Competition Policy, Competition Law, and Development

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Competition Policy, Competition Law, and
Development

• Dr. Simon J. Evenett
• World Trade Institute
• Bern, Switzerland
• simon.evenett_at_wti.org and www.wti.org

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Agenda

• Competition policy objectives and instruments
• Barriers to entry, FDI, and imports
• Competition law instruments
• Competition, inter-firm rivalry, and development
• Spread of competition law
• Effects of competition law on economic
  performance
• Effects on dynamic economic performance
• Cartel enforcement in developing economies
• Initiatives at the international level
• Enforcement actions against international cartels
• UNCTAD, OECD, WTO, and ICN

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Competition policy objectives

• Economic objectives
• Freedom to engage in commerce
• Protection of competitive processes (not
  necessarily of competitors!)
• Efficiency
• Static
• Dynamic
• Non-economic objectives
• Fairness
• Social justice, eg. South Africa

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Competition policy instruments

• Regulations on domestic entry
• Regulation of ongoing business
• Regulation of exit
• Barriers to trade and to FDI
• Competition advocacy
• Competition law

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Importance of barriers to entry, imports, and FDI

• Well established in the literature
• New analyses of size of barriers to entry in
  developing countries large in some developing
  and industrial economies
• Barriers to imports and FDI recall Hoekman
  presentations yesterday
• Key question is whether lowering these barriers
  completely eliminates domestic market power. If
  so, not much role for other instruments of
  competition policy, such as competition law.

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Competition law instruments

• Measures against cartels
• Measures against abuse of a dominant position
• Measures against collusion or collective
  dominance
• Measures against predatory pricing
• Measures regulating nature of inter-firm
  cooperation on research, development, and
  marketing of products

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Spread of competition law in the 1990s

• Number of jurisdictions adopting some form of
  competition law in the 1990s
• EU member states 8
• Non-EU high income OECD nations 3
• Developing countries 27
• Least developed countries 0
• Total 38
• Even so many developing countries and least
  developed countries still dont have competition
  laws

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Why has the spread occurred?

• World Bank-IMF conditionality
• Fear of MNCs and FDI
• To complement trade and investment reforms
• As part of a regional trade agreement
• FTAA negotiations
• As part of accession negotiations to the EU
• Eastern European nations
• Growing profile given to competition law in
  international fora

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Effects of competition law on economic development

• Direct effects on market outcomes
• Indirect effects competition law affects the
  degree of inter-firm rivalry, which in turn can
  affect
• Innovation
• Productivity growth and economic growth
• Prices paid by customers, including the
• Poor
• Government
• Indirect effects often work through deterrents to
  firms to engage in anti-competitive practices

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Competition law and dynamic economic performance
is there a conflict?

• Yes
• Cartels prevent price competition and finance
  investments needed for growth
• Mergers are needed to promote national champions
• Unconstrained rivalry in banking sector and
  network industries is inefficient

• No
• Are cartels the best way to finance investment?
  What about investment credits, subsidies?
• Do larger firms have higher productivity levels
  and growth? No.
• Argument for a sectoral exemption from
  competition policy, not a general exception

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Even if there is a conflict, here are five ways
to manage the conflict in a national law

• Exempt state actions from competition policy
• Allow competition policy to have multiple
  objectives
• like in South Africa
• Give dynamic as well as static efficiency a role
  in competition enforcement
• like in the US, Canada, and EU
• Create sectoral exemptions
• Allow national cabinets to over-rule the
  competition authority
• e.g. recent merger of Eon-Ruhrgas in Germany

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Evidence on link between competition law and
dynamic economic performance

• Cross-country studies
• Strengths and weaknesses
• Effects on economic growth
• Dutz and Hayri (1999)
• Effects on productivity growth
• Dutz and Vagliasindi (2000), Eastern Europe
• Effects on price-cost margins
• Hoekman and Lee (2003)

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Direct effects of competition law national
enforcement actions against cartels

• What are cartels?
• Enforcement actions
• Arguments against enforcing cartel laws in
  developing countries
• Cost-benefit analysis of cartel enforcement

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What are cartels? Who gets hurt by them?

• Types of cartel
• Bid rigging
• Price fixing
• Allocating market shares and quotas
• Restrict output levels

• Victimscustomers
• Governments
• Private consumers (including the poor)
• Firms

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More than 20 developing countries have taken
action against cartels in recent years

• These countries are found in every continent and
  at every stage of development
• See tables in section III of my WTO report
• Lots of bid rigging cases (about a quarter of the
  case load), see table III.T2
• Cases involve the poor and access to medicines
• Peruvian case against poultry
• Romanian pharmacists
• Socartel enforcement is not the preserve of rich
  countries

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Two common arguments against cartel enforcement
and their flaws

• Critics of national cartel enforcement make often
  make the following two arguments that do not
  stand up to scrutiny
• Open and contestable markets destroy cartels
• We cant afford cartel enforcement
• Let us examine argument each in turn

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Open and contestable markets do not destroy all
cartelsfor good reasons

• For this theory to work it requires
• No or low barriers to entry by new firms no or
  low barriers to FDI no or low import barriers
• Is this the case in your economy?
• High prices to act as a signal to new firms
• But list prices rarely indicate true transaction
  prices, so where does the signal come from?
• Or high profits act as a signal to new firms
• But private firms dont report profits and
  publicly traded firms dont report profits by
  product line. So where does the signal come from?

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Cant afford cartel enforcement?

• Suppose 1 less state contracts are subject to
  bid rigging and prices on those contracts fall 5

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Summary of effects of competition law in
developing economy

• Effects of dynamic economic performance
• Productivity growth
• Economic growth
• Effects of exercise of market power
• Effects on prices including those paid by poor
  and the government
• I will discuss the challenges faced by
  implementing competition law in developing
  countries in the case study session

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Developments at the international level

• Surge in international cartel enforcement after
  1993
• Implications for developing economies
• Is there a case for international action on
  cartels?
• Initiatives in
• UNCTAD
• OECD
• WTO
• ICN

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Cartels detected in the 1990s

• Prevalence 39 cartels
• Diverse membership 31 economies (including 8
  developing economies).
• Duration 24 cartels lasted at least 4 years.
• Overcharges on imports are not just the only
  adverse effect on developing economies.
• Exports are reduced too.
• Technology transfer slowed down also.

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The international vitamins cartel

• Worldwide cartel, 1989-1999
• US Federal authorities took action in 1999
• US fines exceeded 900 million EU fines of a
  similar magnitude
• What effects on developing countries?

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Vitamins cartel targeted nations without active
cartel enforcement
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Overcharges on vitamins imports 1990-1999

• Singapore 245.22m
• Hong Kong 178.48m
• Thailand 78.45m
• China 77.61m
• Indonesia 45.32m
• Philippines 29.94m
• India 25.71m
• Malaysia 22.41m

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Attacking cartels Lessons from the 1990s

• Cartels are conspiracies prosecution requires
  evidence of inter-firm agreements.
• Tough sanctions are important, and so are
  leniency or amnesty programmes.
• But what is the case for an international
  agreement?
• Cartel members meet and hide evidence abroad
  often in jurisdictions with no enforcement.
• Non-enforcement creates harms trading partners
• Enforcement actions against cartels reveals
  information that is of value to other trading
  partners.

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Initiatives at the international level UNCTAD
and OECD

• UNCTAD
• UNCTAD Set
• IGE
• Regional workshops
• OECD
• Recommendation on Hard Core Cartels (1998)
• Best practices and peer review
• Three Global Fora on Competition Policy
• Regional workshops
• UNCTAD Set and HCC Recommendation are non-binding
  agreements

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Initiatives at the international levelWTO

• Singapore issue competition
• Doha Development Declaration
• Discussions in the Working Group
• Cancun WTO Ministerial in September
• Proposals for a multilateral framework on
  competition policy, including
• Provisions on core principles
• Provisions on hard core cartels
• Provisions on voluntary cooperation
• Capacity building

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Initiatives at the international levelWTO
(continued)

• Important to appreciate what the proponents are
  arguing for and not arguing for
• Proposals are for a set of minimum standards for
  a small set of competition law-related matters
• They are not arguing that
• All WTO members must enact all types of
  competition law
• All WTO members must create a separate
  competition agency
• Only efficiency or a narrow set of objectives are
  allowed for competition law
• Industrial policies must end
• Exemptions, exclusions etc are to be banned

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Initiatives at the international levelWTO
(continued)

• Analysis of proposals for a multilateral
  framework on competition policy
• Provisions for hard core cartels well founded
• Provisions for core principles little case for
  discrimination in enforcement of competition law
  (national champions)
• Provisions on voluntary cooperation resource
  costs are likely to be very small for economies
  with new competition enforcement regimes
• Capacity building
• Resource cost-based arguments see section II of
  my WTO report