The Role of Competition Policy in Promoting the ASEAN Economic

Community

The ASEAN Competition Conference. Bali, Indonesia. 15-16 Nov 2011.

Andreas Stephan

ESRC Centre for Competition Policy

University of East Anglia.

www.ccp.uea.ac.uk

ESRC Centre for Competition Policy

Working Paper Series:

www.competitionpolicy.ac.uk

Blog:

Competitionpolicy.wordpress.com

Why Competition Policy Matters

Economic Growth

Competition Policy is not a prerequisite to economic growth: China and India have grown enormously either without competition policy or without active enforcement.

Japan and South Korea put industrial policy before competition policy in order to boost investment and enter new markets.

But international markets were less liberalised - huge investments and incentives by governments to maximise production.

Only Japanese sectors characterised by strong domestic competition remain internationally competitive following the country’s downturn in the 1990s (Porter 2000).

Competition must be promoted along side investment and skills.

Why Competition Policy Matters

Productivity and Efficiency

Competitive pressures have positive impact on firm efficiency and productivity growth (Van Reenen 1995, Buccirossi et al 2009).

Market power has opposite effect (Geroski 1990).

Competition policy boosts productivity by lowering artificial barriers to entry put in place by anti-competitive practices, rewarding the more productive with greater market power and putting pressure on managers to increase internal productivity. (Van Reenen 2011)

Mechanism for selecting efficient firms and closing less efficient ones.

A lack of competition protects inefficient firms.

Firms which face strong domestic competition perform best in international markets.

Why Competition Policy Matters

InnovationMixed picture, but competition trade-off between dynamic and static efficiency no longer thought to exist. (OECD 2002; Blundell et al 1995)

Firms may innovate in ways that they may not have in the absence of competitive pressures.

Little empirical support for view that large firm size or high concentration is strongly associated with higher level of innovative activity. (e.g. Nickell 1996)

Nevertheless, competition alone will not guarantee sufficient innovation and too much competition can stifle it.

Why Competition Policy Matters

Consumers and Public FinancesCompetition policy helps lower prices, increase quality and maximise consumer welfare.

Lower prices mean many in society can enjoy a higher standard of living than under a monopoly or distorted competition.

Link between competition policy and social justice

Competition and commercial democracy through greater choice.

Government is one of the biggest consumers and so stands to gain significantly.

Bid-rigging in public procurement can have a significant impact on public finances and on investment in infrastructure etc.

Why ASEAN Cooperation is Important

Trade openness means countries are now more exposed to international cartels.

Many of these control raw materials and key commodities of great importance to emerging economies.

Enforcement against these is only currently undertaken by a small number of jurisdictions, with fines falling short of deterrence.

Firms involved in international cartels tend to be based in a small group of countries.

Why ASEAN Cooperation is Important

Why ASEAN Cooperation is Important

Overcoming capacity constraints in international enforcement.

Inadequate assets in jurisdiction to enforce decisions.

Fears of losing investment and jobs.

Lobbying from foreign firms not to enforce laws.

Why ASEAN Cooperation is Important

Also the ability to deal with regional infringements; the boundaries of markets rarely coincide with the borders of legal jurisdictions.

Groups like ASEAN more accurately reflect local markets.

Focus on domestic enforcement may be considered more important (as many international cartels will at least be brought to an end by US or EU).

Resource savings through shared expertise, training etc.

Greater confidence for firms looking to invest in the region.

What are the Preconditions to Success?

Enforcement is there to make sure that liberalisation works.

Highly concentrated markets bring rise to tacit collusion and demand a regulatory rather than an enforcement model.

Corruption and high levels of organised crime must be dealt with separately.

Sufficient political backing.

Sufficient powers of enforcement and resources.

What are the Preconditions to Success?

Harmonisation (e.g. monopolisation rules and merger regulation)

Coordination (e.g. leniency applications in cartel cases). In terms of leniency, competition authorities are reluctant to exchange information. Firms will only apply for leniency in jurisdictions where there is a credible threat of enforcement. What is really needed is one-stop-shops for leniency through groups like ASEAN.

What are the Preconditions to Success?

Consumers are a key driver of competition. If they are unable or unwilling to make or act on informed choices, then competition will be distorted (e.g. Energy and Mobility Scooters in UK).

What are the Preconditions to Success?

Creation of a competition culture. Collectiveness and the cohesion of social groups within business may also serve to stabilize anti-competitive behaviour .

Strong competition culture will create greater social constraints on such behaviour, such as shaming penalties and negative publicity.

Firm culture reflects in part the overall ethical and compliance culture of the country.

What are the Preconditions to Success?

Education through Media Coverage is Challenging

Complexity of some competition issues

Remoteness of Harm – lack of visual images

Lack of victim & image of wrongdoers.

Faceless upstream industries nobody has heard of.

Contradictory behaviour by Governments (UK Dairy case, Australia, OPEC).

Leniency programme – clash with effective enforcement.

What are the Preconditions to Success?

Media coverage particularly important in disseminating information. (OFT competition compliance survey 2011).

Early case selection should take newsworthiness into account.

By ensuring the media is engaged in effectively communicating enforcement to the wider business community and public, the agency helps to create robust competition culture.

A cartel of supermarkets (Bulgaria), bread (South African, Panama), Cooking oil (Indonesia) or toilet paper (Brazil) has a much better chance of significant media coverage than a cartel involving ball bearings or marine hoses.

Sticking Points

Conflict between competition policy and trade policy.

Export cartels are generally exempt from competition laws.

Unclear how damaging export cartels are.

Canadian Potash cartel. Significant increase in the price of potash (mined salts used in fertiliser). Many developing countries have reduced their use of fertilisers as a result (lower agricultural yields and higher food prices). Attempted takeover of Canada’s Potash Corporation by BHP Billiton in 2010 blocked in part because Canadian government feared breakup of export cartel.

Generally recognised as important to accessing new markets.

Hypocrisy, perceived blurring of lines in competition culture.

Sticking Points

Ensuring effective leniency. Anti-competitive agreements underpinned by social or familial ties are hard to break.

There may also be a perception that ‘ratting’ or ‘dobbing’ is more deplorable than the illegal act itself.

Importance of departing from fixed ‘models’ of enforcement. E.g. Through to 2008, there were 15 cases in which the KFTC granted rewards to cartel informants. These totalled 333 million KRW ($314,000 USD)

Concluding Remarks

Scope for Competition Policy to significantly benefit ASEAN members.

Especially through cooperation and eventual harmonisation.

But the success of competition law depends on a number of related factors.

These must be considered and addressed alongside the development of competition policy.