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TI Source Book 2000Chapter 26: Competition Policy and Containing CorruptionCompetition:... 6. Ecology. The struggle between individuals of the same or different species for food, space, light, etc., when these are inadequate to supply the needs of all. |
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The fight against corruption does not, of course, take place only within the public sector, oronly where the public sector and the private sector do business in the form of public procurement.It takes place, too, within private sector organisations and in areas governed by a coun-try's"competition policy".
It is well beyond the scope of this Source Book to attempt to examine the concept of "competitionpolicy" its entirety. Instead, this chapter seeks to comment on some of its aspects wherecompetition policy touches on matters which many consider to be "corrupt", including abusiveexercises of economic power.
Because competition is essentially indiscriminate, in that it does not favour one interest overanother, there are few political constituencies which have a vested interest in promoting andbuilding a culture of fair competition. This renders the consumer movement an importantstakeholder in the anti-corruption movement, with strategic alliances between consumergroups and Transparency International proliferating.[1]
In essence, competition policy provides opportunities for civil society to mobilise and intervenein defence of consumer rights. Consumer groups can:
At the same time, civil society (and consumer groups in particular) can foster the political willto pursue a process that stimulates an understanding of how a properly-conceived competitionpolicy works in the interests of all.
"Competition policy" is an essential tool to protect and promote economic activity, and toensure and to underwrite the integrity of private sector activities. It determines the place of thestate in the economic life of the nation, defining the activities the state will be involved in andwhich will be left to the private sector. It also regulates in appropriate ways the manner inwhich the private sector is to function so as to ensure that this serves the best interests of all.
Competition policy seeks to deliver goods and services to a country's citizens at the cheapestsustainable prices, to encourage innovation and development, to increase productivity and toengage in trade and competition on international markets. A prime purpose is to minimise thescope for rigging markets by prohibiting the formation of cartels. It also aims to reduce barriersto entry into business activities and to expand opportunities for small and medium sizedbusinesses, but its aims are not confined to the economic. They include social objectives,including equity, the welfare of consumers and the enhancement of the quality of life of all(and particularly the most vulnerable, the poor).
Some might be forgiven for thinking that competition policy and laws are designed only forrich and urban societies, or that competition law is designed to impose forms of capitalism atthe expense of the poor and the weak. In fact its functions are, if anything, the very reverse.
Competition law builds and sustains public confidence in institutions, and so, in the end, canhelp underpin the stability of democracies. It is the key to an effective market economy. If, asmany now believe, the route to development for the world's poorest nations lies by way of privatesector activity rather than through the largely-failed government-led commercial initiativesof the past, a sound competition policy can provide the bedrock for a country's development.When the institutions designed to promote competition policy are weak, corruptioncan flourish, which is why those who would fight corruption should see the role they are playingagainst this broader background.[3]
In many ways, a well-thought out "competition policy" in its totality can give substance to acountry's vision of what it wants to be.
A core objective of competition law is to create an open and well-regulated economy for thebenefit of all the people in a given country through:
Effective procurement laws (discussed earlier in this Source Book) are just one, if highly important,example of competition policies put into practice.
A sound competition policy can help the development of a country by rendering it moreattractive to investors, usually by increasing investor confidence. But competition policy andcompetition law may be ineffective unless they are developed within the wider context ofregulation and legal frameworks relating to the business environment. Issues of corporategovernance, contract enforcement, the judicial system and dispute resolution mechanisms arealso important.
The reform of competition policy and laws should go hand in hand with the strengthening ofcorporate governance and the development of appropriate codes of conduct.
Some of the more black-and-white maplractices which competition policy seeks torestrain include:
There were times in the recent past when some economists attacked the notion of the stateplaying an economic role, asserting that governments should withdraw from the marketplaceentirely, privatising as they go, abandoning the old control and command economies they hadbeen practising, and leaving the private sector more-or-less in sole charge.
Most have now rejected the more extreme elements in this minimalist view. The state is seenrather as having a crucial role in ensuring that the principal players in the economy abide bywell-defined and appropriate rules. This in turn demonstrates the absolute necessity of a strongstate, well-equipped to protect the public interest and to regulate areas of the private sectorsusceptible to corruption and other forms of abuse.
It is obviously nonsensical to suggest that such critical strategic activities as banking, themanagement of pension funds, and insurance could ever be left free to operate entirely as theyplease. Indeed, the absence of effective banking regulation was one of the major factors behindthe collapse of the "Asian Miracle". In an ideal world, self-regulation might be effective: in thereal world it tends to fail.[6]
One may be able to agree that government intervention in the economy should, to the extentpossible, be restricted to setting the ground rules for fair competition, to providing a conduciveenvironment for efficient production and provision of goods and services, and to regulatingmarket excesses. At the same time the state must also be strong and properly equipped to beable to perform each of these functions. This may also take some time to achieve. Where thestate has been deeply involved in the economy through state-owned enterprises, the governmentitself may well have become a monopoly, and it can take also quite some time for a competitivemarket to take responsibility for all of a government's commercial activities.
Distortions in a domestic market, too, can often be the result of government interventions,such as protectionism of inefficient local industries producing sub-standard and overpricedgoods. These interventions may also work against the interests of the poor in particular, bydenying them access to cheaper goods of better quality, and need to be addressed in the contextof competition policy.
As noted, competition policy is not just for rich developed countries. At the national level,competition policies and laws are found in countries in all stages of development. History suggeststhat competition policy is actually a means for accelerating development by casting offthe shackles of anti-competitive and anti-consumer practices.
The legislation of Canada, the United States and the United Kingdom, for example, dates backto the end of the nineteenth century, when all three had many of the less attractive featuresof today's developing economies. There were small cliques of powerful private sector interests(oligarchs) which did not hesitate to manipulate markets at the expense of the public interest.Likewise, bribes and kickbacks flourished in the private sector. The responses to the challengesthese interests posed can now be seen as marking an emerging recognition of the need forcompetition policy.
It was not that policymakers in these countries necessarily had a very clear concept of whatthey were trying to achieve, or of where their reforms would ultimately lead. The measuresintroduced were piecemeal, not comprehensive. In the US, for example, the law was developedprogressively and in response to differing problems. First, the Sherman Act of1890 rendered conspiracies in restraint of trade a criminal offence, but itrecognised no role for the state in actively regulating what was taking place(Canada had done so a year earlier, in 1889). Then came the Clayton Act of1914, still the primary tool for the control of anti-competitive mergers andjoint ventures in the US. At the same time, the Federal Trade Commission Actcreated the Federal Trade Commission and so introduced the element of activeregulation. These countries, and other developed economies, are constantlymodernising their legal framework, the United Kingdom as recently as in1998, with its Competition Act.[7]
So it is that elsewhere today, countries such as Thailand and South Africa areenacting competition laws addressing unfair and unjustifiable dominant marketconduct; mergers that may lead to monopolies or unfair competition;monopolies and the reduction of competition as a result of mergers; andunfair and restrictive trade practices.[8]
Competition policy works against cartels, and those who would manipulatepositions either through being the sole provider of essential products, orthrough combining with others in a conspiracy against competition, andagainst the public interest. Many countries have been victims of cartels overthe years--the areas of vitamins, cement and heavy electrical engineeringbeing among the best-known. In the field of heavy electrical equipment, fordecades collusive behaviour artificially inflated infrastructure costs aroundthe world. Manufacturers closed down their cartelization in countries wherethey were prosecuted, but elsewhere--largely in the developing world--theycontinued where regulatory agencies did not exist or were powerless to intervene.[9]Without doubt, suspicion of cartels fuels much of the contemporaryhostility within the contemporary globalisation debate.
In retrospect, too, we can see that one of the root causes of the chaos in thetransition process in Russia stemmed from a failure to recognise from theoutset the need for a competition policy that would have acted as a brake onthe "winner takes all" free-for-all that in fact developed. The need for Russiato have a sound regulatory framework within which competition can takeplace is all too stark today.[10]
Competition policy and law does not operate simply by banning certain typesof behaviour. It does much more than this. It establishes mechanisms whichoversee and regulate the various activities for which they are responsible. Insome instances a Competition Authority is established to oversee and enforcethe whole gamut of pro-competition policies and laws; in other instances,specific regulators are appointed to regulate defined areas of activity (e.g.telecommunications; electricity; water).[11]
The regulators should be independent of government, otherwise they can simply become furthercentres of potential corruption, cronyism and mismanagement. The regulators shouldunderstand and work in with the competition policies of the government of the day. The regulatorsthemselves should be accountable and required to give reasons for their decisions. Thelegality of their decisions should be subject to review by the courts.[12]
Regulators also have a major role in promoting transparency and higher levels of publicunderstanding of how the economy of their country functions.[13]
For instance, the Australian Competition and Consumer Commission has been able to publiciseand explain price fixing, has conducted studies on telecommunications demonstrating tothe public the significant savings which they have enjoyed as a consequence of competition,and it has tried to address the belief that competition leads to reductions in services.[14]TheCommission works closely with civil society, even to the point of making its countrywidevideo conference facilities available to consumer groups, an invaluable gesture where thegroups are spread over vast distances.
In Thailand, a Competition Commission has been established, comprisingpoliticians, civil servants and representatives of the private sector, and guidelinesare being developed. The law there is not an attempt to impose a "quickfix" remedy, but cuts across the omnipotent monopolies and majority ownershipsthat feed poor corporate governance, minority shareholder abuse andmanipulation. In the absence of experience and in the face of a market obviouslylacking competition, which is monopolistic or oligopolistic in structure,the task for the Commission is as daunting as it is necessary. Added to this,monopoly businesses are in state hands but undergoing privatisation.[15]
A prime difficulty for many developing countries is simply one of a lack ofexperienced people to serve as independent regulators and a dearth of stronginstitutions to service them. The questions individual regulators encounterare often highly technical and call for considerable experience and wisejudgement. Yet while looking for such a cadre of professionals to emerge,developing countries have little time to lose. The best starting point might befor new competition agencies to give priority to fostering greater publicunderstanding of precisely what "competition" means, its benefits, and whoits beneficiaries are.
Many developing countries have suffered grievously through a lack of competition policy inthe area have of banking regulation. Much of the blame for corrupt practices which havedegraded the economies of a number of developing countries can be laid squarely at the doorof the banking system. Banks have been inadequately supervised so that politicians have beenable to raise loans for political, not economic, reasons. Institutions have been brought to thethreshold of insolvency, at times impoverishing small savers.
Now euphemistically described as "non-performing loans", enormous sums have been drawnfrom banks by the politically well-connected in developing countries from Asia to Africa,seemingly without the slightest intention of ever paying them back.
Some countries, too, have suffered from the depredations of "pyramid schemes", in which massivefrauds have been perpetrated through financial operations that have involved the acceptanceof deposits from the public at artificially high interest rates. The interest has been paidfor a time, but out of fresh deposits being received. As the schemes gained a unmerited reputationfor good performance, new deposits flowed in and before long the promoters werenowhere to be found. In Albania and Romania such schemes created major public unrest.
The struggle to strike a fair and justifiable "balance" between the competing claims of thosewho have developed intellectual property and those who need to have the benefits of it, seemslikely to be a dominant feature of the globalisation debate.
A ferocious battle is being waged in the field of intellectual property--what degree of protectionshould a country afford to the "owners" of intellectual property, and what (if any) limitsshould be placed on the rights of its "owners" to exploit their positions.[16]
The debate has become particularly fierce as companies try to extract what to many seem tobe unjustifiably high returns on investments in the development of new drugs--such as drugsto treat HIV-AIDS--and particularly when they seek to do so at the expense of the sick of thedeveloping world.[17]
Even trade mark provisions have been used to derail national public health programmes, forexample Canada's programmes to discourage smoking and Guatemala's legislation to guardagainst the aggressive marketing of breast-milk substitutes.[18]Could those drafting the internationalConventions that deal with patents, trade marks and copyright ever have foreseenthat their work would be misused in such a manner?
Consumer groups also oppose attempts to "fix" prices across borders. Trademark or patent"owners" claim the right to charge more for the same goods in one country than they do inothers. This is seen as an unjustifiable manipulation against the interests of consumers in themarkets where higher prices are demanded. Hence battles also rage over so-called "greyimports", or "parallel importations". Importers by-pass local franchised suppliers of well-knowngoods and import them directly from suppliers in other countries, where the prices arelower.[19]Defenders of the manufacturers deny that this is market manipulation--and so a corruptpractice--claiming that "orderly" marketing through designated sales outlets assuresquality, after-sales service and product development in line with specific country needs.
For years, many developing countries have been "free riding", and denying protection to intellectualproperty owners either generally or by category. Weak patent laws have been part ofthe economic planning of Taiwan, Singapore, Hong Kong and Korea. Governments of India,Thailand and Brazil have been highly selective.[20]Some countries, particularly in Latin America,have imposed systems of "mandatory licensing", granting protection but affording theright to local manufacturers to be granted licences at fixed maximum royalty rates.
In recent times "intellectual property rights" have become a burning issue, especially for countrieswho have substantial trade with the United States. Although the US was for generationsamong the "pirates" of the intellectual property world (it did not sign the 1971 Berne Conventionfor the Protection of Literary and Artistic Works until as late as 1989)[21], it has recognisedthe global power which ownership of intellectual property can confer, and successiveadministrations have worked assiduously to assert it.
Yet US intellectual property law can itself be quirky. Competition policy analysts are concernedabout attempts being made in the US to "copyright" novel business practices, such asways of avoiding (but not evading) income tax, and forms of financial instruments that havenot been used before.[22]The US is not alone in this. In Russia, a company has successfullyapplied to Rospatent for patent rights over the ordinary bottle--having previously "patented"nails and railway tracks![23]With such maverick developments at the national level there isadded cause for disquiet.
The benefits for developing countries to sign up fully to the global intellectual property regimeare promoted vigorously by the World Intellectual Property Organisation (WIPO), but otherstake a more sceptical view and note that intellectual property regimes mean little to countriesin sub-Saharan Africa and in Asia where people live on less than one dollar a day, and whereless than five per cent of economic activity relates to manufacturing.[24]
What seems overdue is a root-and-branch re-evaluation of the global intellectual propertyregime. It must ensure that it strikes a fairer balance between creators and users. Rewardsshould be provided for the enterprising to encourage further initiative, but they should not besuch as to be able to deny most of the world the benefits of scientific and other advances, atleast until patents expire--by which time, of course, science and innovation have moved on.[25]
Quite apart from intellectual property considerations, globalisation brings a new dimension tocompetition policy. Abuse is not confined within national borders. International cartelizationand similar abuse, and other forms of corruption, can impact seriously on international trade,and there is a growing realisation of the need for international guidelines for the control ofanti-competitive conduct. These abusive practices do not impact simply on final consumergoods, but also on "input goods" such as steel, fertiliser and energy.
Countries with weak domestic institutions are particularly vulnerable to cross-border restrictivetrade practices and international business conspiracies. Integration into the global economymay increase competition, but it does not necessarily ensure it. Cartels, vertical restraints(agreements between sellers and buyers), exclusive dealerships and controls over domesticimports can effectively block people from receiving the development benefits which globalisationshould bring. Concern over these vulnerabilities lie at the heart of some of the protestsagainst globalisation presently taking place around the world.
The problem, too, is a growing one as privatisation continues to place more and more previouslypublicly-owned assets into private hands, thus paving the way for increased levels ofinternational mergers and acquisitions. As the public barriers to competition are removed theprivate barriers must, correspondingly, be addressed--and the more so with the growthof globalisation.
For regulators there is a growing headache. A merger in the host country of two previously-competingbusinesses may not result in an adverse reduction in competition there. However,in a foreign country the two firms may have subsidiaries, previously the only two rivals in aparticular market. Thus the consequences of a merger going ahead in one country can havevery serious consequences for another. Anti-competitive practices can also be importedthrough foreign direct investment, with international franchisers using local franchisees tosource particular products and tie up local distribution chains.
There is also a controversial question to resolve: what is to be the role of the World TradeOrganisation in enforcing competition policy at the global level? Is it to be a "global competitionpoliceman"? Is there to be an international framework, perhaps developed at the WTO,to underpin the development of competition policy?[26]Would such a framework be a way inwhich to tackle the provision of increased cooperation to counter abusive and corrupt practiceswhich are adversely affecting international markets, and particularly the economies ofdeveloping countries?
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