Transcript Cover page - CUTS International

Advocacy and Capacity Building on Competition Policy and Law in Asia
(7up2 Project)
16-17 August 2005, Hanoi, Vietnam
Competition audit of the
economic policy making process
Dr. Lucian Cernat
UNCTAD
[email protected]
Contents
1. Competition audit: role and priorities
2. Key areas for competition audit
- horizontal policies (trade, FDI,
- sectoral policies
3. Way forward
etc.)
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
Market access
Trade
FDI
Export-oriented FDI/
supply capacity
Competition
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 tradedistorting 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

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
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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?

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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
Restrictions on direct investment in fixed network services
Restrictions on direct investment in cellular mobile phone services
30%
SACU region
Other Africa
price increase
25%
20%
World
benchmarks
15%
10%
-FDI barriers to entry in
foreign markets reduce
competition.
-This is especially important
in the case of services and
other non-tradeables.
5%
Zimbabwe
Zambia
Nigeria
Mauritius
Angola
South
Africa
Namibia
Botswana
0%
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.
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 lowincome countries (2.8%)
Example 2: the New Economy
Global e-commerce impact on volume of world
exports, by sector
15
scenario 1
10
scenario 2
communicatio
otherserv
finance
constrtrans
utilities
agrifoodmin
Mnfcs
0
retailwhols
5
tourism
percentage
20
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?
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In both cases:
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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
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
per cent
Binding recommendations
50
45
40
35
30
25
20
15
10
5
0
Electricity
Gas
Telecoms
Source: Based on ICN (2004)
Railways
Air
Services
Maritime
transport
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
Credibility

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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 politicallevel appointees
 Exchanges of staff

What kind of competition audit?

Establishing adequate competition audit
mechanisms that:
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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