presidential Control on Regulatory Policy 30VI. OIRA Performance in Clinton and Bush Administrations 36Conclusions 41References 43Page | 3 INTRODUCTION One of the main subjects in political economy, especially in the area of the regulation, is the question of “who regulates the regulator.” A possibility pointed out by the literature is the political control of the agency through procedurals instruments. Amongst these instruments we can emphasize the introduction of “regulatory impact analysis” (RIA). The RIA`s introduction and institutionalization is in the political agenda of the Brazilian government and is part of a set of proposals with the objective to improve the governmental capacity in regulation matters. This paper has the purpose a) to study how the RIA is institutionalized in USA - carried through by Office of Information and Regulatory Affairs (OIRA) in Office of Management and Budget -, b) if there are elements that could support the affirmation of that the process of OIRA`s analysis has been neutral in the time or if it tends to benefit the present administration and, c) in the light of the American experience and considering our specific institutional design, which of the possible inferences about the consequences, positive or negative, could apply to RIA`s implementation in Brazil. The introduction of the RIA has been sustained on the traditional premise that the main governmental objective is to promote social welfare. Under this premise, regulation will always try to guarantee the optimal allocation of resources in order to maximize benefits and minimize costs, whether administrative costs or costs related to the society`s adhesion to the regulation. Behind the idea of RIA`s implementation there is the recognition of the existence of asymmetrical information between the agency and the politician (or the legislator), which can result in adverse selection and moral hazard problems. Regardless, the attainment of the best regulatory policy is only a technical issue. Normally this type of approach tends to ignore, or undervalue, the role of the economic and political institutions. In opposition to the traditional view of the role of regulation, there is the economic theory of regulation (TR), based on the hypothesis of rational choice in the public world. For TR, regulation results from demands of diverse groups of interests forPage | 4 governmental intervention. The nature of the actor who moves in the politics is the same one of the actor who acts in the market. The regulator/politician will be rational if he chooses not the most efficient regulation (lesser dead-weight loss), but the one that will maximize his private interests (in the terms of Stigler (1971), votes and money of electoral campaign). In this direction, sometimes, creating market imperfections can generate electoral benefits, despite the eventual losses of social welfare. Some authors, for example, Becker (1983), argue it is possible to reconcile the hypothesis of rational choice with the correction of market imperfections. Even so, if this happens, it will be because of rational calculation and not because the politician or bureaucrat is benevolent or Kantian.1 Therefore, considering the hypothesis of rational choice, the agency responsible for the RIA theoretically will have incentives to promote a biased evaluation of the costs and benefits of regulation for an administration pro or against regulation. It does not mean that the RIA cannot generate good governance and increase the quality of the regulation, given the incentives from the institutional structure. However, as a result of a degree of reasonable subjectivity in the evaluation of the costs and benefits of regulatory proposals, a low degree of transparency and imperfections in the mechanisms of check-and-balances between the Executive branch and the other powers can generate a socially inefficient regulatory design. The decision to act in short run (regulatory exploration) or in the long run (regulatory commitment) results from a calculation derived from the comparison between the benefits reached with the regulatory commitment and the costs generated for the disutility of the Executive in giving up its preferences for the maintenance of this commitment. The introduction of the RIA can exert the influence to adapt the preferences of the agency to the political agenda of the Executive, without risks to the regulatory commitment and to the efficiency of regulation, since the institutional design considers the incentives foreseen by TR. 1 There is some academic discussion about the rationality issue. In daily situations, many individuals take decisions under considerations of moral order that contradicts its personal preferences. The point is not to evidence the existence of benevolent and kantian people, but to explain the results observed in the public world.Page | 5 RIA influences the behavior of the agency since it will take in consideration the probability to have the proposal reviewed or, in last case, refused. In this way, the agency will be able to formulate strategies of presentation of proposals that also consider the preferences of the Executive, and thus minimizing the number of vetoes or reviews, without perceiving any arbitrariness, at least in an explicit form. Consequently, the preferences of the agency can be adapted in favor of the Executive, without necessarily losing of regulatory credibility. However, if the Government decides to be more or less rigid in relation to the analysis of the rule without transparency or if manipulation occurs in the formal procedure of the process of regulatory analysis, the introduction of the RIA will