Why the Gold Standard Isn't Always Golden

In 1962, Frances Kelsey, a pharmacologist at the US Food and Drug Administration, refused to approve thalidomide for the American market. European regulators had already approved it. The drug was being prescribed widely to pregnant women for morning sickness. Kelsey was not convinced the safety data was adequate and held her ground against considerable pressure from the manufacturer. She was right. Thalidomide caused severe birth defects in thousands of children across Europe. The United States was largely spared because one regulator applied genuine scrutiny rather than deferring to incumbent approval.

The story is told, correctly, as a triumph of regulatory rigour. What is less often told is its corollary: the same institution that produced Frances Kelsey now takes an average of ten to twelve years and over two billion dollars to approve a new drug. Treatments that could save lives sit in regulatory pipelines for a decade. Patients with terminal diagnoses die waiting for approvals that arrive, if they arrive at all, too late. The FDA that was right about thalidomide has become an institution whose prestige now protects its processes from scrutiny more effectively than those processes protect patients.

This is the incumbency problem. And it appears, with remarkable consistency, wherever regulatory institutions accumulate enough prestige to place themselves beyond challenge.

The Federal Reserve failed to prevent the 2008 financial crisis — not because it lacked information, but because the dominant framework within which it operated could not process the signals that independent economists had been sending for years. The Bank of England made the same mistake. Both institutions recovered their reputations relatively quickly, not because they demonstrated accountability or reformed their analytical frameworks, but because they are the incumbents. When you are the gold standard, failure becomes an anomaly to be explained rather than a pattern to be corrected.

The cost of this circularity falls unevenly. For wealthy nations with mature regulatory systems, incumbency is expensive but manageable — the delays are frustrating, the inefficiencies are real, but the underlying institutional capacity exists to absorb them. For developing nations, the cost is categorically different. A country that cannot afford to build its own FDA-equivalent is told, implicitly, that it must either adopt the incumbent's standards wholesale — at costs that bear no relationship to local capacity — or operate without credible regulation at all. The space for innovation, for context-appropriate regulatory design, for frameworks that achieve the incumbent's objectives through different means, is effectively closed.

I observed this from a position I had not anticipated occupying. The institutional framework I helped design in Honduras was built to international standards — not because we were trying to imitate incumbents, but because we understood that credibility with international investors required legal and governance architecture that could withstand serious scrutiny. The framework incorporated elements from Singapore, from the UAE's free zone model, from international arbitration practice, from the best thinking available in special jurisdiction design at the time. It was not a copy of anything. It was an attempt to build something appropriate to a specific context, drawing on the best available evidence about what works.

It was dismissed, repeatedly, by international commentators and institutions who evaluated it not on its architecture or its outcomes but on its lineage. It did not carry the right letterhead. It had not been designed by the right organisations. The methodology was unfamiliar, which was taken as evidence of inadequacy rather than as evidence of genuine innovation. The full story of what was built, why, and what happened to it is the subject of my forthcoming book, The Fortress Builders. What I will say here is that the dismissal was costly — not primarily to me, but to the people the framework was designed to serve.

The incumbency problem is not, at its root, a story about bad regulators or captured institutions — though both exist. It is a story about how prestige, once accumulated, begins to protect itself. The FDA is not primarily defending patients when it resists alternative approval pathways. It is defending a methodology that has become inseparable from its identity. The Federal Reserve is not primarily protecting the financial system when it dismisses heterodox economic analysis. It is protecting a framework whose authority depends on its being treated as settled.

The antidote is not to abandon incumbent institutions. Frances Kelsey was right about thalidomide, and the FDA's rigour has saved lives that a less careful system would have lost. The Federal Reserve, for all its failures, provides a degree of monetary stability that its absence would make immediately and painfully visible. The incumbents have earned some of their prestige honestly.

The antidote is to separate the question of whether an institution has done good work from the question of whether it should be immune from challenge. These are not the same question. An institution that has genuinely earned its credibility should be able to defend itself on the merits — on outcomes, on evidence, on performance — rather than on lineage and methodology alone.

This distinction matters most in developing nations, where the cost of regulatory incumbency is highest and the capacity to bear it is lowest. A country that cannot afford to wait twelve years for drug approvals, or a decade for financial regulatory modernisation, needs the freedom to design regulatory frameworks that achieve the incumbent's objectives through means appropriate to local capacity and context. That freedom is currently constrained not by evidence that alternatives fail, but by the accumulated prestige of institutions that have made their methodology a condition of credibility.

That is not rigour. It is incumbency protecting itself. And the people paying the price are the ones who could least afford it.