Latin American Capital Markets

424 OSVALDO R. AGATIELLOfrom a justifiable, expedient exercise of authority and that the public's impatience inthis sense is increasingly loud across all latitudes (Sunstein 1996).Rules and regulations express a society's efforts to address the issues it confrontsthrough peacefully accepted political processes. Respect for the law also revealsrespect for one's fellow citizens as "the lawbreaker arrogates for herself a privilegedposition outside the moral community" (Luban 1988, p. 44). Obeying the law is aprima facie obligation, that is, it depends on the generality and fairness of its content.But when the law becomes an instrument of interested parties in detriment to thecommon good, it looses its moral authority and becomes a mere vehicle of coercion,no matter how effectively it can be enforced. A peculiar, purely contextual socialmorality develops in these circumstances that challenges and supplants the universalrule of law as the established mechanism to process and resolve conflicts in civilizedsociety. An example of this is the scandalous inability of many Latin American andCaribbean governments to effectively collect taxes, especially direct ones, and the correlativenonchalance of the transgressors.The historical context has to be taken intoaccount as well. For instance, when the highest social compact of a country—its politicalconstitution, from which all legislation logically derives—goes largely unheeded,it is a natural consequence overtime that some segments of the population, or someof their activities, will not abide by positive law either and will be governed by an informalsubstitute. Contracts are unlikely to have unquestionable validity and predictableenforceability under such circumstances.In the Western tradition, this discussion goes back at least to the Roman dictumPacta sunt servanda, the juridical notion that the stipulations of the parties to acontract must be observed like law itself (a deal is a deal is a deal—again, the intuitivenotion of justice as regularity). However; in an environment of endemic economic andpolitical instability, the legal profession may resort to the equally ancient principle Rebussic stantibus (the stipulations of the parties to a contract cease to be obligatory whenfacts and conditions substantially change).This principle feeds the theory of improvision,which originated in French administrative law in the 1950s and has been receivedwith enthusiasm by the judicial doctrine of some Latin American and Caribbean countries.Extending its use beyond the narrow limits of gross inequities, this notion maynurture moral hazard as a questionable culture of "post-contractual opportunism"rapidly spreads (Milgrom and Roberts 1992).What can be done for the ethics of free markets to prevail? The first step isthe strengthening of the rule of law for all economic agents (once more, justice asregularity).This also means that the legal framework is an external limit to the marketand that the moral framework, in turn, is an external limit to the legal framework(Kirzner 1993).The moral, legal, and economic orders are harmoniously interarticu-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub