WTO competition policy ignores political economy

by Chakravarthi Raghavan

GENEVA: Competition issues in terms of international trade and liberalization, which now spill over national boundaries, can no longer be addressed through voluntary bilateral or regional cooperation, and may need to be addressed through international cooperation.

And such international cooperation perhaps, needs to be achieved through WTO negotiations and agreements and rules, as a follow-up to the study on Trade and Competition issues mandated by the Singapore Ministerial meeting and which is now under way.

This perhaps, is the substance of the proposition of WTO economists, on "Trade and Competition Policy" which speaks of competition policy's "welfare enhancing effects", and purports to address "economic" theory and "legal" viewpoints.

But the view of the economists, in a chapter of the WTO's 1997 Annual Report, divorces "economics" from "political economy", though possible only in text-books, but difficult for any government policy-making or justifiable in an international organization of governments that the WTO is.

While the study of competition issues in the report, to the extent that it has chosen some issues, may be of high technical quality, what it does not include is as important as what it does.

Like the report of last year on Trade and Investment, this WTO report too, is one-sided, aimed at advancing the agenda and interests of the US and the EC (and their TNCs) at the WTO, and both, in omission and commission, weighs heavily against the developing world.

Efforts to justify these and other such studies, on the basis of the independence and "objectivity" of the economists and secretariat, wear thin.

The primary responsibility though lies with the trade diplomats and negotiators for their failure to openly question in the WTO fora (and ensure their views are relayed to the press by the WTO press office), the WTO head, who this year, as last, has been criss-crossing the world, and delivering speeches to promote issues of concern to the US and EC (information technology, basic telecoms and financial services), but very obliquely, if at all, to trade concerns of the developing world.

Unfortunately, few of the Third World diplomats are equipped to deal with some of the substantive questions in such WTO studies and reports, and they often remain silent (and get good conduct certificates from the majors) when one or two among them raise such questions.

Even the bibliography in the report shows that, except for an odd citation or two, including some of the UNCTAD Restrictive Business Practices (RBP) reports, the WTO has drawn on competition issues based on OECD country-experiences, and that too, from the viewpoint of the orthodox school of economics, and not of others.

And despite the efforts of the WTO economists to portray themselves as dealing mainly or only with "economic" issues, and not political or social dimensions, the choice of issues addressed and omitted, or dealt with very lightly, is a political choice - of the Secretariat and its economists.

In the process of the issues addressed and omitted, the Secretariat attempts to subtly set the agenda for WTO negotiations, for framing Trade and Competition rules.

Economics of competition policy

The economic analysis, as two senior WTO officials, Adrian Otten and Patrick Low, conceded at a briefing, deals with the competition issue in the neo-liberal "economic theory", divorced from politics and political issues such as distributional effects of competition as between consumers and producers. This is more glaring in international trade where liberalization results in domestic markets of developing countries being taken over or dominated by a few transnational corporations from the advanced industrialized world, whose profits rise and are accumulated as capital in home countries or benefit their home country shareholders.

Otten is the Director of the WTO division dealing with investment, intellectual property issues and competition, while Low heads the WTO's Research and Analysis division.

In explaining the economics of competition policy, the WTO economists, say that the purpose of competition is to maximize "welfare", defined as the sum of consumer and producer surplus through efficiency.

But the distribution of that surplus, as between consumers and producers, is not taken into account per se.

Explaining away this approach of economists (it is misleading though, to tar the entire economic profession with such a view that is confined to the late 20th century versions of neo-liberal economists ensconced in US and Europe, IMF, World Bank and WTO), the report says that this is because it is difficult to decide "in an economic sense" what the distributional outcome should be.

Using "competition policy" to achieve desirable distribution of income and surplus (as between producers and consumers) would be an indirect and costly way, and this effect is best achieved through taxation and other government policies, it says.

"Intuitively," (a term that by definition excludes logic and proof) the WTO economists say, "the purpose of competition policy is to maximise the size of the "cake". How the cake is divided among different groups within society however, is a different matter to be addressed by other policies such as redistributive taxes, spending programs..."

Distributional issues

But the economists had no answer as to how the distributional effects can be achieved in terms of the WTO demand for international trade liberalization of goods and services and investments to enable foreign competition.

Otten said that the report had brought up these distributional issues "up-front", but that no answers had been attempted. Low suggested that there was an element of confusion involved (presumably, in the question) in dealing with the issue of trade liberalization and distributional effects of competition policy to promote this.

Neither Otten nor Low explained how and why governments, and the public at large, should deal with these separately.

In terms of the WTO push for trade liberalization, the emphasis is on throwing open markets to enable foreign suppliers of goods and services, whether by exporting the goods and services or by investment and local production, compete with domestic producers.

Whatever the merits of the concept of distributional effects as between producers and consumers being achieved by other means in the context of a national policy and market or in terms of the US and Europe (more or less in equal economic positions, intra-industry trade and TNCs), it falls apart in terms of the "global" market and international trade of developing countries.

When TNCs, under WTO rules and IMF conditionalities - in Africa, Asia or Latin America, and now the transition economies - move into the developing countries, and compete with each other in those markets, but wiping out domestic producers and competitors, and the domestic capital and labour employed, can any taxation or "asset-ownership" (shares in the companies) policy for consumers be fashioned by the host developing country for the consumers and people of the host country to benefit?

For example, as is now the case, IMF conditionality packages in South-East Asia and Korea, require foreign banks, insurance companies and investment groups, to be able to take over domestic firms, with 100% equity ownership.

And "openness" to foreign investment in developing countries, such as in India, has resulted in two US TNCs, Coca-Cola and PepsiCo to move in and either take over local firms or drive them out of business, and diversify from beverages to other areas (including agri-products, seeds and so on).

Financial services accord

In the WTO financial services negotiations which concluded on 13 December, foreign insurers like the US firm, American International Group (AIG) or Aetna demanded "full" equity ownership for their subsidiaries in South-East Asia and Malaysia was pilloried and pressured to allow this, and not compel foreigners to give part of their equity (up to 49%) to local people and firms so that they could, as shareholders, benefit from the competition.

When asked about such cases, and what solutions they would advocate, the WTO economists had no answers.

The report says that it has focused mainly on competition (or anti-trust) law about enterprise behaviour affecting competition, but not governmental restraints upon competition, because a broad definition of competition policy includes all policies relevant to competition in the market, that GATT/WTO have spent 50 years disciplining governments, and the time has come to take complementary actions against the private practices of corporations.

But other experts suggest that this is a fallacious argument.

For even a very broad definition of competition policy would not include other governmental policies. Competition policy rather, tries to influence other governmental policies in a pro-competitive way, as also direct itself to deal with Restrictive Business Practices.

And while national competition policy is promoted on the grounds of consumer welfare and efficiency, it is clear that there is a need to use competition policy at the international level to promote pro-consumer welfare and economic efficiency policies - by promoting, for example, liberalization in textiles and agriculture, and in curbing the propensity of governments to use anti-dumping and countervailing duty investigations and measures to protect particular domestic firms.

Competition policy restraints

There is a cursory reference in the report to the impact of trade policy interventions on the behaviour of firms, as well as to several WTO agreements relating to governmental actions and agrees that "it is not always possible to make a useful distinction between government and private restraints."

It acknowledges that even where competition authorities in some developed countries (like US and Canada) have the authority to advocate competition policy restraints on trade policies or measures, there is no indication of its success - though reference is made to a 1986 OECD Council recommendation that in considering trade policy measures, government should consider the impact on markets.

How far have OECD governments paid heed to this? Is it a case of the OECD making recommendations but not monitoring its implementation? And if so, why does not the WTO say so, and provide its own?

The report does deal with some anomalies in anti-dumping proceedings, and of the anti-dumping agreement provisions for use of competition policy to restrain anti-dumping - but does not follow it through in the sections dealing with the WTO agreements.

Even in the concluding remarks, the WTO Secretariat has fought shy of references to the issue of anti-dumping or drawing operational conclusions.

The authors perhaps, decided on mentioning anti-dumping - so that it does not attract criticisms from developing countries, Japan, Hong Kong-China, Korea and others who raised it at Singapore - but not to go beyond and reach conclusions lest the real bosses of the WTO, the US and EC, are offended or upset.

There are references to the need "to take into account the special situation of developing countries", particularly those who do not as yet have functioning competition laws and the particular situations of their economic circumstances. But it has not addressed the question of "injecting" the development dimension into this whole exercise.

The WTO economists dismiss the "infant industry" arguments for protecting developing country markets - and equates it to the concept of industrial policies to promote "national champions" to knock down the latter.

But elsewhere, the report agrees with the view that "the implication of the theory of second-best is that a belief in 'maximal' competition as an unreserved goal for competition policy is never warranted in practice". It also agrees that "temporary imperfections" in the market and competition "are sometimes necessary in order... to give entrepreneurs incentives to invest in product development".

Perhaps this last is intended to meet the criticisms of economists that the WTO and its TRIPs accord are not "liberalization" but "restriction" of competition, and do not advance global welfare.

"Infant industry" arguments

The report also says, "economic theory does not provide a single, uniform depiction of the working of imperfectly competitive industries and, in particular does not give a simple, unambiguous prescription for the design of competition policy."

It is no doubt true that many developing, and even some developed countries, in using and misusing the "infant industry" arguments and picking national champions have picked the wrong ones, or have kept "infant industry" protection for far too long.

But there are equal number of cases perhaps, where this has been successfully used to give national firms breathing space to build national technological capacity and commercial success in world markets dominated by transnational corporations of the US, EU and Japan.

UNCTAD's Trade and Development Reports, over the years, has highlighted the adoption of a nuanced approach by developing countries to manage competition to advance development.

Even the Michael Porter study on "The Competitiveness of Nations" (cited in the WTO report) has accepted the justification of the "infant industry" argument to promote development.

It is now regarded as (over the last few weeks) economic wisdom (in the North, and its leading media) to bash the countries of East and South-East Asia for their "economic models" as responsible for their current travails.

But not too long ago, even in 1996 and early 1997, institutions like the World Bank, were praising the success of the East and South-East Asian economies, and holding them out as examples for others to follow.

And developed countries, the US and Europe even more, are even now pursuing competition-distorting policies to advance the interests of their aircraft industry and strengthen the Intellectual Property Rights protection to help their TNCs.

The report argues that private restraints in the market are possible only with explicit consent of governments.

But developing countries don't have the resources to detect or intervene against private restraint by firms operating on their territory. How then, can they be held responsible for such restraints at the international level?

The concluding remarks about competition law and how to deal with trade problems, and about enforcement and substantive standards, appear to be unveiling an agenda for WTO negotiations, and rules to flow from them, that would limit the discretion that developing countries now enjoy on whether or not to adopt competition law and policy, what such a law should or could exempt, the criteria to be adopted and how they can structure their institutions and procedures - so as to maximize their development.

The industrialized countries took over a century to develop their laws and procedures. Instead of developing countries getting some leeway and freedom, in space and time, they are to get a "one-size-fit-all" jacket.

The most dangerous, perhaps, of the suggestions is the emphasis on national treatment and private enforcement or right of redress by foreign persons to secure market access or presence for TNCs, as well as use of the market access criteria as a substantive standard. (Third World Economics, 16-31 January 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) ffom which the above article first appeared.