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A matter of basic freedom: end the state monopoly and allow a gambling and lottery market

24/05/2019

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Daniel Homem de Carvalho*

For several decades, Brazil has been living the dilemma of so-called gambling legislation. Dozens of bills have been sponsored and some are still being debated in Congress.

First, a few points need to be explained.

  1. Gambling is not illegal in Brazil.

The prohibition against games of chance only applies to private enterprise. The Misdemeanor Act prohibits games of chance run by private enterprise.

Lotteries are permitted, as long as they are run under state (Loterj is the most famous) or federal (run by the Federal Savings Bank) monopoly.

As the old libertarian saying goes: “The state hates competition.”

Reality, however, is that virtually all the lottery games run (badly) by the Federal Savings Bank are games of chance, as the Misdemeanor Act defines them: games of which the result depends solely or preponderantly on luck.

Thus, in reality, there is no prohibition of gambling in Brazil, rather, a state monopoly on gambling. Perhaps this is part of the explanation of why the gambling market is not opened up in Brazil: the state hates competition.

  1. State lotteries have been repeatedly restricted, beginning with Decree Law 204/67, up to the – legally questionable – Stare Decisis 2 of the Federal Supreme Court.

In practice, therefore, in the gambling sector, the federal model provided in the Federal Constitution does not apply. Only the Union can legislate on “pools and raffles” – which, for the Supreme Court, are synonymous with gambling and lotteries.

Today, there are only four state lotteries in operation: LOTERJ, LEMG, LOTEP and LOTECE. Other state lotteries, abolished, were replaced with “capitalization securities,” investment funds or insurance bonuses, with lotteries backed by the Federal Lottery.

That is, our “federal” system considers federal games of chance legal, but the same games run by the states are illegal. Our federation is definitely a façade.

  1. As defined in a law from the 1930’s (Decree 21.143, of March 10, 1932), lotteries are a “public service” (Article 20).

Although a search through the canons of the theory of public service does not support that definition, that is how it is defined. However, it is a typical business activity and should come under the constitutional principles of a market economy, free competition, free enterprise and private property. Repeating: the government hates competition.

What can be done

This said, let us recall the attempts to expand the right to exploit gambling in Brazil.

Even though there is a federal monopoly over gambling and lotteries, quite a few missteps of government agencies (using the term broadly) have been permanent. The lesson of sociologist Max Weber is useful: The bureaucracy tends to serve itself, irrespective of the state and the government.

A stable bureaucracy tends to become autonomous from the state that created it and from other “competing” agencies. They look after their own interests, which mainly have to do with their survival as state entities. In this category, we have the Federal Savings Bank (monopolistic state bank), Internal Revenue, the Ministry of Finance, the Public Prosecution Office, and other bodies currently in existence and that existed before (see an example here).

In this institutional context, it is not surprising that bills to “legalize” gambling are contaminated by these evils of origin: state dirigisme and the conflict among public agencies for regulatory dominance.

 Here’s how it happens

Discussions over details of how the market will work start in the National Congress. There, they go after extremely detailed legislation to micromanage privatized gambling, in a continent-sized country with a formal federal structure. To give one example: the Congress has debated regulations for casino-resorts, for the entire country, trying to specify the minimum number of rooms and places for entertainment and leisure.

Is there any way this would work in such an immense country? The reasonable approach would be for each state to adopt its own formula for regulation – generic, very generic.

Good old market practices need to be applied to an industry that naturally has competition and that will not – and should not – have access to financing from public funds. It must be private money generated and operated by private companies.

Therefore, a proposal for “regulating” gambling in Brazil must be minimalist. It must impose the minimum and allow private actors to go about generating profits, jobs and taxes. After all, how would it be possible to affect the monopolistic, state market with a “dose of capitalism”?

Regulations that are intended to free the productive forces to get to work would just need four bases:

a) Repeal Decree-Law No. 9.215 of April 30, 1946, which abolished gambling in Brazil as being “degrading” to human beings;

b) Repeal Articles 50 to 58 of Decree-Law No. 3.688 of October 3, 1041 (Misdemeanor Act);

c) Recognize gambling as a business, overriding the extravagant classification of “public service;”

d) Delegate regulation to the states. This is true federalism.

This formula could overcome the excess of micromanagement from which bills of law have suffered to date, and would start to bear fruit immediately in terms of creating income and jobs (isn’t that what the government wants?). It would allow companies, subject to business principles, to adapt much more flexibly to the socio-cultural specifics of each region of the country.

Conclusion

Gambling is a business like any other. It involves risk, with the possibility of profit or loss. It is no more risky that opening a bakery or a beauty shop (is there any guarantee of success in those businesses?) or investing money short term in the stock market.

Above all: absolutely no one is obliged to gamble. The only people who gamble are those who want to. To forbid people to gamble (which means forbidding them to win money), besides being old-fashioned paternalism, is a blow to people’s most basic freedom.

(*) Daniel Homem de Carvalho is a lawyer, chairman of the Gambling and Entertainment Law Commission of the Brazilian Lawyers Institute (IAB), member of the Law Commission for Sports, Lottery and Entertainment Gambling of Brazilian Bar Association, vice president of the Brazilian Institute Legal Gambling – IJL e Former President of Rio de Janeiro state lottery.