Evolution of Competition Laws and their Enforcement

A Political Economy Perspective

Pradeep Mehta, Pradeep S Mehta

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9780415672139
• eBook ISBN: 9781136598487
• Topic: Business
• Subtopic: Business General
• Index: Business

This edited volume identifies the various country specific factors that warrant changes in the design and implementation of competition laws.

The book covers case studies of nine countries of differing sizes and at varying stages of economic development, that have at one stage or another repealed extant competition laws for new ones, and seeks to examine the motivations and contexts under which this was done. The countries examined include the Czech Republic, Hungary, India, Ireland, Poland, Serbia, South Africa, Tanzania and the UK. Tracing the evolution of competition regimes in the countries covered, the book provides lessons for countries still in the process of forming their competition regimes. The contributions show that the road to strong competition regimes is seldom smooth, and that social, economic and political factors in the country hugely impact on the pace and effectiveness of competition reforms. The volume also addresses the issue of when the development of competition policies and laws can be seen to be in conflict with national development strategies.

1
Adoption and reform of competition laws and their enforcement

A cross-country perspective

Vivek Ghosal and Siddhartha Mitra

Background

Countries often grapple with the question of whether the competition institutions and enforcement mechanisms based on the European or the US models are relevant for their developing markets. As we note later in this chapter, these comparisons raise complex issues. For example, on matters related to the conceptual framework and methods used to assess market power, efficiencies and damages, these advanced jurisdictions, which have practised competition law enforcement for many decades, have much to offer to emerging economies. Other dimensions of the challenge of such enforcement – such as raising resources for the effective functioning of competition agencies in a situation characterised by constraints; the efficiency of legal systems; development of human capital in the relevant law and economic areas; and instilling a competition culture among government and citizens – pose very different challenges and would require emerging economies to evolve home-grown responses. Such evolution, which requires the development of institutions and laws, and capacity for implementation and law enforcement, may take a long time to mature. The above-mentioned responses need to have a home-grown component because of the different histories preceding the setting up of modern competition regimes.

For example, like many African countries, Tanzania has little history of competition or consumer advocacy, and its small markets can typically accommodate only a few firms. Then there are countries – like many in Eastern Europe such as Poland, Hungary and the Czech Republic – each of which has a mixed history of, first, a more market-oriented economy, followed by a centrally planned phase, and finally the re-emergence of a market economy. Finally, there are countries, such as India, that went through a period of colonisation, then embarked on a planned economy phase and finally undertook reforms to open up markets.

Some economists and policy-makers are of the opinion that the current tides of trade liberalisation, privatisation and deregulation taking place at a fast global pace call for laying the foundations for effective competition policy and law enforcement. Others have argued that since developing countries have been operating for years in highly controlled regimes, and often at low levels of economic activity, the liberalisation process should not be hampered by imposing unduly burdensome additional regulations, and that market forces should be left to function unimpeded. A few have even argued that the limited number of companies and firms observed in a several sectors in these countries may reflect lack of foreign capital inflows. A system for generating competition can ensure that the preconditions for enhancing foreign capital inflows are satisfied.

As with all changes in institutions and laws, and new regulatory and governance mechanisms, change comes slowly. This is not necessarily a bad thing as it is critically important to understand the social, economic and political background of each country before embarking on new institutions, laws and policies, and their implementation. What is important to note is that even relatively small open economies, such as Hong Kong or Singapore, might be served by markets in services – for example, real estate services, banking, healthcare, retail – which are often local or regional, and are thus susceptible to the usual adverse impacts of anti-competitive practices, such as higher prices, potentially reduced choices for consumers and lower innovation. Overall, similar local and regional issues could arise in agricultural and natural resource markets, depending on the nature of the economy and the trade flows. Therefore, irrespective of the specific structure of the economy, it will pay dividends in the longer run to establish competition laws and have clear implementation and enforcement. The culture of competition often takes time to instil, and, in this sense, it is ideal to start early and have a clear framework and direction.

With these issues in mind, this chapter briefly examines the economies and histories of selected countries in the context of the emergence and evolution of competition laws and their enforcement, as well as the benefits accompanying these changes. The countries we examine are the UK, Ireland, South Africa, India, Tanzania, Poland, Hungary, the Czech Republic and Serbia. While the UK is an advanced economy, its modern competition laws and enforcement mechanisms have crystallised only recently. This is an interesting fact in its own right given that the UK has always had a more market-oriented economy. Examining the UK case also provides interesting insights for many other countries. The other countries we examine offer a kaleidoscope of political and economic histories, and hence make for an interesting set of comparisons. By examining such a diverse set of countries in detail, we hope to offer some observations that may lead to useful policy prescriptions for those countries that are still in the process of developing a comprehensive set of competition laws and enforcement mechanisms.

This chapter is organised as follows. It takes a look at some of the broad economic indicators for the nine studied countries and notes some implications for competition policy and related issues. It highlights the political and economic contexts under which the competition laws were adopted and traces the evolution of competition regimes in each of the studied countries and elaborates on the rationale for change over time as well as the triggers for such change. The chapter notes the key differences between the old and new competition laws and evaluates the extent to which such differences have resulted in improved outcomes as well as offers explanations for the same through the characterisation of implementation mechanisms and available resource bases. Lastly, it presents some concluding remarks.

Economic characteristics and related indicators

In this section, we examine selected data on the levels of economic development and market indicators for the set of nine countries, and briefly comment on what implications these observations may have for competition policy and law enforcement.

To facilitate examination of overall levels of economic activity, Table 1.1 below presents data on Gross National Income (GNI) as well as Gross Domestic Product (GDP). As is well known, the UK and Ireland have high GDP per capita. While in the UK, per-capita incomes have been high for a time, Ireland’s numbers reflect the significant growth in the 1990s. Tanzania and India are at the lower end of the spectrum, with per-capita GDP only a small fraction of the UK and Ireland. In the middle of this spectrum lie Hungary, the Czech Republic and Poland which have reasonably high per-capita incomes. While data on the skewedness of the income distribution would be needed to complete the picture regarding demand and its distribution across households, the per-capita GDP numbers and population provide a proxy for the level of demand in these economies, at the household level as well at a more aggregated level. Although individual incomes are typically low in many of these countries, GDP growth has been rapid in countries such as India, Tanzania and Serbia, implying the likelihood of significant increases in the size of markets in the future which in turn would provide incentives for new domestic and foreign firms to enter. This is desirable as new entry is often associated with greater variety and quality of goods and services, along with likely reduction of prices owing to competition. In the context of these high growth rates, it is important that competition policy and law enforcement ensure that markets remain relatively competitive and contestable to foster new entry and sustain innovation in the longer run.

One additional aspect needs to be recognised when examining issues related to the size of the domestic markets, and how this might be related to the necessity for and sophistication of competition laws and their enforcement. If we consider goods and services that fall under the necessities category, the size of the domestic market is more likely to be proportional to the population. For example, if we consider a staple like rice, the total demand in countries like India, China or Indonesia is very large, and is directly related to the population. In this sense, while these economies have low per-capita incomes, the demand for such necessities results in a relatively large market, larger than, say, in the UK or Ireland. In contrast, in the case of goods and services that are categorised as luxuries, such as high-end motor cars, or designer garments, the demand is proportional to per-capita incomes, the distribution of incomes, as well as the population. For example, while the per-capita incomes of India and China are lower than, say, the UK, their combination of much larger population and a significant group of high-income earners in the upper-tail of the income distribution results in a relatively high demand for luxury items. Countries like Tanzania and Serbia, in contrast, would not have a large market for luxuries. What this implies is that there is a complex relationship between the size of the population, per-capita incomes, distribution of incomes and the size of the domestic markets. The size of markets, in turn, is important as, in conjunction with technology, it places constraints on the maximum number of firms that are economically viable. This in turn has implications for the extent of competition, and suitable policies for the realisation of high quality and low prices. Therefore, competition and enabling laws and policies are needed by all countries to attain markets that result in lower prices of goods and services for consumers, and higher rates of innovation to ensure long-run growth.

Now we examine some other data which indicate the scope for competition in markets. The examination reveals stark differences across countries in our sample. While in the UK and Ireland it takes only 13 and 16 days, respectively, to start a business, 65 and 42 days are required in India and Hungary, respectively. These numbers reflect the fact that bureaucratic procedures to start businesses vary considerably across countries; this, in turn, implies larger barriers to entry of (small) businesses in the emerging and developing economies than in developed economies. In the context of competition, this affects the process of entry and potentially reduces the dynamism of markets and innovation.

Another indicator which is instructive to note relates to the number of internet users (per 100 people). While these numbers are increasing in most countries, the differences across countries are telling: in the UK this number stands at about 65, whereas in India and South Africa it is less than eight, and less than one in Tanzania. One way to view the internet numbers is that these are likely to correlate with the levels of economy-wide information flows. In the relatively more advanced economies, the larger proportion of internet usage would imply greater information on a wide range of characteristics of goods and services, as well as governmental and non-governmental (e.g., various non-profit organisations’) efforts to educate the citizens on policies and other matters. Better-informed consumers, for example, are expected to make better decisions on purchases of goods and services, and this has a bearing on the extent and nature of competition between firms in the markets.

The next indicator we discuss is the market capitalisation of listed companies (as per cent of GDP). The market capitalisation data proxy the vibrancy of the domestic private sector, with implications for competition, innovation and growth. As the economies become more market-oriented and grow, we expect this percentage to increase. The UK stands at 141 per cent while all other countries are less than 80 per cent, with some, like Hungary, Czech Republic, Hungary, among others, at less than 35 per cent. The number for South Africa is probably not easily comparable to the others as it arises in the context of the large multinational companies that dominated the South African economy during the apartheid regime. India does surprisingly well, given its low per-capita income, and has a higher percentage than Ireland. This potentially signals India’s shedding of a relatively planned economy and emergence of a more market-oriented economy with growth of important private sector businesses.

The economic data and characteristics presented in Table 1.1 and discussed above emerge, of course, from differences in the social, economic and political histories and structures of these countries. In part, these features have also influenced the extent and sophistication of institutions related to competition policy and law enforcement.

Table 1.1 Broad economic indicators

Political and economic contexts under which the competition laws were adopted

The political and economic backgrounds underlying emergence of competition laws vary considerably across countries. Unlike most of the Western European countries, the UK, Canada and the US which had market-based capitalist economies, many countries emerged from more centrally planned economic systems with little or no private sector and significant control exercised by the government over economic activity. In the latter context, there was little need for competition laws. But as these countries slowly shed their command-and-control economic systems, it became imperative to develop institutions for keeping markets relatively competitive and contestable. What is also interesting is the variation among advanced countries in regard to competition policy and law enforcement. The US and Canada, for example, had competition laws established at the end of the nineteenth century, whereas most of the (current) advanced European economies did not have such institutions and laws till much later.

The relatively recent introduction of a rigorous competition regime by the UK is quite surprising, given its long history of market orientation. Modern competition policy first emerged in the UK after the Second World War. It was only with the coming into force of the Competition Act, 1998, and the passage of the Enterprise Act in 2002 that the UK saw the completion of a well-rounded scheme of law. The transformation began during the Thatcher administration when privatisation, liberalisation, deregulation and the contracting out of public competences all became mainstays of UK economic policy. Yet the introduction of the necessary corollary – an effective policy designed to police newly competitive markets – did not eventuate for almost two decades.

It is difficult to understand why advanced competition policy and its enforcement took so long to develop in the UK, especially given its market-oriented economy. Scholars have offered alternative hypotheses. These include, for example: (1) the British benefited from having large enterprises during the Second World War and it took time to shed these influences; (2) it is possible that the government was captured by the agenda of big business; (3) since the EC competition laws ensured that anti-competitive agreements and practices of the largest corporate entities – those whose behaviours were likely to impinge upon trade among Member States of the European Community – were potentially supervised, there was less need for national action; and (4) the Conservative governments from 1979 considered their priorities to be lying in deregulation and privatisation of publicly owned industries. The supranational policy related to EC, however, could not compensate in full for the absence of a domestic counterpart.

UK’s neighbour, Ireland, had the Restrictive Trade Practices Act dating back to 1953. The Irish laws were enacted against a backdrop of complaints about anticompetitive practices. The laws did not start from an existing list of prohibited practices, nor create or extend a list, but merely established a mechanism for examining market activities in terms of their competitive effects with a view to legal or administrative actions to regulate them where necessary. The government was operating on the basis that greater competition in domestic markets was in the public interest, and that agreements among firms that limited competition harmed consumer welfare. The cautious approach adopted in the Act reflected the fact that such legislation was novel in Ireland – while the Act was rather limited in its scope, it was far ahead of the continental European competition laws.

In sharp contrast to the UK and Ireland, South Africa, for example, faced a very different political and economic history. During the 1948 to 1994 period, when South Africa was governed by a right-wing Nationalist government, the markets were highly concentrated with low levels of consumer choice, high prices of basic commodities, a poorly developed small-medium enterprise sector and low levels of productivity. By 1994, the five largest conglomerates – the Anglo American Corporation, Sanlam, Liberty Life, Rembrandt/Remgro and SA Mutual/Old Mutual controlled entities – accounted for close to 85 per cent of the capitalisation of the stock exchange. The origins of competition policy in South Africa lie in the Regulation of Monopolistic Conditions Act (1955) which was administered by the Board of Trade and Industries. After nearly two decades of work, recommendations to the Minister of Economic Affairs were made on just eight occasions, and there was only one case, a case of resale price maintenance, where the Minister ordered a prohibition of the activity.

In short, it was an Act without any credible enforcement, and successive Ministers of Industry often ignored the Board’s competition law mandate. Amendments to Act were repeatedly offered so as to enhance effectiveness, but were unsuccessful. To address problems of anti-competitive behaviour and market failure, the Maintenance and Promotion of Competition Act (1979) was introduced and the Competition Board was established to administer the Act. However, the problems of lax implementation were not resolved as two decades of its existence were characterised by an increasing concentration of economic power in South Africa.

Tanzania is one of several developing countries which had begun to introduce competition legislation in the 1980s. Its first major competition law was the Fair Trade Practices Act (1994). Tanzania’s other major competition law is the Competition Act (2003), which was designed to solve some of the weaknesses of the former law.

Like South Africa, India has a colonial past, but the subseque...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of illustrations
• Notes on contributors
• Foreword by Eleanor M. Fox
• Preface
• Abbreviations
• 1 Adoption and reform of competition laws and their enforcement: a cross-country perspective
• 2 The Czech Republic’s experience with competition policy and law
• 3 The development of the Hungarian competition law – from the outset (1991) until 2007
• 4 Evolution of competition policy and law in India
• 5 Boston v. Berlin: a half century of Irish antitrust
• 6 Evolution of the competition law and competition policy in Poland
• 7 Competition law and policy in Serbia in the context of the EU accession process
• 8 The evolution of competition policy and law in South Africa
• 9 Why do countries adopt competition laws? The Tanzanian case
• 10 The evolution of competition law and policy in the UK
• Index