Competition Policy and Economic Development

1. Komisi Pengawas Persaingan Usaha Competition Policy and Economic Development Dr. Ir. Benny Pasaribu, M.Ec Commissioner, KPPU, INDONESIA

2. Outline of presentation • The presentation tries to show a preliminary study focusing on the impact of fair competition on economic development. The study is conducted by the University of Gadjahmada, Jogyakarta, in 2010, in cooperation with KPPU-RI. This presentation shows that the improvement in fair business competition will have a positive impact on the performance of the relevant industries, hence the economic development, ceteris paribus. However this study needs to be followed by a more comprehensive research with the improvement on the economic modeling and collection of primary and secondary data and information. • The presentation consists of: • Current development of competition law in Indonesia; • The impact of fair competition on economic development; • Conclusion.

3. RECENT DEVELOPMENT COMPETITION LAW IN INDONESIA

4. Objectives of the Law (article 3) • To safeguard the interests of the public and to improve national economic efficiency as one of the efforts to improve people’s welfare; • To create conducive business environment through the stipulation of fair competition in order to ensure the certainty of equal business opportunities for large-, medium-as well as small-scale businesses; • To prevent monopolistic practices and or unfair business competition that may be committed by business actors; • To create effectiveness and efficiency in business activites.

5. THE LAW prohibits: • Agreements; • Business activities; and • Dominant Position, that may potentially cause the occurrence of monopolistic practices and unfair business competition; • These may include prohibitions of cartel, price discrimination, abuse of dominant position, and merger and acquisition, that may potentially cause the occurrence of monopolistic practices and unfair business competition.

6. Principles of The Law no.5/1999 • Business activities in Indonesia must be based on economic democracy, with due observance of the equilibrium between the interests of business actors and the interests of the public; • Guarantee fair price of goods and services with adequate quality and supply, and qualified services. • Promoting innovation, efficiency, and productivity.

7. KPPU-RI • KPPU is an Independent Commission established according to Law no. 5/1999; • KPPU as the Competition Authority supervises the implementation of the Law; • KPPU has a number of authorities, including to impose sanctions, though administrative sanctions, against business actors violating the law.

8. CURRENT DEVELOPMENT

9. Development of Indonesian competition law • There is positive trends of increased number of reports from public; • The implication will be: an increase of public awareness. A. Reports Received Reports Fair Competition for Welfare of the Society

10. Development of Indonesian competition law (2) • Number of case initiative is increased compare to average number on the first five years. • The increased case initiative is one of KPPU’s efforts to conduct enforcement activity on anti competitive behaviors that harms consumers. B. Initiative Cases Cases Fair Competition for Welfare of the Society

11. Development of Indonesian competition law (3) • Between 2000-2010, KPPU issued 245 outputs; • 51 statements on behavioral changes and the in-existence of unfair business competition; • KPPU issued 190 decisions on competition violation; • Some of which are abuse of dominant position by Carefour, SMS cartel, cooking oil cartel, fuel surcharge, and cartel in pharmaceutical; • KPPU also issued three policy recommendations, related to specific cases. Statement Decision Recommendation Process Fair Competition for Welfare of the Society

12. Development of Indonesian competition law (4) • There are 78 objected decisions; • In district court level, 34 decision is affirmed (43.6%), while 29 decision (37%) is annulled by the court. Affirmed Annulled Process Fair Competition for Welfare of the Society

13. Development of Indonesian competition law (5) • There are 59 decision applied for cassation to the Supreme Court; • 31 decisions is affirmed (53%), while 12 decision (20%) is annulled. Currently there are 16 decisions under cassation process. Affirmed Annulled Process Fair Competition for Welfare of the Society

14. Development of Indonesian competition law (6) • As part of advocacy, KPPU issued policy advice to the government with increasing trend, especially since 2006; • Some advices dealt with policy in several sectors, namely energy and natural resources, transportation, telecommunication, retail, cooking oil, fuel surcharge, and agro-industry. • More than 50% of advices gained positive response by the government through policy adaptation. F. Policy Recommendations Recommen dations Fair Competition for Welfare of the Society

15. THE IMPACT OF COMPETITION ON ECONOMIC DEVELOPMENT

16. Conceptual Background (1) Price Note: D = Demand S = Supply Pc = Price Competitive Pm = Price Monopoly Qc = Quantity Competitive Qm = Quantity Monopoly DWL = Deadweight Loss DWL Pm S Pc D Qm Qc Quantity MR Fair Competition for Welfare of the Society

17. Conceptual background (2) • A study by MarcinPrzybla and Moreno Roma in 2005 found negative correlation between competition and inflation. Similar finding also identified by Jonsson in 2007; • A study by Griffith, Harrison and Mc Cartney in 2006 found negative correlation between competition and unemployment in an optimal labor market institution. • A study by Dutz and Hayry in 1990 indicated correlation between law enforcement and competition policy with long-term economic growth.

18. Conceptual background (3) Lower inflation Poverty reduction Increased competitiveness INCREASED WELFARE OF THE SOCIETY Normal Price Fair competition Increased Quantity and Quality of goods and services Reduce unemployment Economic growth Better services

19. Conceptual background (4) Concentration; Company size,; Entry and exit condition,; Product differentiation,; Vertical integration; • The basic concept of the research is to follow classic SCP (Bain, 1957), where market structure will affect behavior and thus will affect performance in a simultaneous way. • Last theoretical development showed interactive SCP pattern where variable SCP will affect one another. • In a fair competition condition, market structure will not be concentrated, which affect to the innovative and competitive behavior leading to more efficient performance. This will create positive multiplier effect on other economic parameter, such economic growth, employment, and inflation. Structure Pricing strategy Production strategy Marketing strategy, R&D Behavior Profitability; Efficiency; Product quality; Technical improvement; Welfare; Employment; Performance Fair Competition for Welfare of the Society

20. Model • Joint research by KPPU and the University of GadjahMada (2010), several approaches and quantitative analysis is used to estimate competition impact on economic growth, inflation, and unemployment. This research used data from KPPU decisions and researches from 2000-2009 and from Statistical Bureau. • Variables used: • GDP (PDRB), GDP per Capita (PDR/PDD), GDP deflator, unemployment (UNP), and competition index (CI)

21. Independent variable: Competition Index (CI) • Competition index of an industry can show balanced condition of resources allocation and SCP’s interaction in national and local areas. • CI is not merely reflecting the structure, but also behavior and performance of an industry (Interactive SCP) • Competition index of an Industri (“i”) in a region/city (CIirt) is calculated using this equation (Glaeser et al., 1992: 1138; Mody & Wang, 1997: 301-2; Kuncoro, 2001: chapter 5): S P

22. Industries observed: • Milk industry • Cooking palm oil industry • Flour industry • Sugar industry • Single artificial fertilizer industry • Mixed artificial fertilizer industry • Pharmaceutical industry • Tire rubber industry • Cement industry • Automotive industry

23. Data • This study used secondary data as follows: • Large and medium industry statistic from Indonesian Bureau of Statistics. The survey provided data on manufacture’s level of large and medium scale manufacturer with more than 20 labor forces, which can be classified according to their industry and local codes, that consist of 20,000 companies, 27-33 provinces, and 300-400 regions from 1998 to 2007. • Economic Census 2006, especially for large and medium industry. • National Social and Economic Survey 1998-2007, especially for welfare’s indicators. • Macro-economic performance indicators, especially inflation (consumer price index and large trading price index), economic growth, and job opportunity.

24. THE RESULTS OF THE STUDY

25. Table 1. Competition Impact on GDP Growth Positive elasticity indicates increase number of company (or competition) will increase output of other industries, vice versa.

26. Table 2. Competition Impact on GDP per Capita Positive elasticity shows increased competition that causing the increase of GDP per Capita, vice versa.

27. Table 3. Competition Impact on unemployment Positive elasticity shows increased competition that will raise unemployment, vice versa.

28. Table 4. Competition Impact on Prices Positive elasticity indicates increased competition that lead to inflation or increasing cost industry, vice versa.

29. Summary of estimation result • Table 1: for most of Java, increasing competition in cooking oil, single fertilizer, and outer-inner tire as well as automotive industries, created positive effect on GDP growth. For out of Java Provinces, increasing competition created negative effects, especially in cement, tire rubber, and single fertilizer industries. • Table 2: for most of Java and Sumatera, increasing competition created positive effect on GDP per Capita, especially in cooking oil, sugar, single fertilizer, and automotive industries. For others, increasing competition created negative effect, especially in cooking oil, mixed fertilizer, pharmacy, tire rubber, and cement industries . • Table 3: in most regions, increasing competition can reduce unemployment, especially in mixed fertilizer, pharmacy, cooking oil, and flour industries. For automotive in Java, increasing competition will lead to increase number of unemployment. • Table 4: for inflation sensitive products (cooking oil, sugar, flour, milk, and cement), increasing competition will reduce inflation. For mixed fertilizer and automotive industries in most of regions studied, increasing competition tends to lead to inflation or price increase.

30. KPPU Research: simulation of income savings due to price cuts • Income savings made by consumers from 4 products due to price reductions after KPPU’s decisions:

31. Income saving for consumerfrom SMS • Using similar methodology, KPPU’s research shows that after the decision on SMS cartel, consumer’s income saving is estimated to increase by +/- IDR20 trillion/year.

32. CONCLUSIONS

33. Conclusions • Fair Competition is part of the implementation of Indonesian Constitution, hence a vital and strategic instrument in Indonesian economy; • The study shows more intense and healthy competition, will lead to positive impact on industry performance, inflation, unemployment, and economic growth; • Income savings from SMS, cooking oil, sugar, and so forth, are part of the people’s welfare improvement. Income savings are made possible when there is a price reductions of monopolistic practices by business actors after the KPPU’s decisions. The decisions of KPPU can be made according to the verdicts of the KPPU’s court and/or prevention and/or recommendation to relevant institutions; • As preliminary study, the findings may be valuable. However, I must aknowledge that the study may contain several weaknesses, especially on the limitation of the economic models and available data/information. More empirical and comprehensive research is necessary. Applying Computable General Equilibrium (CGE) model will provide highly useful findings, hence very much recommended.

34. References • Dutz, M. A and Hayri, A. 1990. Does more intense competition lead to higher growth? World Bank Research Project. • Griffith, R., Harrison, R and Cartney, G.M. 2006. Product Market Reform, Labor Market Institutions And Unemployment. Working paper: The Institute for Fiscal Studies. • Jonson, M. 2007. Increased Competition And Inflation. Economics Review, 2nd Edition. • Kuncoro, dkk. 2010. KajianPerananPersaingan Usaha DalamperspektifKesejahteraanKonsumen, Inflasi Dan PertumbuhanEkonomi. KPPU danPusatStudi Asia Pasifik UGM. • Lipczynski, J. and Wilson, J. 2001. Industrial Organization: An Analysis of Competitive Markets. Prentice Hall: Singapore. • Pasaribu, Benny P. 1995. “Industrial and Trade Policies: A MultySectoral Model with Increasing Returns to Scale and Imperfect Competition”. PHD Thesis, University of Ottawa. • Pryzibla, M. and Roma, M. 2005. Does Product Market Competition Reduce Inflation? Evidence From EU Countries And Sectors. Working paper: European Central bank Ed 453.