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Sustainability of Regulatory Reform in Latin America



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Sustainability of Regulatory Reform in Latin America Unraveling Commitments Carlos Rufin Babson College Evan n Romero Prepared for presentation at the 2004 Annual Research Conference of the Association for Public Policy Analysis and Management Washington D C 6 8 November 2004 Please do not cite or quote without the corresponding author s permission 2 November 2003 Abstract We examine the likelihood of indirect expropriation of private assets appropriation or the capture of regulatory agencies by private interests We first consider different theories that explain time inconsistency in public policy towards infrastructure sectors ideology political strategy political transaction costs and legitimation We then compare the post reform experience with regulatory independence and capture in the electricity industry in three Latin American countries Brazil the Dominican Republic and Guatemala Our comparison shows that in these countries domestic resistance to reform packages that originated mainly abroad introduced imbalances into the implementation process that have progressively undermined the reforms The result may be a vicious cycle in which the imbalances lead to crises that are then used as an excuse to reverse reforms by reasserting political control over the industry We show that this process is largely consistent with the theoretical perspectives and conclude with recommendations for reducing time inconsistency in pro market reforms Corresponding author Babson Park MA 02457 USA and crufin babson edu We are very grateful for the financial support of the Institute of Latin American Business at Babson College which generously funded research assistance and field research for this project We have also benefited from extensive discussions and analytical perspectives of participating researchers in the Inter American Development Bank s project on the sustainability of regulatory institutions in Latin America and from panel participants at the LASA 2001 Conference in



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