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TWN Info Serice on WTO Issues (July03/6)

Third World Network

10 July 2003

Dear friends and colleagues

WTO COMPETITION AGREEMENT WOULD UNDERMINE DEVELOPMENT, ACCORDING TO EXPERT AT UNCTAD COMPETITION MEETING

UNCTAD held a expert meeting on competition law and policy on 2-4 July in Geneva.  The meeting held a number of roundtables.  One of the main resource persons at the meeting was Prof. Ajit Singh of Cambridge Univerity’s Economics Faculty, who presented a paper and spoke at two of the Roundtables.

Ajit Singh’s paper provided a “developing country perspective on the new European Community proposals” on competition policy at the WTO.

As you may know, the EC is the main proponent on launching negotiations for a new WTO agreement on competition policy.

This is opposed by many developing countries who either do not believe there should be such an agreement in WTO, or that the issues are so complex that they do not want to embark on or commit themeslves to negotiating an agreement.

Ajit Singh’s paper points out the dangers to developing countries and to development of negotiating a competition agreement, even one based on an apparently “watered down” version now being advocated by the EC.

Below is a report of the paper and the UNCTAD session in which it was presented.

Please check our website www.twnside.org.sg for previous issues of TWN Info Service.

With best wishes

Martin Khor

Third World Network

 

 

EXPERT AT UNCTAD COMPETITION MEETING WARNS THAT A WTO COMPETITION AGREEMENT WILL UNDERMINE DEVELOPING COUNTRIES’  DEVELOPMENT EFFORTS

TWN Report by Martin Khor, Geneva 3 July 2003

A WTO-based multilateral competition framework, as proposed by the EU would undermine the ability of developing countries to control their economies and foster their own domestic companies, according to the main resource person at an UNCTAD experts’ meeting on competition law and policy.

“It is perfectly legitimate and reasonable for developing countries to argue that they do not have sufficient experience with competition laws to be able to participate meaningfully in a treaty concerning multilateral competition policy,” said Prof. Ajit Singh of the Faculty of Economics and Politics, University of Cambridge.

The Cambridge academic was presenting a paper on “Multilateral competition policy and economic development: a developing country perspective on the new European Community proposals”, at the UNCTAD-organised meeting (2-4 July) of the intergovernmental group of experts (IGE) on competition law and policy.

Discussants at the panel on Wednesday included representatives from the EU Commission, India, Thailand, and Argentina, with more comments from the floor.

Ajit Singh’s paper aims at giving a development view of the current proposals of the EU for establishing a new WTO agreement on competition policy. The EU is the main proponent of an agreement, whilst several developing countries are against starting a negotiation towards such a treaty.  A decision is to be taken at the Cancun Ministerial conference, on the basis of an “explicit consensus”, whether negotiations should begin.

Ajit Singh said his main argument is that: “The multilateral competition policy proposed by the EU is neither suitable from the perspective of developing countries nor from that of the world economy as a whole.  As far as developing countries are concerned, the policy goes too far in instituting homogenization of competition policy and thus deprives them of important developmental instruments.

“On the other hand, from an international perspective, the proposed policy is too feeble to deal with the challenges posed by large multinational corporations intent on monopolizing world markets.

“To deal with this, what is required is greater policy autonomy for developing countries and at the same time a more stringent framework for dealing with mammoth multinational companies and their endless appetite for overseas expansion, often through mergers and takeovers.

“Both the EC’s proposals on competition policy and on foreign direct investment seem more concerned to provide TNCs with additional tools to give them unfettered access to developing countries and undermine their ability to control the economy and foster their own domestic companies and national economic development.”

Ajit Singh called on EC to recognise the complexity of the important wider competition policy issues and their serious implications for development. It is these that contribute to the lack of consensus among professional economists, between developed countries themselves and also between developing and developed countries.

He argued against a one-size-fits-all approach to competition policy for developing countries. When conditions for competitive equilibrium do not exist, economic efficiency may require restrictions on competition, he said.  However the nature of restrictions would differ in each case, requiring a case by case analysis of the conditions.

In a separate paper, Ajit Singh had recommended for developing countries the Japanese competition policy as a role model during the period 1950-73 when Japan was more like a developing country.  Also relevant is the Korean competition policy during its high growth phase in the 1970s and 1980s.  In both, although there were competition laws, these were subordinated to requirements of industrial policy in each country.

Based on concepts and historical evidence, said Ajit Singh, an appropriate competition policy for development would differ between countries depending on their level of development, the state of heir governance and many other factors.

“This requires a case-by-case approach rather than a one-size fits-all.  For many countries Japanese and Korean industrial policies will be a useful role model.  For some others, as Prof. Laffont (one of the world’s leading industrial organisation economists) suggests, no competition policy may be suitable at all.”

Ajit Singh emphasized the importance of dynamic efficiency as the central element in any consideration of competition policy for developing countries.  This highlights the role of profits, investments and technical progress as well as the achievements of an appropriate blend of competition and co-operation in the operation of competition and industrial policies.

Coherence between these two policies is essential, and, in general, this will involve the competition policy being subordinated to the industrial policy during the course of economic development. This dynamic perspective is very much in line with the emphases of the modern theory of industrial organization.

Ajit Singh asked how the EC’s multilateral competition policy proposals measure up to the requirement of an appropriate competition policy for developing countries.

He noted that the EC’s revised and more modest proposals for a multilateral competition policy have the following main features:

·        All member countries should declare hard-core cartels to be illegal.

Countries should co-operate in implementing such a ban. Other than this ban on hard-core cartels countries can have any provisions in their competition laws as they like.

·        However, these domestic competition laws should be in conformity with the core WTO principles of MFN, non-discrimination, national treatment, transparency and procedural fairness.

·        There would be only limited application of WTO’s dispute system.  It would not cover individual competition cases, but limited to assessing the overall conformity of the actual law, regulations and guidelines of general applications against the core principles contained in a WTO agreement, including a ban on hard core cartels.

Ajit Singh asked whether these new EC proposals are scaled down sufficiently so as not to harm the developmental interests of emerging countries. He said that on the face of it these EC’s proposals would seem to be reasonable as it claimed the multilateral framework  involves only a minimum set of rules.  It does not ask countries to adopt a uniform  competition policy, but only to make hard-core cartels illegal.

However, said Ajit Singh, the EC proposal not only requires all competition laws to incorporate the cartel provision but also subjects member countries to accept the core principles of MFN, non-discrimination, etc.

Ajit Singh stressed that these principles are not in the best interests of developing countries. They do not recognise the great disparity between rich and poor countries in  their technological development, human capital and infrastructural facility, the cost of raising external funds, etc.

Developing country corporations need the principle of affirmative action i.e. non-reciprocity to give them a chance to build their productive capabilities.

In the absence of an affirmative action programme the WTO concepts become onerous from a developmental perspective. This is particularly the case when market access is added to these principles.

Although market access is at present not included in the WTO core principles relating to competition policy, the EC may find it tactically prudent to introduce it into the discussion at a later date when the rest of their proposals have been accepted, Ajit Singh noted.

Indeed, a World Bank study in 2003 suggests that market access is almost always linked to the question of competition policy.

“The basic aim of the EC would appear to be to establish a framework based on WTO principles which will give their multinational competitors unfettered access to developing country markets. Essentially they will be able to invest whenever they like, wherever they like and whatever they produce,” he said.

“It would seem that for tactical reasons this objective is being approached in two stages. In the first stage only action against hard-core cartels is being asked for, plus adherence to the so-called key WTO principles.

“At the next stage, when poor countries in relation to competition policy have accepted these core principles, they will be asked to accept the market access part of the EC programme as well. This may be regarded as speculation but it is fully warranted by the experience of developing countries at the Uruguay round and at subsequent negotiations on these subjects at the WTO.

“To sum up, contrary to impressions given, the latest EC proposals contain significant elements of one-size-fits-all syndrome. Under the proposals, all signatory countries will be subject to the core WTO principles of national treatment, etc outlined earlier. They limit the domain of policy options, which developing countries adopt to assist economic development.”

For example, he said, two of the most important policies used by the Japanese government during that country’s developmental phase will no longer be permitted.

These are administrative guidance and an extremely important co-ordinating role of MITI through the so-called deliberation councils.

In relation to the issue of “modalities”, Ajit Singh said that to the EC this was simply a minor procedural matter of setting out an agenda and a timetable for negotiations but developing countries attribute a more substantive meaning to the concept.

This includes a consideration of the following kinds of questions: what kind of competition policies should be considered in the negotiations - all kinds or just multilateral and plurilateral, or domestic as well as bilateral.

What kind of burden such policies would impose on developing countries and what can be done to relieve these burdens. The answers to these questions are important for defining the terms of modalities to be followed and for the focus on prospective negotiations.

“However, it is quite clear that we are far away from satisfactory answers to these questions. Therefore any negotiations on the subject are premature.  The Working Group has made some progress but there is still a need for further period of reflection and clarification of issues between developed and developing countries,” he said.

Ajit Singh added that developing countries have a substantive point that unlike Canada and the US, which have had competition policies in their domestic economies for the last 100 years, until the end of 1980s, very few developing countries had any competition laws at all. Most of the 90 or so developing countries, which now have such laws, acquired these only during the 1990s on the encouragement of the international financial institutions and the OECD.

However, for such laws to be effective new institutions have often to be created, judges and lawyers trained and the laws to be understood and assimilated by the corporations and the people. All this takes time, perhaps a couple of decades for the appropriate social and legal culture of competition and competition policy to evolve, as the record of the US and European countries show.

“In these circumstances, it is perfectly legitimate and reasonable for developing countries to argue that they do not have sufficient experience with these laws to be able to participate meaningfully in a treaty concerning multilateral competition policy.”

Ajit Singh also raised questions about the proposed prohibition of hard core cartels. If there was such a solid case for banning hard core cartels, why was it only in 1993 that the US strengthened its anti-cartel enforcement practices and subsequently the EU took a more serious view on it?

Economic theory does not have a black and white attitude towards cartels.  Some cartels aim to maximise monopoly profits through collusion, but also result in greater price stability, intended or not, which promotes social welfare.  Others do the opposite, i.e. seek to promote price stability but achieve neither this nor higher monopoly profits.

The EC needs to clarify whether the current proposals are a prelude to subsequent banning of state-supported international cartels (e.g.  commodity agreements) and also domestic cartels (e.g. those used by the Japanese government during its developmental phase to promote industrial development, or cooperative arrangements between firms for their mutual development that may require investment and market coordination).

“It is not enough for the protagonists of the EC proposals to tell us that under the current scheme, developing countries may retain existing state-supported cartels.  The important question is, what will be their position tomorrow vis a vis state and private cartels that may actually increase social welfare.  These questions are salient to the discussion on he framework of modalities.”

Ajit Singh also asked why should competition policy, which is normally a domestic issue, be considered at all at the WTO, an organization that concerns itself with multilateral issues in the field of trade?  Competition policy is a complex undertaking and an enormous challenge that cannot be undertaken by an institution that is already overloaded.

The links between competition policy and trade are no more significant than many other issues such as trade and tax policy, or infrastructure deficiencies or education.

It would be best for the WTO to confine itself to its core competences regarding strictly trade matters, rather than overextend through mission creep to an endless string of trade related matters.

Stephen Ryan of the European Commission presented a paper by its Competition Directorate General on the interaction between competition policy and industrial policy.

He acknowledged that many developing countries have concerns about the advisability of introducing a competition policy either unilaterally or in the context of a WTO agreement, and one concern is that a competition policy may interfere with the country’s freedom to operate appropriate industrial policy.

The EC wanted to allay these concerns because:  the only substantive area covered in the WTO discussion is hard core cartels.  There should be no tension between competition policy and industrial policy for a country which chooses a competition law that includes only a ban on hard core cartels, he added.

Aspects of competition law whose interaction with industrial policy could be more sensitive are merger control, abuse of dominant positions.  In such cases there should be clear criteria for assessment, for example to what extent industrial or development policy considerations should be factored into the competition assessment.

He added the interaction between competition and industrial policy can and should be one of complementarity.  Tensions will arise, said Ryan, and his paper gave several examples of ways to manage them.

He said a possible WTO multilateral competition agreement based on current discussions would “probably have a neutral effect on the relationship between competition policy and industrial policy” in that it would not create new tensions.

Peter Augustine from the Commerce and Industry Ministry, India, took a different view. Industrial policy and competition policy have their important roles in development, he said.  The developed countries and newly industrialised countries (NICs) extensively resorted to deliberate industrial policy measures in an effective manner when they were developing.

Many of them implemented competition policy quite late in their development process and when they did so it was done selectively covering only sectors in which they had evolved comparative advantage, said Augustine.

He added that the Uruguay Round agreements had clipped policy flexibility for developing countries considerably.  Instruments available to the present day developed countries and the NICs are not available to developing countries today. The S and D provisions are largely ineffective as they are best endeavour clauses or involve conditionalities or involve limited transition periods.

“The solution lies in leaving individual countries to autonomously undertake liberalisation efforts, taking into account their individual economic, trade, and development needs rather than prescribing one-size-fits-all multilateral disciplines, with non-operable and best-endeavour type S and D provisions,” he concluded.

 


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