Competition audit of the economic policy making process

1
Competition audit of the economic policy making
process
Advocacy and Capacity Building on Competition
Policy and Law in Asia (7up2 Project) 16-17
August 2005, Hanoi, Vietnam

• Dr. Lucian Cernat
• UNCTAD
• lucian.cernat_at_unctad.org

2
Contents

• 1. Competition audit role and priorities
• 2. Key areas for competition audit
• - horizontal policies (trade, FDI, etc.)
• - sectoral policies
• 3. Way forward

3
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

4
Key areas for competition audit

• General economic policies
• Trade policies (tariffs, AD, CVD, standards,
  etc.)
• Promote pro-competitive FDI
• RD 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

5
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

6
Trade, FDI, and competition linkages
7
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

8
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).

9
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

10
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.

11
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, MNCs 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
  MAs

12
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

13
Example 1 the telecom sector

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

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.
14
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)

15
Example 2 the New Economy
Source Cernat, L. (2003) Trade and Competition
Policy in the Digital EraTowards a Regulatory
Framework for Global e-Business, Journal of World
Investment 46, pp.988-1010.
16
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

17
Binding recommendations
Source Based on ICN (2004)
18
Conclusions

• OBJECTIVES
• Competition 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

19
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

20
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

21
What kind of competition audit?

• 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