Competition policies should be outside WTO
A noted economist has stated that the optimal competition policy for developing countries will differ according to their respective levels of development and governance capacities, and that maximum competition does not necessarily maximize economic efficiency. Cambridge academic Prof Ajit Singh has also suggested the establishment of an international competition authority - outside the WTO framework - to scrutinize cross-border mega-mergers from a developmental standpoint.
by Chakravarthi Raghavan
GENEVA: Contrary to conventional wisdom, many different kinds of evidence suggest that the intensity of competition in emerging markets is certainly no less, if not greater, than that in advanced countries, and developing countries need to formulate national competition policies to foster competition along with state-directed cooperation for promoting development, an eminent economist and expert on competition, corporate governance and development said here on 18 September.
Speaking at an UNCTAD Development Seminar on “Competition and Competition Policy in Emerging Markets: International and Development Dimensions,” Ajit Singh, Professor of Economics at Cambridge and author of several books and studies on a range of competition and development policy issues, said that the “current discourse on the development dimension of competition policy at the WTO is unsatisfactory and that its terms and language need to be radically changed.”
“The ultimate aim of the WTO should not be to promote free trade for its own sake, but to achieve economic development,” and any multilateral cooperation and competition rules or policies need to be looked at purely from the perspective of economic development, Singh said.
Developing countries, he said, should not follow the current competition policies or theories of the United States and the European Union, but rather the policies adopted by Japan during 1950-73.
The Cambridge academic also challenged as contrary to evidence the views promoted about Japan as an anti-competitive market, and said that while there was less competition at the retail level, in other sectors there was considerable competition.
[A revised version of a background paper by Singh, prepared for the Group of 24, can be found on the G24 website: http://ksghome.harvard.edu/~drodrik.academic.ksg/G24Singh.pdf. The G24 is the developing-country grouping at the IMF and World Bank fora.]
Competition theories contested
In effect Singh challenged the theories and doctrines about competition policy promoting consumer benefits and welfare - a theory advanced by the protagonists at the WTO working group on competition policy who are pushing for the opening up of the domestic economic space of developing countries to the goods and services exported by their transnational corporations, while keeping their own domestic markets protected through a variety of anti-competitive instruments ranging from safeguards to anti-dumping actions.
Developing-country trade negotiators (very few of whom, unfortunately, were present at the seminar) have been fed these last 4-5 years (and more so after the Doha Ministerial Conference of the WTO) with studies and theories on competition by the US and EU, the WTO secretariat and the investment division at the UN Conference on Trade and Development (UNCTAD).
Under these views on competition, it is as if the world is one seamless global economy; developing-country markets, structurally and otherwise, are seen as rigid, monopolistic and lacking competition; and allowing a free hand to foreign investors and corporations, along with WTO multilateral rules and competition policy framed on the basis of globalization and global markets and contestability of markets, would ensure consumer benefits and efficiency of markets.
In notes for the presentation, Singh cited a paper by J. Laffont at the Annual World Bank Conference on Development Economics (1998), which said: “Competition is an unambiguously good thing in the first-best world of economists. That world assumes large numbers of participants in all markets, no public goods, no externalities, no information asymmetries, no national monopolies, complete markets, fully rational economic agents, a benevolent court system to enforce contracts, and a benevolent government providing lump sum transfers to achieve any desirable redistribution. Because developing countries are so far from this ideal world, it is not always the case that competition should be encouraged in these countries.”
Viewing competition policy in emerging markets from a developmental and international perspective, Singh said that contrary to conventional wisdom, while the evidence was conflicting in terms of static measures of concentration, many different studies and indicators of the dynamics of the competition process and different kinds of evidence suggest that the intensity of competition in leading emerging markets is certainly no less, if not greater, than that seen in the advanced countries.
Among the indicators cited were the market shares of three or four leading firms in leading emerging markets, Japan, the EU and the US, and the persistence of profitability over a period of years (in emerging markets and in the industrialized world), and Singh said these did not provide any evidence about emerging markets not having competition.
Even if they were not required in the past, however, developing countries do need national competition policies, Singh said, but the current competition policies in the US and the EU are unsuitable for developing countries.
Countries at different levels of development and governance capacities require different types of competition policies, the academic added.
Analysis and evidence show that maximum competition is not necessarily optimal in terms of dynamic efficiency, that is, maximization of an economy’s long-term productivity growth.
On the issue of mergers and acquisitions, and more so trans-border activity (encouraged by some as a way of attracting foreign direct investment), Singh said: “There is little evidence to indicate that the current international merger wave will enhance global economic efficiency.”
A table presented by Singh in his G24 paper, summarizing the results of a wide range of studies on mergers, brought out that in terms of returns on shares, it was just about equal to long-run losses; profits, sales were down after the mergers, and in most cases market shares were also down. Investments and research and development (R&D) remained about the same; labour costs were down, and there was asset restructuring and management turnovers.
“Giant cross-border mergers, as well as those occurring between large firms within advanced countries, could, however, adversely affect competition and contestability in developing countries and the world economy.
“Even with competition policies, developing countries may not be able to restrain anti-competitive behaviour by large multinationals,” he said.
In the G24 paper, Singh brought out that there would appear to be no obvious relationship between competition policy and competition, since main developing countries have been able to maintain considerable competition in product markets despite the absence of a formal competition policy. While maintaining selective import controls, the Asian newly industrialized countries’ (NICs) export-oriented policies exposed firms to competition in foreign markets. And the governments organized contest-based competitions for state subsidies that were conditional on achievement of certain performance standards.
The relationship between competition and economic development was quite controversial, both in economic theory and in relation to empirical evidence. While economic orthodoxy posits a monotonic positive relationship, modern economic analyses qualify that conclusion, with new developments in the theory of industrial organization indicating that the proposition about excess of competition is valid and that maximum competition is not necessarily the optimal degree of competition, either for promoting economic welfare in the static sense or in dynamic terms for maximizing long-term productivity growth in the economy.
In the real world, the case for competition spurring economic efficiency is very weak. A suitable combination of cooperation and competition is more likely to enhance societal welfare than competition alone - a conclusion supported by the experience of East Asia, China and also industrial countries. In relation to innovation, inter-firm coordination among horizontal competitors can bring substantial benefits.
A competition policy suitable for developing countries must be able to restrain anti-competitive behaviour by domestic privatized large firms, limit abuse of monopoly power by mega-corporations created by the international merger movements and promote development.
However, competition policy cannot be a unique, one-size-fits-all policy appropriate for all developing countries, Singh says in his G24 paper. The optimal policy will differ between countries depending on their stages of development and the effectiveness of their governments as well as the supporting institutional framework.
Competition policy in the WTO?
In terms of discussions within the WTO on competition policy and the development dimension, the view that developing countries need only a longer time frame to comply with and implement US- or UK-type competition policy was unsound, Singh said.
In the WTO context, the advanced industrial countries want a multilateral agreement on competition, as also a multilateral agreement on investment, with “national treatment” (i.e., treatment no less favourable than that accorded to domestic parties) for their multinationals.
“This would be seriously prejudicial to economic development,” Singh said. The mechanical application of national treatment would lead to perverse results in developing countries where it should be perfectly legitimate to allow large domestic firms to merge so that they could compete on more equal terms with multinationals from abroad.
Singh suggested that rather than a multilateral competition policy with national treatment to foreign firms, there should be an International Competition Authority (ICA), outside the WTO framework, to deal with mergers and acquisitions in relation to developing countries and development.
Such an authority would be charged with maintaining competition in the world economy, pay heed to special needs of developing countries (on the lines of the social welfare objectives of the European Commission) and scrutinize mega-mergers across borders.
At the UNCTAD seminar, some staff members argued that such an authority would involve sovereignty issues, though it was difficult to understand such arguments in the face of attempts to expand the WTO’s remit and given that signing on to the WTO itself involved giving up some sovereignty.
Singh in his G24 paper has presented a logical case for keeping the WTO and the ICA separate.
If the primary goals of the WTO are being harmed rather than helped by specific measures such as TRIMs or the equal application to all countries of particular principles such as national treatment, “it is the latter that should be changed,” Singh said. “It is the primary goals rather than procedural rules of an international organization that should dominate,” he said.
Responding to some questions, Singh said that in the area of the WTO’s TRIPS Agreement on intellectual property rights (which provides for global monopolies), national competition policies in developing countries may not suffice, and they may need regional cooperation and policies.
On the push by the major industrial countries for WTO investment and competition rules, and suggestions that special and differential treatment could be a way out for developing countries, Singh said the main, if not the key, interest of the advocates of the multilateral agreements was market access for foreign direct investment. Therefore, for them, there was no real point in a competition agreement without an investment agreement.
Special and differential treatment in the traditional sense (when it applied to goods crossing frontiers) was no longer helpful, he agreed. “What will be needed (in the new negotiations) is a new way of describing the need of developing countries to have more policy space,” he added. (SUNS5195)
From Third World Economics No. 290 (1-15 September 2002)