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Competition policy at the service of development

Patrick Kavanagh

Inefficiency and corruption collude to keep people poor. The solution: rules and regulations that force companies to compete fairly. IDRC hears from the experts.

For some people, the word “competition” brings to mind the realm of business or maybe sports. But competition is a crucial issue also for those who struggle to achieve economic justice and international development — and for the many who will benefit from these efforts.

This is because open competition is a form of “economic democracy” that frustrates price-fixing, bid-rigging, and other forms of corruption and inefficiency. Competition is essential for the well-being of resource-poor societies because, without it, scarce assets that ought to benefit everyone are diverted to predatory interests such as monopolies or cartels.

For example, in 2005, economist John M. Connor examined over 332 cartels of various types that had been active during the past two centuries. He found that their collusion resulted in a 25% median price overcharge. This figure translates into crippling cost increases for buyers in developing countries, including for governments that are victimized by bid-rigging.

Says economist Simon J. Evenett: “Cartels retard development and compromise the fight against poverty.” In a 2005 article, consumer advocate Phil Evans put a dollar figure on this damage. “International price cartels cost developing countries at least $10-24 billion per year. That's more than the Gross Domestic Product [GDP] of Tanzania in 2002.”

When corrupt business alliances collectively wield more economic clout than some sovereign states, what can be done? According to Maureen O’Neil, president of the International Development Research Centre (IDRC):

The answer lies in developing a policy framework on competition, in formulating rules that are impartial and rational, and creating the necessary institutions — whether domestic, regional, or international — to prevent foreign or domestic firms from engaging in anti-competitive behaviour.

IDRC has supported research to help developing countries strengthen their competition regimes by installing just this kind of policy and institutional framework. In June 2007, at the 13th Conférence de Montréal, O’Neil chaired a panel of international experts — Taimoon Stewart from Trinidad and Tobago, Phil Evans from the United Kingdom, Robert Rennhack from the United States, and Canada’s Sheridan Scott — in a discussion on “competition policy at the service of development.”

Here follow the key points of each panelist’s presentation.

Creating a competition culture

Taimoon Stewart is an advisor on trade and competition issues at the University of the West Indies, Trinidad and Tobago, and co-author of IDRC’s 2007 book, Competition Law in Action: Experiences from Developing Countries. She opened her presentation with a brisk definition:

Competitive markets are ones in which many firms operate. These firms have limited ability to increase prices above market price. Information is widely available to producers and consumers. There is easy entry and exit of firms. There are limited externalities. There is adequate infrastructure. Contracts can be enforced and intellectual property rights protected.

If there are competitive markets then there’s efficient use of resources. This leads to quality goods, best prices, and choices for consumers. Firms are forced to innovate, and consumer welfare is maximized.

Unfortunately, Stewart observed, such ideal circumstances are rare. Instead, markets are often controlled by large firms or by some form of collusion. Rather than innovate and pursue efficiencies, these firms find it easier to abuse their dominant position. The result is poor or overpriced products and services. The consumer loses, and development suffers.

One response for governments is to enforce legislation to prevent firms from engaging in anti-competitive strategies. Typically, competition law targets both the behaviour of firms, such as “abuse of dominance,” and the structure of the markets in which they do business, for example by regulating mergers.

Challenges for developing countries

According to Stewart, developing countries wishing to introduce competition law face particular hurdles: 

  • Competition law must make allowances for local conditions. She cited South Africa’s legislation on mergers that includes dispensations benefiting historically disadvantaged people, and the US Virgin Islands’ law that allows agreements among small retailers for bulk purchasing so that they can compete with bigger firms.

  • Developing nations often lack technical expertise in drafting and implementing such legislation. Needed are skilled and experienced lawyers and judges, investigators, and consumer advocates. Stewart feels that long-term training programs ought to address these shortages; meanwhile, provisions of the law can be introduced piecemeal, rather than the entire regime at once.

  • Many poorer countries lack a “competition culture” of interest groups that will support the competition regime. Because consumers and small businesses may not fully understand how the law can benefit them, they are hesitant to join the process. Stewart’s answer is advocacy and public education, which she sees as necessary companions to enforcement mechanisms.

  • “Regulatory capture” is a global problem that is particularly severe in developing regions. A regulatory agency can be “captured” by the vested interests it is meant to supervise. A common example is when a powerful entrepreneur or corporation pressures a public official to call off an investigation into anti-competitive practices.

  • Stewart also warned of the perils of “prosecutorial discretion” — of failing to choose the most effective cases to pursue. Regulatory bodies, she feels, should only take up cases “that are well understood by consumers and will have a positive impact on the majority of the population,” for example, issues surrounding the marketing of staple foods.

Competition policy and consumer welfare

Phil Evans is Head of Consumer Policy at FIPRA, the Finsbury International Policy and Regulatory Advisers, a leading European consultancy specializing in political and regulatory issues. He is a veteran activist on behalf of consumers, and has authored six books on topics from trade policy to shopping.

Evans opened by calling attention to the sheer scale of the task:

Competition policy really is about reforming the way economies work. It’s about changing — or challenging — the dominant order, particularly in developing countries where you tend to have more concentrated economies: smaller numbers of very large players, usually well-connected politically.

The reformer will likely make enemies among those who have done well under the old conditions, but will have only lukewarm defenders among those potential beneficiaries of some new and untested regime. “Whether you like it or not,” said Evans, “there are certain people who will simply hate what you’re doing, and no amount of discussion will change their minds.” He stressed the further challenge of persuading consumers to modify their behaviour when the potential gain to individuals may be relatively small. Nonetheless, competition policy does have natural allies: new firms entering the market, for example, and anti-corruption campaigners who appreciate the value of competition as a “sunshine tool” for throwing the sharp light of exposure on crooked practices.

Shared agendas

Evans noted that competition policy today is at the stage trade policy was a decade ago, when few outside the business community were interested in trade issues. Now, these issues have become a major public concern, and the trade community has developed a substantial infrastructure for addressing them. Despite the creation of new legislation, institutions, and mechanisms, however, the competition community cannot yet boast the same sophisticated infrastructure. Consequently, progress on competition policy is at risk of being rolled back by unsympathetic governments.

Evans called for aggressive outreach on the part of the competition community, and for identifying shared agendas with consumer advocates, whom consumers often trust more than they do governments:

We have to look at consumer policy and competition policy not as separate beasts. Long-term, I don’t think there’s a lot of difference between the debate around efficiency and innovation and consumer welfare because, after all, what is long-term consumer welfare if it is not innovative markets and efficiency enhancing growth?

Progress in Latin America

Robert Rennhack, Assistant Director of the Western Hemisphere Department at the International Monetary Fund, has written extensively about the economy and trade in Latin America.

In summarizing the region’s productivity and economic growth during the past three years, he noted that while Latin American countries have done well, they have grown less rapidly than other developing countries. The region can do still more to boost its living standards. Competition policy is one area that its governments are studying as a means to achieve economic stability, particularly more equitable income distribution. Rennhack observed that, in a region with a long history of political volatility, achieving economic justice brings extra benefits. “If you improve equity and reduce poverty, you get more social and political stability as well,” he said.

Awareness of competition issues is growing rapidly in Latin America. Mexico, for example, is a member of both the Organisation for Economic Co-operation and Development and the North American Free Trade Agreement, and is acutely conscious of the pressure of competing markets. Nonetheless, few countries in the region have developed formal competition policies. Often, instead, competition is enhanced in a “backhanded” way, when privatization measures break up a public monopoly into a number of companies.

The rules of the game

Rennhack offered three policy suggestions for improving competition:

First, reduce the informality of the economy. Latin America has huge informal sectors: in Brazil, for example, 40% of GDP is generated in this sector. Informality expands, Rennhack said, as a reaction to labour market rigidities, overregulation, and taxation. Reducing this sector will level the economic playing field by fostering transparency:

People will know what the rules are, and can see who’s playing by them and who isn’t. That’s the way you get fair competition. It becomes easier for firms to achieve their most efficient size. Nobody gets an unfair advantage by avoiding the rules of the game.

Rennhack called for labour market reforms such as limiting costly severance payments, trimming non-wage labour costs that encourage employers to hire workers “off the books,” easing restrictions on part-time or overtime labour, and building a stronger social safety net. A related measure is rationalizing Latin America’s highly distorted tax regimes, filled with exemptions and deductions that encourage firms to compete by seeking a tax break rather than by producing good products.

Second, promote more trade with the rest of the world. Rennhack suggested lowering regulatory obstacles to foreign investment and commerce, such as tariff barriers and licensing requirements. Furthermore, he said, “In Latin America, there isn’t an infrastructure for trade, customs administration is weak, there’s lots of corruption — and these just don’t help to promote openness.”

Third, strengthen the financial sector. Because of weak competition in Latin America’s oligopolistic banking sector, for example, it’s difficult and expensive to get a loan. The market is distorted by taxes on financial transactions and forced investment requirements. Large borrowers go to Miami for loans, leaving Latin American banks to serve only the high-risk borrowers. Consumer credit lacks transparency: for instance, stores are not obliged to tell customers the interest rate they are paying on installment purchases. Meanwhile creditor rights are weak and it can take years to settle claims.

International Competition Network

Sheridan Scott is Canada’s Commissioner of Competition, the head of the federal government’s Competition Bureau. In this role she administers and enforces the Competition Act, among other statutes. Scott is also chair of the International Competition Network (ICN).

Scott reminded the audience that, around the world, competition law is a relatively new phenomenon:

If you look back as recently as 10 years ago, you would find that antitrust agencies, as they are often called, frequently worked in a vacuum. They worked within their national boundaries. They were very focused on their local issues — but that is in the process of changing dramatically.

Three priorities

That change is reflected in the history and role of the ICN, an organization that was set up only in late 2001, but has grown to 100 member agencies representing 88 nations, including many developing countries. The ICN promotes greater substantive and procedural convergence among antitrust agencies, and supports the work of new agencies in developing countries. It concentrates on three priorities:

  • Policy consensus and convergence. ICN members work together to identify recommended principles and practices to inform competition policies and to mitigate what Scott called the “patchwork quilt of solutions.” These non-binding recommendations serve as models for governments and antitrust agencies that are trying to introduce or enforce legislation. This effort focuses on “the three pillars of antitrust” — mergers, cartels, and abuse of position.

  • “Competition outreach,” or capacity building. By way of workshops and mentoring partnerships, established antitrust agencies help younger agencies build their substantive and investigative capacity. “I certainly think our work in this area complements IDRC’s mission to support the development of local research capacity to sustain policies and technologies in transition economies,” Scott remarked.

  • Engagement. ICN reaches out to try to involve all stakeholders in its work. In particular, it is eager to attract non-governmental associations of expert lawyers, economists, and consumer groups, as well as younger antitrust agencies. In fact, 40% of the network’s chairs and co-chairs come from developing countries.
More to come

While the Montreal panel provided a crisp snapshot of some of the policy issues that currently surround competition and development, IDRC is committed to funding related research and other activities in the long term.

IDRC’s Globalization, Growth and Poverty program, for example, supports research, capacity-building, and networking in the area of competition policy and development. And soon, one of IDRC’s In_Focus series ­— comprising scientific articles, case studies, websites, short videos, and a book — will present a thorough treatment of competition and development issues.

Patrick Kavanagh is a senior writer with the Communications Division at IDRC.

 
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