Competition audit of the economic policy making process

1. 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 lucian.cernat@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 • 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

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. Market access Trade FDI Export-oriented FDI/ supply capacity FDI attraction/deterrent Increased competition/concentration Import discipline/ International RBPs Export competitiveness Competition 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 agriculturewould 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 billionin 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, 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

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 Era—Towards a Regulatory Framework for Global e-Business, Journal of World Investment 4:6, 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