Competition audit of the economic policy making

process

Dr. Lucian CernatUNCTAD

lucian.cernat@unctad.org

Advocacy and Capacity Building on Competition Policy and Law in Asia (7up2 Project)

16-17 August 2005, Hanoi, Vietnam

Contents

1. Competition audit: role and priorities

2. Key areas for competition audit- horizontal policies (trade, FDI,

etc.)

- sectoral policies

3. Way forward

Competition audit

Part of competition advocacy, together with public advocacy

not only private anti-competitive conduct like collusion and abuse of dominance, that can hinder competition but also regulatory intervention and rule making by public officials

Competition agencies (CAs) - active in promoting competitive, market-oriented policy-making and regulatory processes

Key areas for competition audit

General economic policies Trade policies (tariffs, AD, CVD, standards,

etc.) Promote pro-competitive FDI R&D policies (transfer of technology,

licensing, patents) Regulated sectors

promoting competition in sectors where privatization has left regulated monopolies with the incentive and ability to hinder competition in their base and related markets

Potential gains from competition audit of economic policy making

When accompanied by competition policy, trade and FDI openness may have a greater contribution to: technological spillovers and increased

productivity as a result of economies of scale increased production efficiency as a result of

further specialization in accordance with national comparative advantage

efficiency gains due to increased competition

Trade, FDI, and competition linkages

Trade FDI

Competition

Market access

Export-oriented FDI/ supply capacity

Import discipline/

International RBPs

Export

competitiveness

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1. Why competition audit of trade policies?

Both theoretically and empirically uncertain (e.g. under collusion, increased imports lead to higher price-cost margins

Although multilateral trade liberalization and regional integration may provide significant welfare gains, there is still need for complementary regulatory and competition policies to ensure that the predicted benefits are not impaired by private anti-competitive practices

Potential gains from trade liberalization

At regional level: Several South-South RTAs more than doubled trade among

members (Cernat 2001) At multilateral level:

Agriculture liberalization, elimination of tariff peaks and escalation affecting developing country exports, as well as other trade-distorting policies are important objectives in the DDA.

E.g. 50 per cent reduction of tariffs in agriculture would increase world welfare by about $20 billion ($ 13,4 billion for developing countries); in all sectors, will double the amount (Cernat, Laird, Turrini 2003).

But… In 1997, developing countries imported US$ 81 billion of goods from industries which had been affected by price fixing conspiracies during the 1990s (Levenstein and Suslow 2001), i.e. approx. $ 20-25 billion in excessive prices (Jenny 2003).

Example 1: Costa Rican 1996 case

Scaffolding manufacturers teamed up to request the Ministry of Commerce to raise import tariffs

in return, they offered undertakings not to raise their prices for certain time;

the MoC agreed The CA declared the agreement harmful to

competition and imposed fines upon the colluding firms

Example 2: US ferrosilicon cartel

In early 1990s the largest US based producers of ferrosilicon formed a cartel, set a collusive price and withdrew capacity from the market.

The drop in their sales was used to prove injury from dumping and AD duties were imposed in against existing foreign competitors.

Why competition audit of FDI policies?

As in the case of trade in goods and services, open and contestable markets for FDI do not destroy all market power of incumbents

a wide range of RBPs - both horizontal and vertical - could affect potential entrants' investment decisions and impede FDI flows

Moreover, MNC’s strong competitive position can lead to anti-competitive structures and behaviour and thus to the establishment of new entry barriers, especially when FDI is accompanied by M&As

Trade, FDI and competition: the case of services

Services represent the fastest growing sector of the global economy and account for 60% of global output, 30% of global employment and nearly 20% of global trade.

more than half of world trade in commercial services is made up of travel and transportation services

The close relationships between services trade, investment and competition policy have long been recognized, given the underlying role played by the services sector in supplying other economic activities

Example 1: the telecom sector

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Restrictions on direct investment in fixed network services

Restrictions on direct investment in cellular mobile phone services

World benchmarks

SACU region Other Africa

Source: Warren, T. 2000, 'The identification of impediments to trade and investment in telecommunications services', in Findlay, C. and Warren, T. (eds.) 2000, Impediments to Trade in Services: Measurement and Policy Implications, Routledge, London and New York.

Notes: The restrictiveness indexes are calculated from Warren 2000. The domestic and foreign restrictiveness index scores range from 0 to 1. The higher the score, the greater are the restrictions for an economy.

-FDI barriers to entry in foreign markets reduce competition. -This is especially important in the case of services and other non-tradeables.

Example 2: the New Economy

Improving the competitive environment by 50% (based on World Bank ranking) may increase Internet intensity by approximately 30% and mobile phone subscriptions by 63%.

Without competition policy, the same progress would require about nineteen years of economic growth at average rate for low-income countries (2.8%)

Example 2: the New Economy

Global e-commerce impact on volume of world exports, by sector

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scenario 1

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Source: Cernat, L. (2003) Trade and Competition Policy in the Digital Era—Towards a Regulatory Framework for Global e-Business, Journal of World Investment 4:6, pp.988-1010.

Competition agency vs. sectoral regulators: Is there an optimal solution?

One size does not fit all, but some rules of thumb Any specific sectoral exemptions from the

competition law for any of the regulated sectors? If yes, sectoral regulators should have a leading role If not, CAs in charge of anti-competitive practices, in

cooperation with the sector-specific regulators In both cases:

neet to have “comity principles” between sectoral regulators and CAs

Allow for competition audit during judicial review, including for regulated sectors

Most importantly: binding recommendations

Binding recommendations

Source: Based on ICN (2004)

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Conclusions

OBJECTIVESCompetition policy should become an integral part of the broader macroeconomic policy apparatus Thus “pro-competitive thinking” can better inform the many other policy areas that can promote economic growth and competitiveness

SOME REQUIREMENTS Credibility Formal but also informal cooperation mechanisms with other agencies

Credibility

Advocacy is probably more effective when it is one part of a larger strategy that includes enforcement.

But many CAs have been unable to establish a credible record of penalties that would function as an effective deterrent.

E.g. the Mexican experience: during its first 10 years, only 10% of the fines imposed by the CA have been collected

However, even enforcement failures may support competition audit. E.g. if an action brought against clearly anti-competitive behaviour must be dismissed because of a regulatory exclusion, the failure can support a call to eliminate the exclusion

Informal cooperation rather than formal adversity

Competition principles could be integrated into other regulatory policies more effectively if formal competition audit is supplemented by informal processes:

staff-level consultations shared values and ideas among political-level appointees

Exchanges of staff

Establishing adequate competition audit mechanisms that: are responsive to market complexities are cognizant of proper pacing and

sequencing of reform adopt participatory, multi-stakeholder

approaches in the formulation of policies Strengthen enforcement actions

What kind of competition audit?