Introducing Competition Policy: The Experience of Developing Countries Does China need a formal competition policy and what kind of competition policy does

China need? Although the answer lies in the empirical studies of Chinese industries, as was stressed in the last section, experience of other developing economies can already provide valuable lessons. A large number of countries have introduced national competition laws.

Currently, over 90 countries worldwide have competition law, including almost all developed countries. There are still a large number of developing countries do not have competition laws and policies. For these countries, the question is whether or not the introduction of competition policy is worth it? Is it necessary that developing countries adopt competition policies that have been adopted by developed countries? It is important for each country to consider the necessity of competition policy in the light of its own economic, legal and cultural environment, as well as its own model of economic development. One size does not fit all in considering institutional design. It is also

important to take a pragmatic approach to building a competition policy, focusing on what can be done practically rather than on what should be done in an ideal world.⁴³ Developing countries can learn from the strengths and weaknesses of the institutions in the developed economies, but they cannot simply copy them. This subsection further elaborates these issues by describing the proliferation of competition policies in general and addressing the experience of East Asian economies and EEFSU transition economies in particular. These two groups of countries are also the comparative basis for Chapter 1.

Proliferation of competition policies

The modern history of competition policy took shape during the later decades of the 19th century. The Sherman Act of 1890 in the United States was the first substantial antitrust measure of modern times. The act was passed in response to the growth in corporate trusts, which led to a substantial increase in concentration in many US industries. The principal areas of modern competition policy include agreements among firms, the abuse of dominant positions and combination or mergers among firms. Competition advocacy is another important function for all antitrust authorities, particularly for developing countries.

Since the late 19th Centaury, competition policy has been introduced in a large number of countries. By the end of 1996, over 70 countries worldwide had introduced competition laws (UNCTAD, 1997a). The number has hitherto increased to over 90.⁴⁴ Figure 2-4 illustrates the proliferation of formal competition policy institutions for countries and territories over time.⁴⁵ Governments have introduced competition laws and established competition authorities to enforce them, because of domestic antitrust concerns, in response to economic crises, or due to international pressures (World Bank, 2002). Most developed countries introduced competition law before 1980, especially in the 1950s.

Except for some pioneers, most developing countries adopted competition policies after 1990. Almost all developed countries have competition legislations, but there are still a large number of developing countries that still have not introduced competition policies.

43 See World Bank (2002) for a discussion of building effective institutions.

44 See the ‘Directory of competition authorities’ prepared by the UNCTAD secretariat, 2002.

45 According to UNCTAD and OECD.

Figure 2-4 Proliferation of competition polices

Asia and the Pacific Latin America and the Caribbean

Central and Eastern Europe Africa South Africa

IsraelLuxembourg

Asia and the Pacific Latin America and the Caribbean

Central and Eastern Europe Africa South Africa

IsraelLuxembourg

Canada and the United States were the first two countries to introduce competition law, in 1889 and 1890 respectively. Sweden introduced an antimonopoly law in 1925 because of concerns about cartels. Most other countries that have introduced competition law before 1950 were Anglo-Saxon, including Australia, New Zealand and the United Kingdom. Many European countries introduced competition policy in the 1950s. Antitrust became institutionalised in Western Europe as governments moved to reduce trade restrictions and integrate their economies. Differing from the antitrust tradition of the United States, argued by Wells (2002), most European countries had tolerated and even encouraged cartels. According to Wells, pressure from Washington helped prevent a resurgence of cartel in Europe after the Second World War. The United States devoted considerable resources to building a liberal economic order, which Washington believed was necessary to preserving not only prosperity but also peace after the war. Antitrust was a cornerstone of this policy and the United States sought to impose antitrust policy on other nations, especially Western European countries and Japan (Wells, 2002). The occupation of Germany and Japan initiated an ambitious social science experiment: the reconstruction of these economies that were largely devastated. The occupation allowed Americans to implement programs of deconcentration and decartelisation in Japan and Germany, which had highly concentrated and cartelised economies. Meanwhile, the United States succeeded in imposing on Western Germany and Japan antitrust policies roughly modelled after its own regime.⁴⁶

A large number of developing countries have also introduced competition laws. The introduction of competition laws in developing countries reflects the changing context of the national and global economy. In the 1970s, support for free markets reached its nadir in developing countries, as governments embraced the policy suggestions based on the traditional development economics (see Section 1.5). Cartels, most notably the Organisation of Petroleum Exporting Countries (OPEC), were established to raise the commodity prices to a ‘just’ level. Since debt crisis in the 1980s, economic liberalisation policies have been introduced with the aim of promoting efficiency and increasing competition. The reform program was implemented through external pressure from international financial institutions and often entailed enacting and enforcing strong competition policy.⁴⁷ Trade liberalisation and privatisation were central components of the reform. For developing countries, the earlier protectionist policies have left a legacy of weak and underdeveloped competition frameworks. Government policy instruments are needed to safeguard and promote the competitive process, especially in a context of rapid institutional change and economic openness. Regulation, sometimes embodied a component of competition policy, was often developed after privatisation (Wise, 2000a).

At the end of the 1980s only a handful of developing countries had effective competition legislation (Gray, 1991). Where rules and guidelines for competition existed, they were poorly implemented compared with competition policies of developed countries.

In the 1990s, the pace of adoption increased rapidly as former centrally planned economies in Central and Eastern Europe introduced comprehensive programs of deregulation,

46 The Antimonopoly Law of Japan and the Decartelisation and Deconcentration Law of Germany were both enacted in 1947. They are significantly amended by later legislation, moving away from their US origins to consider more local conditions, particularly through a higher degree of tolerance for some types of cartel activities (World Bank, 2002). In Japan, the Fair Trade Commission was created in 1947, modelled on the American Federal Trade Commission. In 1957, the parliament legislation of Western Germany strictly limited, although not entirely abolished cartels, which was not as strong as the 1947 degrees.

47 See Sell (1998) for a discussion.

privatisation and competition policy. A number of developing countries also introduced competition policy in the 1990s. Since 1990, more than 35 developing countries and transition economies have introduced competition law.

Experience of the East Asian NIEs

The four ‘Asian Tigers’ – Hong Kong, Singapore, South Korea and Taiwan – are the core of the so-called ‘East Asian Miracle’. In these four ‘dragons’, South Korea and Taiwan, have introduced competition policy, but Singapore and Hong Kong still do not have competition legislation. As city-states, Singapore and Hong Kong provide a rather unique environment, the political and economic idiosyncrasies of which make international comparisons difficult, if not impossible. South Korea deserves the most attention because it introduced competition legislation earlier and improved it in a gradual manner. The South Korean competition policy provides a typical example for the competition policy introduced and improved in a context of state-led rapid economic development. The special role the competition policy played for chaebol reform and policy consultancy can also be used by China as a reference. Nevertheless it seems reasonable for developing countries to question the relevance of competition policy to their development given the success of economies such as Hong Kong and Singapore, even and South Korea. In fact, competition policy played a negligible role in the era of rapid economic development in South Korea.

South Korea is one of the pioneers in developing countries introducing competition policies.⁴⁸ In South Korea, competition policy played a small role in the era of state-led development of the 1960s and 1970s. In this period the government assigned top priority to industrial and trade policies in order to maximise investment and international market share. South Korea’s competition policy regime developed as its economic policy has shifted from government controls toward reliance on markets since the early 1980s (OECD, 1996). Since the policy shift took place in the early 1980s, chaebol, the primary vehicle for investment and development, has emerged as a primary subject of competition policy. The chaebols are historical legacies of the early period of government-led rapid economic growth. In South Korea’s development program, the chaebol structures offered some advantages, but, as South Korea’s market environment opened more in the 1980s, weaknesses in this economic organisation became evident (Wise, 2000b). Chaebol, the effective solution for rapid industrial development and catch-up in the era of state-led growth has posed serious problems in the new economic environment.

The Monopoly Regulation and Fair Trade Act (MRFTA), the current antimonopoly law of South Korea, was adopted in December 1980, essentially replacing the Price Stabilisation Act enacted in 1974 aiming at controlling prices and assuring fair trade practices. The stated purpose of MRFTA is to encourage fair and free competition by prohibiting abuses of dominant positions, preventing excessive concentration of economic power and regulating improper concerted activities and unfair business practices, thereby stimulating creative business activities, protecting consumers and promoting the balanced development of the national economy. The MRFTA marked a significant departure from the traditional model of government-led development to a market economy and created a comprehensive set of new rules for the market economy – free and fair competition.

Responsibility for the implementation of this new law was assigned to a new agency, the Korea Fair Trade Commission (KFTC), within the powerful Economic Planning Board.

48 See e.g. OECD (1996) and Lee (1998, 2002).

The MRFTA forbids dominant firms in monopolistic or oligopolistic markets from abusing their market dominating positions.⁴⁹ The KFTC exerted considerable administrative efforts to identify these monopolistic or oligopolistic firms, but was only able to correct a very small proportion of these cases. In 1999, the MRFTA was amended to abolish this prior designation of dominant firms. The KFTC prohibits firms and cartels from engaging in collective activities that would restrict competition substantially. By 2000, 329 such prohibited collective activities had been remedied.⁵⁰ As to merger review, the 1999 amendment also abolished the ambiguous exemptions (either industrial rationalisation or strengthening the international competitiveness of an industry) and set up the efficiencies and failing-firm defence. The KFTC also administers rules pertaining to unfair contract practices and advertising, as important complements to competition policy. The KFTC also plays a unique role in the area of competition advocacy. Other government agencies are required to consult with the KFTC in case that they are going to introduce, amend or enact any laws, degrees, or administrative measures that may restrain competition. From 1981 to 2000, government agencies consulted with the KFTC on 3,789 separate proposed legislation or alterations, of which the KFTC corrected 685.

The institution of competition policy has progressed gradually since the 1980s. In 1988, competition policy enforcement intensified and the Task Force for Economic Autonomy and Competition was established to review existing regulations and recommend changes.

In 1990, the Committee for Administrative Deregulation was set up, which was succeeded in 1993 by the Deregulation Committee. Issues addressed included rules about plant establishment, construction, land use, customs clearance, foreign investment, environment, and distribution. Sectors studied included transport, distribution, construction, finance, stock brokerage and insurance, pharmaceuticals and cosmetics, food and beverages, alcoholic beverages, fisheries, energy, and services such as advertising and telecommunications (Lee, 1998). In 1990, decision-making power of competition law related matters had been shifted from the Minister of the Economic Planning Board to the KFTC Chair, thus giving the KFTC independence in its enforcement decisions. In 1994, as a result of the re-organisation of government, the KFTC emerged as a separate and independent agency.

Following the 1997 financial crisis and the measures imposed by the International Monetary Fund (IMF), competition policy was considered key to regulatory reform for South Korea. The government has used competition policy tools to restructure chaebols as well (Wise, 2000b). There is continuing concern about problems raised by the chaebols, problems which are not limited to conventional competition issues but which also include concerns about capital structures and corporate governance. The MRFTA, for example, prohibits direct cross-investment between subsidiaries of the same chaebol and restricts affiliate cross debt guarantees between subsidiaries belonging to any of the 30 largest chaebols. Under the 1998 amendment, MRFTA prohibits affiliate payment guarantees for all new borrowings to the 30 largest chaebols. The 1999 amendment of the MRFTA permits the existence of holding companies with certain restrictions⁵¹, as a means to induce

49 Market dominating firms refer to either any single firms that has a market share of more than 50 percent or the three largest firms in a given market that have a combined market share of more than 75 percent. See Monopoly Regulation and Fair Trade Act, Law No. 3320 of 1980.

50 See Lee (2002).

51 ‘Financial’ holding companies cannot possess non-financial subsidiaries and ‘general’ holding companies cannot possess subsidiaries doing financial business.

chaebols to reorganise themselves and to separate financial capital from industrial capital.

Advocacy to achieve procompetitive reform has been comparatively successful. Recent reforms eliminated most remaining exemptions from the competition law and some potentially anticompetitive special privileges remain, many of them benefiting small and medium-sized enterprises.

The introduction of competition policy in Taiwan was later than in South Korea. A ‘Fair Trade Law’ was promulgated in 1991 and became effective in 1992. The target of this competition law is restrictive business practices and unfair trade practices. The Fair Trade Commission (FTC) was established in January 1992. The FTC is the central authority in charge of competition policy and the implementation of the Fair Trade Law. It is responsible for drafting fair trade policy, laws and regulations, and for investigating and handling various acts impeding competition, such as monopolies, mergers, concerted actions, and other restrictions on competition or unfair competitive practices by enterprises.

When matters provided for under the Fair Trade Law concern the authority of other ministries and commissions, the FTC handles them in consultation with those bodies. The FTC is also charged with directing and supervising the enforcement of the Fair Trade Law by the authorities at the municipality and county (or city) level.

Hong Kong and Singapore are among the most open economies in the world (see Subsection 1.3.2). Although they are widely regarded as a free and competitive economy, there are actually no competition policies in Hong Kong and Singapore. In 1992, the Consumer Council of Hong Kong began to study a number of industries where there was a lack of competition. The Council later published a summary report, which recommended the enactment of competition laws and the adoption of comprehensive competition policies in Hong Kong. But the government did not accept the Council’s recommendations. The government argued that the needs, requirements and characteristics of individual sectors varied, so a sector-specific approach to safeguarding competition was more practicable. In case that the government finds that effective competition does not prevail in certain industries, or a dominant firm abuses its market dominance, it will take actions to promote competition. This sector-specific approach was adopted by Lam (2000) to analyse the problem of market dominance in Hong Kong’s gas industry. The author concluded that the gas industry in Hong Kong is dominated by HKCG, which gained unreasonable profits depending on its dominance position. It is argued that, instead of imposing extensive government regulation on the company, a better way to discipline the firm is to introduce natural gas and a common carrier system to Hong Kong. Like in Hong Kong, there is generally no legislation or regulation that governs anticompetitive practices in Singapore.

Starting with the telecommunications and power industries, Singapore has been adopting a sector-specific approach to ensuring efficient competition in liberalised markets. The Singapore government was reported to be studying the need for special legislation to ensure commercial fair play and a competition law will be enacted by 2005.

Without competition policy, Hong Kong and Singapore have realised high economic growth performance over decades. This indicates that in extremely open economies, international trade can introduce fierce competition into domestic markets and possibly act as an effective substitute for competition policy. But the experience of post-war Japan could also be treated as a demonstration of the irrelevance of competition policy for rapid economic growth even in a large and relatively closed economy. Japan’s anti-monopoly law has been in place since the end of the Second World War. For most of the post-war era, however, the principal goal of Japan’s economic policy has been economic growth and free competition has sometimes been seen as inconsistent with that goal (Iyori and Uesugi, 1994). Competition policy was assigned to a separate agency, independent of the

government but politically not strong enough to promote its policies effectively (Wise, 1999). In the 1990s, Japan’s attitude toward competition policy enforcement has changed mainly due to pressure from the United States.⁵² The enforcement activities were increased and exceptions from the competition policy were removed. Despite the recent renaissance of competition policy in Japan, the decades of rapid growth of the post-war Japanese economy generally witnessed the absence of an effective competition policy. The Japanese, as well as the South Korean, experience has questioned the relevance of competition policy for economic growth. Rather, the necessity of a proactive industrial policy has been highlighted.

Experience of transition economies

The number of countries and territories with competition laws increased sharply after 1989 as the former centrally planned economies in Central and Eastern Europe introduced comprehensive reform programs including competition policy. Starting from an initial condition where industries were extremely concentrated in line with the model of centrally planned economy, most transition economies pursued policies to reduce concentration through facilitation of entry and restructuring of state-owned industries. Privatisation played a central role in most EEFSU transition economies. Based on the experience of the privatisation of other developing countries, given the initial levels of concentration, there was a keen awareness of the risk that privatisation might easily transform public monopolies into private ones and might increase the risk of abuses of market dominance.

Most policy advisors therefore strongly supported the implementation of antitrust mechanisms in transition countries (Pittman, 1992; Willig, 1992; Estrin and Cave, 1993;

Mastalir, 1993; Saunders, 1993). In some transition economies, competition authorities were given the mandate to scrutinise privatisation decisions ex ante in order to ensure that newly privatised entities would not have excessive market power (Djankov and Hoekman, 1998a). Competition authorities had the mandate to impose demonopolisation prior to

Mastalir, 1993; Saunders, 1993). In some transition economies, competition authorities were given the mandate to scrutinise privatisation decisions ex ante in order to ensure that newly privatised entities would not have excessive market power (Djankov and Hoekman, 1998a). Competition authorities had the mandate to impose demonopolisation prior to