"The Role of Competition Policy and Practices in Reaching Macroeconomic Objectives

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"The Role of Competition Policy and Practices
inReaching Macroeconomic Objectives
Frederic Jenny Professor of Economics,
ESSEC Chair, OECD Competition Committee
11th Anniversary of the Establishment of the
Turkish Competition Authority Ankara,
Wednesday 26 March 2008
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Issues to be discussed

• Introduction
• 2) International trade and the impact of
  transnational anti-competitive practices
• 3) Domestic anticompetitive practices and the
  deadweight loss of consumer surplus
• 4) The impact of anti-competitive regulations on
  productivity
• 5) Competition and growth
• 6) Anti-competitive practices, anti-competitive
  regulations and innovation
• 7) Anticompetitive practices, anticompetitive
  regulations and investment
• 8) Anticompetitive regulations and employement
• 9) Conclusion

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1) Introduction
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Competition and Macro-Economic Performance

• Three links could be distinguished
• -A link between competition in markets and
  macro-economic performances
• A link between policies that promote market
  competition and
• macro-economic performances
• A link between competition law and enforcement
  and macro-economic performances.
• Few empirical studies tackle the question of how
  market competition affects performance, because
  competition is hard to measure directly. The
  economic literature contains little systematic
  analysis of overall effects of competition law
  enforcement. Cross-country comparisons are
  impaired by the difficulty of quantifying
  differences in laws and policies and differences
  in the structure and effectiveness of enforcement
  institutions.

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Laws and regulations that promote competition

• General laws about competitive interactions in
  markets
• Sectoral regulations of competitive conditions in
  particular markets.
• International trade laws
• Consumer protection laws
• Unfair competition laws
• Laws against deceptive marketing practices
• Public procurement laws

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OECD research on the relationship between
competition and macro-economic performance
OECD research has concentrated on the question of
how pro-competitive policies and regulations
affect performance. In 1997, the foundation
paper for the project on regulatory reform
derived economy-wide effects of reforms to
increase competition in the key sectors of
electricity, telecoms, airlines, road transport
and distribution. This report examined how
prices, output, employment and productivity in
those sectors responded to regulatory reforms and
estimated improvements in productivity and other
aspects of sectoral performance that would follow
from moving to best-practice regulation. To
calculate the resulting effects on GDP,
unemployment, employment, real wages, inflation
and price levels in the largest OECD economies
the report added up the effects in individual
sectors and also tested interactions in an
input-output system and a macroeconomic model.
(OECD, 1997)
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Possible macro-economic impact of competition
The promotion of competition and the elimination
of monopoly rent affects - Price level -
Efficiency -Innovation (complex) -Investment -
Employement (complex)
Output Growth
Increased demand
Social welfare
Economies of scale Adoption of Inform technology
Output growth
Productivity growth
More dynamic growth
Higher level of employement Higher real income
of employees
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2) International trade and the impact of
transnational anti-competitive practices
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The Consequences of Transnational Anticompetitive
Cartels for Developing Countries Macro
Assessment1(I)
  In 1997, the latest year for which we have
trade data, developing countries imported US
81.1 billion of goods from industries which have
seen a price-fixing conspiracy during the
1990s. These imports represented 6.7 of imports
and 1.2 of GDP in developing countries.They
represented an even larger fraction of trade for
the poorest developing countries, for whom these
sixteen products represent 8.8 of imports.The
consumption impact appears to be the largest for
upper middle income countries, for whom these
imports represent 1.5 of GDP.

• Margaret Levenstein and Valerie Suslow   Private
  International Cartels and their Effects on
• Developing Countries , background paper for the
  World Banks Development Report 2001

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The Consequences of Transnational Anticompetitive
Cartels for Developing Countries Macro
Assessment1(II)
A recent UNCTAD study estimates the welfare
impact of various hypothetical trade
liberalization measures and states   in the
first experiment, a worldwide reduction of 50
per cent in all agricultural tariffs brings
about an aggregate welfare gain of US 21.5
billion. .
A further analysis using UNCTAD figures shows
that the net welfare benefit for developing
countries from such an agreement would be equal
to US 13.4 billion. Thus the net annual welfare
benefit for developing countries from a drastic
multilateral reduction in agricultural tariffs
is only about half the minimum estimate of the
direct benefit they would get if a multilateral
agreement on competition enabled the elimination
of international cartels and therefore the supra
competitive margin they have to pay to cartel
members when they import (US 20-25 billion).
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3) Domestic anticompetitive practices and the
deadweight loss of consumer surplus
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Deadweight losses due to non competitive prices
Price effects on non competitive
markets Estimates of this deadweight loss to
society have varied widely, from as low as .1 of
output to as high as 11. (Hines, 1999
Davies-Majumdar, 2002 Kwoka, 2003)
1) Hines, J. R., Jr. (1999), Three sides of
Harberger triangles, Journal of Economic
Perspectives, vol. 13, p. 167. 2) Davies, S. and
A. Majumdar (2002), The development of targets
for consumer savings arising from competition
policy, Office of Fair Trading, Economic
Discussion Paper no. 4. 3) Kwoka, J. E., Jr.
(2003), The Attack on Antitrust Policy and
Consumer Welfare A Response to Crandall And
Winston, unpublished.
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4) The impact of anti-competitive regulations on
productivity
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Competition and Productivity
Three avenues to greater productivity can be
distinguished Efficiency using current inputs
with less slack Improvement adopting better
available technology for using those
inputs Innovation developing and implementing
new technologies and products.
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Regulation , Competition and Productivity
. Anti-competitive regulation slows productivity
growth in sectors where information and
communications technologies are particularly
important Anti-competitive regulation slows down
the process of catching up to the productivity
leader Rates of investment in information and
communications technologies are several
percentage points above average in the US, UK,
Canada and Australia because of their
competition-friendly regulations by contrast,
constraints on competition lead to ICT investment
rates well below average for Greece, Italy,
Portugal and France. Conway et al, Regulation,
Competition and Productivity Convergence ( 2006)
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Competition, Efficiency and Productivity at the
Firm Level
Dozens of empirical studies show that competition
clearly improves productivity and productivity
growth. (Ahn, 2002) Nickell (1996), analysing
the accounts of 670 UK companies from 1972-1986
found that more competition, as indicated by more
competitors or by lower rents, is associated
with higher productivity growth, while market
power, as indicated by market share, is
associated with lower productivity levels.
Another analysis of UK companies found
similarly that productivity is higher where
competition is stronger (as indicated by lower
rents and market shares), while productivity
growth is lower where competition is weaker (as
indicated by higher rents). (Disney, 2003)
1) Ahn, S. (2002), Competition, innovation and
productivity growth a review of theory and
practice, OECD Economics Department Working
Papers, no. 317, Paris. 2) Nickell, Stephen J.
(1996), Competition and Corporate Performance,
The Journal of Political Economy 104(4) (August
1996), pp. 724-746. 3) Disney, Richard, Jonathan
Haskel and Ylva Heden (2003), Restructuring and
Productivity Growth in UK Manufacturing,
Economic Journal, vol. 113, pp. 666-94.
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Competition, Efficiency and Productivity at the
Firm Level
Similar results are reported about Germany, where
firms showed higher productivity growth when
operating in markets with intense competition
(Januszewski, 2000), and Korea, where plant entry
and exit accounted for from 45 to 65 of
productivity growth. (Hahn, 2000) Where
competition law enforcement is more effective,
more efficient firms can grow faster. (Dutz and
Vagliasindi, 2000)
1) Januszewski, S. I., J. Köke, and J. K. Winter,
(2001), Product market competition, corporate
governance, and firm performance An empirical
analysis for Germany, mimeo. 2) Hahn, C.-H.
(2000), Entry, exit, and aggregate productivity
growth micro evidence on Korean manufacturing,
OECD Economics Department Working Papers, no.
272, Paris. 3) Dutz, Mark and Maria Vagliasindi
(2000), Competition policy implementation in
transition economies An empirical assessment,
European Economic Review, vol. 44, pp. 762-772
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5) Competition and growth
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Competition and Growth in the OECDE 1980-2000
Long-term performance trends among OECD Members
show that the economies with superior growth
records have relatively strong competition
policies or have made significant reforms to
improve competitive conditions in their markets.
The US is often taken as the sustained-growth
performance target, but growth of per capita GDP
was even stronger in Australia, Ireland and Korea
over the 20 year period 1980-2000. These four
were the only Members whose growth was above
average over both of the two decades 1980-1990
and 1990-2000. Each of these four long-term
leaders was reducing barriers to entry and
competition or strengthening competition policy
and enforcement in this period. By contrast,
where growth was below average for each of those
decades Germany, France, Italy, Belgium,
Denmark, Greece and Switzerland
competition-based reforms were less ambitious.
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Competition policy, Law Enforcement and Growth
A clear correlation between effective competition
policy and growth has been demonstrated in a
regression analysis of the effects of a wide
range of institutional and other determinants.
Using survey responses to measure effectiveness,
Dutz and Havri find that the perception that
antitrust policy is effectively promoting
competition in a country has a distinct,
positive, statistically significant effect on its
growth, which is separate from the effects of
trade liberalisation, institutional quality and a
favourable policy environment generally. Dutz,
Mark and Aydin Hayri (2000), Does more intense
competition lead to higher growth?, World Bank,
Development Research Group, Policy Research
Working Paper no. 2320.
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Competition policy, Law Enforcement and Growth
Other survey-based studies report similar
correlations the intensity of local competition
seems to be strongly correlated with the standard
of living, i.e., economies with high levels of
competition are richer than economies with low
levels of competition. Other studies quantify
the effect, showing that stronger competition
could boost output by several percentage points.
Krakowski, Michael (2005), Competition policy
works The effect of competition policy on the
intensity of competition an international
cross-country comparison, HWWA Discussion paper
no. 332, Hamburg Institute of International
Economics.
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Pro-competitive Reforms and Output Growth in OECD
countries

• OECD (1997), The OECD Report on Regulatory
  Reform, vol. 2, Thematic Studies, Paris
• OECD (2005a), The benefits of liberalising
  product markets and reducing barriers to
  international trade and investment in the OECD,
  OCCD Economics Department Working Papers, no.
  463, Paris

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The US Experience
Basic changes in competition and regulatory
policies began in the mid-1970s. Airline
deregulation started in 1978. In other transport
modes, rate and entry controls on interstate
trucking were repealed in 1980 (and on
within-state trucking, in 1994), along with most
rate and service controls over rail freight. In
the natural gas market, reforms that began in the
late 1970s ended price controls. In telecoms,
vertical separation of the traditional monopolist
was ordered in 1982 and completed in 1984. Since
then, 1996 legislation set a new regulatory
framework governing the evolution of competition
in this industry. In electric power, the
principles for competition-based reform were set
by legislation in 1992 and by federal regulatory
order in 1996. Financial services were opened to
larger-scale competition from 1980 to 1994.
Emergence since the late 1970s of a new consensus
for efficiency-based enforcement of the general
competition laws. Merger control guided by
economic analysis concentrated on large
horizontal combinations.
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The Australian Experience
Australia launched its ambitious National
Competition Policy reform process in the
mid-1990s, planners predicted long-term gains in
GDP of up to 5.5. An ex post study nearly 10
years later quantified the results of these and
other major reforms. The Productivity Commission
established that productivity improvements and
price changes in six key infrastructure sectors
alone, which were one principal objective of the
National Competition Policy reforms, generated a
permanent increase in GDP of 2.5. Better
multifactor productivity growth added the
equivalent of an additional AUD 7000 (USD 5500)
to the average household. (Productivity
Commission, 2005)
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The Korean Experience (I)
Following the second oil crisis and the recession
of 1980, Korea began a long-term program of
economic liberalisation and macroeconomic
stabilisation to replace targeted credits, tax
benefits, import protection and promotion of
selected industries. Limits on foreign investment
were reduced, banks were privatised, interest
rates were deregulated and tariffs were cut. In
transport, rate controls were lifted in the 1990s
and entry conditions have been eased. The
electric power industry has been restructured,
but open access and competition are being
introduced more slowly. At the outset in 1981,
Korea had replaced price control regulation with
a comprehensive competition law the Korea Fair
Trade Commission, became formally independent in
1994.
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The Korean experience (2)
Reforms intensified following the financial
crisis of 1997, further reducing trade barriers
and liberalising restrictions on inward foreign
investment. Regulatory reform priorities included
repealing most exclusions from the competition
law and eliminating or revising regulations that
constrain competition and enterprise. Financial
sector regulation was strengthened and
consolidated in new institutions. In telecoms,
reforms had begun in the 1990s, and the sector is
now open to competition.
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6) Anti-competitive practices, anti-competitive
regulations and innovation
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Competition and Innovation
An early game theory approach by Scherer
predicted that greater rivalry, represented by
lower concentration indices, stimulates RD
spending up to a certain point, but that too
little market concentration would discourage RD
because it would become too difficult for firms
to appropriate a sufficiently enticing share of
the returns from their innovations.1 In the
1980s, models based on decision theory agreed
with Scherers theory that intermediate market
structures often exhibit the most innovative
activity.2 Newer theoretical models continue
to predict that the relationship between product
market competition and innovation is best
described by the inverted-U shape.3 1
F.M. Scherer, Market Structure and Employment
of Scientists and Engineers, 57 American
Economic Review 524 (1967). 2 Morton Kamien
Nancy Schwartz, Market Structure and Innovation
105-145 (1982). 3 Phillipe Aghion, Nicholas
Bloom, Richard Blundell, Rachel Griffith Peter
Howitt, Competition and Innovation An Inverted
U Relationship, NBER Working Paper 9269 (2002).
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Innovation and anti-competitive regulations
Figure 6. Competition-Restraining Product
Market Regulations and Intellectual Property
Rights
Figure 7. RD Intensity in the Business Sector
Adjusted for Variations in Industry
Structure Average, 1999-2002
Source OECD, Going for Growth 68 (2006).
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Innovation and anti-competitive regulations
An OECD study on RD intensity and patenting for
a sample of 20 OECD countries over the period
1982-2001 shows that, all else being equal,
anti-competitive regulations (other than IPRs)
have a significant negative correlation with both
RD intensity and patenting. The authors
concluded that the low levels of such regulations
in Australia, the U.K. and the U.S. helped to
raise the intensity of RD in each of those
countries by ten percent or more above the OECD
average. In contrast, the presence of more
anti-competitive regulations in Ireland, Italy
and Portugal reduced their RD intensities by
more than eight percent relative to the OECD
average. Pro-competitive reform was therefore
found to pay large dividends.
Florence Jaumotte Nigel Pain, From Ideas to
Development The Determinants of RD and
Patenting, OECD, ECO/WKP(2005)44, Economics
Department Working Paper no. 457 at 49 (2005)
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7) Anticompetitive regulations and investment
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Product Market Reforms and Investment
The focus is on the effects of policies aimed at
strengthening private governance and opening up
access to markets where competition is
economically viable. The paper calculates that
these improvements in regulation would increase
investment by 2-3 percentage points increase
foreign direct investment by 20 overall, and up
to 80 in some countries and reduce the
(multi-factor) productivity gap with
high-productivity countries by 4-10.
Nicoletti and Scarpetta, Regulation and Economic
Performance Product Market Reforms and
Productivity in the OECD , 2005
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Product Market Reform, Trade Liberalization and
Investment
Improvements in GDP and productivity from
adopting a package of reforms related to trade
liberalisation tariffs, constraints on foreign
investment and regulation affecting inward trade
are computed by applying coefficients derived
in previous regression studies. The paper finds
that reforms affecting trade could lead to gains
in GDP per capita of up to 4-5 percent.
Different methods yield different estimates of
the gains from reforms that encourage competition
through trade liberalisation direct test 4.7
gain in GDP per capita Linked through effect on
productivity 2.7 gain in GDP per capita
General equilibrium model 1.9 gain in GDP per
capita. The benefits of liberalising product
markets and reducing barriers to international
trade and investment in the OECD (OECD, 2005)
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Foreign direct investors are attracted by profit
opportunities

• Some profit opportunities are good both for
  investors and for
• the economic development of the country.

-Some profit opportunities are good for investors
but not so good for the economic development of
the country because the expected profit comes
from a commitment by the government to restrict
competition in favor of the foreign
investor. (examples Western firms invested
heavily in Eastern European countries in the
1990s under the condition that local governments
would subsequently prevent other entries in their
lines of business) .
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The effect of foreign direct investment on
competition1
Foreign Direct Investment can increase
competition (particularly in the case of
greenfield investments)
But Foreign Direct Investment can also reduce
competition (and therefore result in a loss for
consumers). Therefore Competition law is also
necessary to prevent anticompetitive practices or
transactions resulting from FDIs.
1) See Unctad Investment Report 2000
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8) Anticompetitive regulations and employement
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Competition and Employement the Theoretical Link
The theoretical links between competition and
employment look complex. Reducing competitive
pressure reduces demand for labour. Market
power tends to reduce the wage elasticity of
demand, while rents encourage employees to demand
premiums as a result, firms choose a higher
proportion of capital to labour. Encouraging
entry and expanding activity would increase
demand for labour. Competition could drive down
wages in some sectors where monopoly profits had
been shared with labour, yet increase real wages
overall by reducing prices. The net effect would
depend on the flexibility of labour market
regulation.
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Product market Competition and Employement
Enhanced product market competition can also
contribute to growth by increasing employment.
Estimates from recent OECD research suggest that,
for the typical OECD country, product market
liberalisation over the past ten years has cut
the aggregate unemployment rate by about 1
percentage point. (Conway, 2005)
Conway, P., et al. (2005), Product Market
Regulation in OECD Countries 1998 to 2003, OECD
Economics Department Working Papers, no. 419,
Paris.
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Product Market Reforms and Employment
The paper finds that Regulations that restrict
competition reduce employment rates Insider
bargaining power increases this effect that is,
rent sharing depresses employment Employment
could increase 2.5-5 points after a shift to
pro-competitive regulatory policies Sequencing
of reform could be a challenge, since are most
restrictive. employment gains would be greater,
but harder to achieve, where regulations
Nicoletti and Scarpetta, Product Market Reforms
and Employment , OECD, (2005)
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Conclusion
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Conclusion

• Convincing evidence that anticompetitive
  practices, both
• national and transnational, impose large costs on
  consumers
• 2) Clear evidence that competition and
  competitive reform
• promote productivity and growth
• 3) Solid evidence that anticompetitive practices
  and
• anticompetitive regulations diminish the rate of
  innovation
• 4) Antitrust enforcement and pro-competitive
  reforms attract
• desirable investment
• 6) The contribution of sound competition law
  enforcement to
• achieving macro-economic goals is more important
  if it takes place
• in the context of a global plan of
  pro-competitive reforms

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Thank You for Your Attentionfrederic.jenny_at_club
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