Development: Theoretical and Policy Concerns for Developing Countries
3.4 The Necessity of Competition Policy for Developing Countries
3.4.5 Evaluating the Necessity of Competition Policy for Developing Countries For developing countries without a formal competition policy, the first thing that should be
done is to evaluate the institutional ability to implement competition policy. A distinction should be made within developing countries between, on the one hand, countries at low levels of development and with low institutional capabilities and, on the other, semi-industrialised countries with greater institutional capabilities. Laffont (1998) argued that even if competition policy of the kind followed by developed countries were appropriate for the least developed countries in Africa, there is a long way for them to have the institutional capability to implement such policies. The introduction of competition policy requires new institutions and effective implementation of competition policy needs sound institutional capability. Only a strong state can implement competition policy (Laffont, 1998). Low-income countries lack financial resources and the human knowledge that make the effective implementation of competition policy possible. Although competition policy is proliferated in developing countries, the degree of success of enforcing competition law in the majority of developing countries was relatively low (Ghoneim, 2002). The situation is changing, particularly among the higher income developing countries that have recently strengthened their approach to competition policy (OECD, 1999). But many countries continue with weak system and processes for monitoring competition. The overall existing institutional environment prevented those countries from enjoying the benefits of such law (Steward, 2001). As Laffont advocated, competition is not the automatic outcome of deregulation, the existence of competition laws will not ensure the creation of proper institutions for effective competition.
For developing countries where institutional enforcement capability is limited, it seems appropriate to make conditions favourable for procompetitive behaviour, by starting free trade and avoiding the creation of monopolies through regulation or protection (Hoekman
37 See Singh (1999) and Lall (2000).
and Holmes, 1999). For developing countries with a very small economy size and very low development level, institutional capability is apparently an obstacle for effective competition policy enforcement. The implementation capability itself limits the necessity of competition legislation. For these countries, it is important to adopt the broader meaning of competition policy, referring to a set of measures and instruments used by governments that determine the overall conditions of competition that are likely to be met in specific markets. The broader set of instruments includes privatisation, deregulation, trade liberalisation and FDI policy. But it is not sure what the optimal mixture of instruments is for particular countries. In developing countries with limited capability and supporting institutions, the priority for policymakers should be to facilitate market entry. Under certain circumstances, international trade can clearly promote competition in markets.
Openness to international trade also helps exert pressure on governments to reform domestic market institutions that undermine the ability of firms to respond to competitive pressures from abroad. But the effect of this source of competition is mostly limited to tradable goods.
In many low-income developing countries, a competition policy that aims at promoting competition rather than controlling prices and market entry is relatively new. In developing countries, particularly transition economics, the past elaborate systems of price and entry controls were established around state-owned firms. State monopolies in some cases had been set up through nationalisation. State monopolies were often accompanied by import protection under import substitution policies. The ultimate effect of these policies may have been to suppress rather than promote competition. For these countries, free market entry and exposure to international competition can quickly introduce new forces of competition. Governments need to build more effective supporting institutions to address aspects of the international trade regime that can undermine competition. At the national level, this may include making further progress in liberalising services as well as manufacturing products, provided developed countries will at the same time grant sufficient access for developing countries’ exports. In case this does not take place, trade policy regimes will suffer from considerable inefficiencies. Consequently, domestic competition policy regimes have to be moderated as well to these international realities. At the international level, it includes reducing compliance and certification costs of trade-related product standards (such as food safety standards) and taking advantage of the flexibility allowed in the Agreement on Trade-Related Intellectual Property Rights (TRIPs) to allow developing countries to maximise benefits (World Bank, 2002).
For developing countries with a relatively high economic development level and competent government machinery, the choice of introducing and implementing competition law and policy seems practical. For some of them, introducing competition policy is more urgent and important. The necessity of competition policy for developing countries is contingent upon particular issues. Some developing countries have a great interest in introducing competition policy in order to minimise the potential negative consequences of implementing some WTO agreements. The need may also arise from the increasing importance of inward FDI, as well as domestic issues such as privatisation.
Tackling the effects of these developments requires establishing some forms of competition policy. All these issues are relevant to development and social welfare of developing countries in relation to the present and prospective discussions on competition policy. Among the issues associated with the necessity of competition policy, some international economic considerations are especially important, as developing countries are increasingly involved in the world economy. With the generally substitutional relation between trade and competition policy, FDI is the primal international issue that necessitate
competition legislation. For the countries that have emerged as major recipients of FDI flows in recent years, particularly China, the necessity of competition policy associated with the structural effects of inward FDI may be especially prominent. However, for one country, at specific time, one issue may be the most important concern as to the competition legislation, but to simplify the problem by focusing on only one factor is sometimes misleading.
Independent decisions and actions are required to ensure the implementation of competition policies that could foster an appropriate trade and investment regime, ensure that markets are contestable, and promote economic efficiency and consumer welfare. An appropriate competition regime should also take into account the market imperfections created by the interventionist activities of the government, in the specific social, economic and institutional context of a developing country, and by the political actions of other countries, in the framework of multilateral institutional arrangements, both of which may be influenced by the actions of foreign and domestic firms. Therefore the design of national competition policy regime should take detailed domestic conditions, particularly at the industry level, into account. In addition, international cooperation may thus be a vital part of the design of a competition policy regime, not only because it might support the building of domestic market-supporting institutions by providing experience and precedents, but also because it could contribute to international harmonisation and/or coordination of competition, FDI and trade policy regimes. In the absence of a specialised worldwide competition organisation and in view of the complementary relationship between trade and competition policy, the WTO may be the institution best suited to house a possible international competition agreement. Another interesting route towards multilateral cooperation in competition policy area is the International Competition Network (ICN). The international competition policy cooperation and the position of developing countries in it will be discussed later in more detail in Chapter 8 when the design of an appropriate version of competition policy for China will be discussed.
Developing countries require special treatment in the sense of being allowed to pursue competition policies that are appropriate to their stage of development. It is important for developing countries to have a competition policy that is designed to take appropriate account of their level of development and the long-term objective of economic growth. An appropriate worded competition law should be developed. The practical concerns of design and implementation of competition policy for developing countries in general and China in particular will also be also discussed in Chapter 8.