Tag Archives: Competition Policy and Development

Concrete Antitrust Economics

By Francisco Beneke*

Last week I read a book called Concrete Economics by two Berkeley professors, Stephen Cohen and Bradford DeLong. The general theme of the book is simple and straightforward: economic policy redesign throughout US history has been successful to the extent that it has been pragmatic, not based on abstract theories of how markets behave but on concrete thinking of what the economy needed. The authors argue that it had been that way until the last redesign of the 1980s when ideology prevailed and nobody had a good idea about the supposed benefits of moving the US away from manufacturing and toward what were believed to be higher value-added activities (finance, insurance, and real estate).

The point applies to the debate on some issues in antitrust analysis. Competition policy can take many shapes within the same country during different periods of times, as in the US, and also differ to a significant degree across important jurisdictions––say, the EU, US and China. The discussion of what is the right approach turns sometimes ideological. Take the debate surrounding digital markets for example. Some people advocate for a loose stance on big tech companies because of the fragility of their position. Google’s competition is one click away and Facebook took the field that was already dominated by other social networks. We can describe a position to be ideological if it’s based on a myopic view of the facts. What about the companies’ jaw-dropping share in online-advertising or the fact that true challengers only appear to succeed in certain niche markets? (think of the success of Snapchat with teenagers in the US). Some commentators like to oversimplify the discussion and throw general arguments such as that intervention dampens innovation. If only things were so simple. The question we should ask is which specific type of intervention we are talking about in order to make an educated guess on the effects we may expect to see.

Another topic on which the debate is highly ideological concerns my main area of research: do we need to adjust competition policy and analysis to the different characteristics and needs of developing countries? A big point of the discussion is about keeping consumer welfare as the north of the compass and ditch other considerations that would make antitrust an instrument of industrial policy. There are good points on both sides, and I must confess that my own research does not depart from the consumer welfare paradigm. What is certainly true is that purists, as professor Ariel Ezrachi calls them, claim a higher intellectual ground. Theirs is the economic approach. In that way, the debate turns ideological too.

There are good questions to ask around the purpose of competition policy in countries ridden with poverty and weak institutions. They are not populist and they are grounded in economic concepts. The desirability of focusing on consumer welfare rests on assumptions that look shaky, to say the least, in the case of developing countries. One such assumption is the flexibility of the workforce. If imports take a market by storm, the displaced workers will have a harder time being relocated to new activities because of their lower average education and skills development. Does that mean that developing countries should close their borders to imports? The point of this post and the book I read is that this is the wrong question to ask. It sounds ideological, not concrete because it is formulated too generally.

Concrete Economics has some important lessons for moving away from this ideology trap. First, in applying the book’s approach to tech markets or adjusting competition policy to unique economic and social contexts requires us to borrow some techniques from the medical profession. We can’t prescribe a treatment without a diagnosis (a point advocated by Jeffrey Sachs in his book “The End of Poverty: Economic Possibilities of Our Time”). That means not only compiling information but the right kind of it. Second, we have to paint a clear picture of the results that we are aiming for––in the authors’ words, what you see is what you get. And third, Cohen and DeLong favor a pragmatic approach of trying the policies that seem to have the best chance of succeeding, observing their results, ditching what does not work and keeping what does. This is what they argue happened during Franklin Roosevelt’s administration amid the Great Depression.

Granted, all of this is easier said than done, but worth the effort. A good start is asking the right questions. In the case of developing countries, for example, an important one is the following: what are the most pressing matters for the well being of the population and on which competition policy can make a significant contribution? Poor countries have an urgent need of education reform, but it is hard for me to picture a way in which antitrust can have a significant impact on the subject. On the other hand, vital infrastructure such as energy and telecommunications have important competition components that determine their coverage rate. Finally, we should come up with good evaluation methods––a practice that is scarce in competition policy––to be able to see what works and what doesn’t. As Cohen and DeLong admit, no one has the right formula, but that does not mean that we should not do anything.

Co-editor, Developing World Antitrust

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Development and Competition: a Useful Tool for Salvadoran Growth

By Flor A. Calvo*

Economic growth and development are highly relevant and important topics in El Salvador: education, health, transportation and security policies all focus on producing better social and economic levels in the country. However, competition law, a policy already present in El Salvador, has been constantly neglected as part of this toolkit for promoting growth and development. The law’s main objective is to “increase economic efficiency and consumer welfare”[1] by eliminating agreements among competitors, abuse of market power or mergers that could damage market competition and harm consumers.

But, how exactly could competition law affect development and growth?

Both theory and empirical research, like Nickell (1996)[2], Aghion (2008)[3] and Buccirossi (2013)[4], indicates that market competition increases productivity among markets and firms, due to the fact that firms that operate in highly competitive markets need to constantly innovate their products and improve their quality. Good examples of this dynamic are food courts: each competitor (food chains) presents their best possible offer in order to attract as many consumers as possible.

Another channel, through which competition affects development, is through the price level offered in each market. The greater the competition in a particular market, the lower the price level it has. Ivaldi (2014)[5] shows that prices in markets where cartels were found were 23% higher compared to the periods prior the establishment of the agreements. This implies that a timely and effective cartel detection ensures that consumers would not have to pay overpriced goods and services.

Also, Gutman & Voigt (2014)[6] analyzed the impact that newly enacted competition laws had on economic growth. They found once competition laws are enacted, they increase economic growth in countries that established them. For developing countries, in particular, economic growth is boosted through an increase in investment levels, both national and foreign investment, among countries with a competition law.

However, the effectiveness of the law to generate competition, and therefore growth, depends not only on its presence, but on the efficacy of its application. This requires coordination among competition authorities and other government institutions in order to punish anticompetitive actions and agents appropriately. Greco et al[7] showed that for Latin American countries, competition law is not enough to increase sustainable growth, but that they need a strong and effective enforcement of the law in order to generate the desired impact.

Although competition law has many limitations, it is a viable option to foster growth and development in El Salvador. Its relevance and inclusion into public policy discussions should be a priority since it is an option that generates positive externalities by increasing productivity, growth and local investment. Cases like South Africa, where competition is at the core of its policies, show how the introduction and strengthening of national competition enhances economic growth and social welfare. Certainly, our country possesses an important tool, one that could boost our economy if applied correctly.

*This article is a translation kindly provided by the author from a post in El Blog de la Competencia. The author holds a bachelor’s degree in economics and a master’s degree in international economics and development, specializing in impact assessment; has worked for international organizations such as FSD and 3ie; and works currently as an economist in the department in charge of the investigations of anticompetitive behavior in the Competition Superintendence of El Salvador.

[1] Art. 1, Competition Law. El Salvador.

[2] Nickell, S. (1996). Competition and Corporate Performance. Journal of Political Economy 104(4), 724-746.

[3] Aghion, P., Braum, M., & Fedderke, J. (2008). Competition and Productivity Growth in South Africa. Economics of Transition, 16(4), 741-768.

[4] Buccirossi, P., Ciari, L., Duso, T., Spagnolo, G., & Vitale, C. (2013). Competition Policy and Productivity Growth: An Empirical Assessment. Review of Economics and Statistics, 95(4), 1324-1336.

[5] Ivaldi, M., Khimich, A., & Jenny, F. (2014). Measuring the Economic Effects of Cartels in Developing Countries

[6] Gutmann, J., Voigt, S. (2014). Lending a Hand to the Invisible Hand? Assessing the Effects of Newly Enacted Competition Laws.

[7] Greco, E., Petrecolla, D., Romero, C., & Martinez, J. Competition Policy and Growth: Evidence from Latin America.

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Ten Years of the Competition Superintendence – Past, Present, and Future

By Marlene Tobar*

Competition law enforcement in El Salvador started ten years ago, an ideal moment to assess the work of the Competition Superintendence, the authority in charge of its implementation since January 2006.

In these first years, the institution has carried out a healthy oversight of markets promoting undistorted competition, strictly following the legal framework and proving its independence from political forces[1]. In addition, the authority has taken a leading position in the region. It has been awarded twice at the World Bank’s Competition Advocacy Contest, it is the only authority in Central America that has enjoined a merger (the acquisition of Digicel by Claro in the telecommunications market), and it has given a strong push to the design of a regional competition law through its work in the RECAC[2] (the Central American network of competition authorities).

In the law enforcement area, it conducted investigations in markets that have spillover effects in the economy such as the energy industry, the wheat flour market (carrying out dawn-raids), the distribution of sugar (imposing a fine on Dizucar, the dominant wholesale distributor that is owned by the local sugar mills), and the telecommunications industry, among others.

The institution acknowledged the role that public sector intervention plays and allocated substantial resources to identify restrictions to competition arising from regulations. For that purpose, the authority pointed toward the need of improving regulations to promote more openness to trade regarding products of social importance such as rice and sugar. The Competition Superintendence has also pushed for reforms to the law that creates a legal cartel in the production of sugar. Another important policy change promoted has been the amendment of the system under which radio-electric spectrum concessions are granted in the telecommunications industry. The recommendations are aimed at promoting competition in the allocation of this input (competition for the market) in a context of upcoming expiration dates to current grants in the broadcasting market and the still uncertain process of digital technology adoption in the country.[3] Recently, the authority issued a statement regarding a decision by the Supreme Court’s Constitutional Bench[4] on the alleged unconstitutionality of certain provisions of the Telecommunications Law. The Court stated that the national congress should not close the door on any advisory intervention of the Competition Superintendence during the hearings on the issue.[5]

The Competition Superintendence has decided a total of 14 cases of anticompetitive behavior, analyzed 16 merger transactions, carried out 23 market studies, issued 128 opinions, signed 36 MoU’s, and implemented a wide-ranging program of diffusion and promotion of the country’s competition law. The authority has imposed $15.1 million USD in fines (93% of which correspond to anticompetitive behavior decisions). In other words, it is quantitatively and qualitatively clear that the authority has sought to cover all sources of restrictions to competition.

Nonetheless, the main topic to reflect upon is the ability of having a real impact on efficiency and consumer welfare (objectives that the authority has to pursue by law), which are to be understood as indirect means to achieve higher living standards for society.

At the moment, such ability is hindered by the lack of support from the legislative, executive, and judiciary branches evidenced by (at least) two facts: first, the Supreme Court’s Administrative Bench’s judicial backlog regarding the review of the Competition Superintendence’s decisions on anticompetitive behavior. From the total of fines imposed by the authority ($15.1 million USD), more than 90% have been challenged by the punished firms, with 27 ongoing proceedings before the Administrative Court and 1 before the Constitutional Court. Currently, there are $9.1 million USD of overdue payments in fines. On its part, the Administrative Court has temporarily enjoined some of the payments and other precautionary measures, a part of which have been certified to the National Prosecutor[6].

Second, the authority has found scant support from other government institutions in the implementation of policy recommendations and inter-institutional dialogues have been rare at best (or non-existent in many cases). The first element hinders the ability to correct the punished anticompetitive behavior and hampers the deterrent effect of the fines; and the lack of support from other government entities reduces the likelihood that competition policy can spur economic and social growth.

All that said, it is important to look at the future and set the direction of competition policy in El Salvador. In his speech in the event commemorating the tenth year anniversary of the institution, the superintendent stated that he would seek for the institution to have a greater impact in key variables of the economy (development, poverty, and inequality) with the purpose of contributing to its “democratization”.

In order to do that, in addition to tackling the problems mentioned above, the authority will have to aim its competition enforcement activities toward solving the real problems faced by the country. As a consequence, there are more than a few considerations to be made. Some of the main issues to be analyzed are if the current legal framework is adjusted to the nation’s objectives; if the use of neoclassic economic theory is an adequate basis for the analysis of competitive restrictions (as the international community advises as best practices); determining the objectives that competition policy has to pursue in order to effectively contribute to the country’s development; to define the term of economic efficiency that will be pursued, among others. This analysis will have to be made taking into consideration El Salvador’s particular traits and variables that determine the dynamics of competition in its national markets.[7]

*The author is the head of the department in El Salvador’s competition authority that is in charge of the merger review proceedings, market studies, and opinions regarding law proposals and rules of tendering in public procurement.

[1] The law entered into force under a right-wing government. Under the current left-wing government the authority imposed a fine in the amount of $759,924 USD to Alba Petróleos for failing to report mergers. This firm is partly owned by ENEPASA, an association of municipalities governed by majors from the political party that controls the executive branch. Even so, the president re-elected the superintendent, Francisco Díaz, for a second term, setting a precedent in the region.

[2] Composed of the competition authorities from Costa Rica, El Salvador, Honduras, Nicaragua, Panama, and the Dominican Republic. Representatives of the Guatemalan government attend the meetings in an observer capacity since Guatemala has no competition law to this date.

[3] Currently, the Congress is evaluating the best way to implement the amendments ordered by the Constitutional Court regarding the design of an alternate mechanism for the auctions of radio-electric spectrum.

[4] Decision of the Constitutional Court on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014. In El Salvador, the Supreme Court of Justice is divided into separate sub-courts according to a subject-matter criterion.

[5] Clarification issued by the Constitutional Court on December 16, 2015, regarding its decision on the accumulated unconstitutionality proceedings with references 65-2012 and 36-2014.

[6] One such example is the order enjoining the anticompetitive behavior for which DIZUCAR (the wholesale distributor owned by El Salvador’s sugar mills) was punished.

[7] Gal, M., et al. (ed.) (2015). The Economic Characteristics of Developing Jurisdictions, Their Implications for Competition Law”. Edward Elgar, Northampton, United States.

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Does Competition Policy Promote Development?

By Francisco Beneke*

There are almost 80 developing countries that have enacted an antitrust statute.[1] In such economies, budget constraints force governments to prioritize the implementation of policies that have the greatest impact. Assigning resources to, for example, prevent and eradicate terrible widespread diseases may be more justified than improving the conditions of roads. The situation is no different for competition policy. The antitrust agency has to be staffed and equipped, which requires taxpayers’ money. Therefore, it is important to know if antitrust law contributes to the development of a country and if there are any adjustments to be made in order to enhance its positive effects.

The academic debate on whether competition policy promotes development is complicated. First, because development itself is a controverted concept and, thus, there are many approaches on how to measure it. In this post I will focus on GDP growth. Even if a high income per capita is a poor measure of development, it is still a valid (though it should by no means be the only) goal to increase the income levels of the population in general.

The second reason for the complexity of the debate is the distinction between competition and competition policy. Many theoretical and empirical studies make the case for a positive relationship between more competition and technological innovation, productivity, and economic growth. However, a different issue is the effect of the policy itself. In other words, is competition policy effective in procuring greater rivalry among firms and, therefore, spurring increases in productivity and innovation that cause sustained long-term growth?

The answer to this question is not a matter settled between academics. Exploring one aspect of competition policy in the US, the enforcement of the law over the period of 1947-2003, Young and Shugart II (2010) find that the activities of the DOJ (measured by the ratio of its expenditures on the Antitrust Division to GDP) are associated with negative impacts on the productivity of firms in the short run with no evidence of long run benefits that compensate the temporary loss of productivity. In other words, it appears that behavior adjustment to antitrust rules imposes additional production costs on firms.

One weakness of the study is, strangely, the timeframe that is analyzed. Usually a greater temporal scope of the data allows for estimations less sensible to short-term shocks. However, in this particular case, the study is measuring different things across time regarding competition policy. As it is known, antitrust enforcement in the US went through a deep overhaul in the late 70’s and all through the 1980’s. Therefore, it is hard to know from the study the effects that the current design has.

In another study, Dutz and Hayri do find a positive association between the perception of firms that competition policy works and economic growth (Dutz and Hayri (1999)). The measure is taken from the Executive Opinion Survey (EOS) administered by the World Economic Forum. It captures the perception of firms, excluding that of other key stakeholders, such as consumers. Therefore, it could be problematic to interpret it as a measure of the overall quality of competition policy.

Another problem of using this and other perception measures of the effectiveness of competition policy is that this latter concept is in itself ambiguous. The EOS does have methods to ensure consistency of the answers within a country, but a more difficult task is to ensure that the mindset with which executives evaluate competition policy across countries is comparable.

A few examples can illustrate the problem mentioned in the paragraph above. In the 2015 release of the EOS’s results we have that in Latin America the county where firms perceive that competition policy works the best is El Salvador, with a slightly better score than Chile. Although El Salvador has made a lot of progress in the implementation of competition policy, Chile has a significantly better track record in actively pursuing cartels and abuses of dominance. It is also surprising to see that Mexico falls well behind and even ranks worse than Guatemala, a country with no competition law. While no measure is perfect, the one used in Dutz and Hayri (1999) is far from adequate to measure real differences in the effectiveness of competition policy across countries.

Other studies use a composite index based on both perception and objective data on competition policy such as the formal and factual independence of antitrust agencies and the years of existence of a competition statute (Voigt (2006) and Bolaky (2013)). For a review of the literature that analyzes the effects of competition policy and growth see Petrecola, et al. (2015). These studies deserve some comments. In order to keep this post short, their analysis will be the object of a future entry.

The studies that find an association between more competition and strong economic performance present their own challenges. Petrecola, et. al. (2015) is an interesting case in which the authors find a positive association between the perception of the intensity of competition within a country and growth at the global level, but find a statistically significant negative association when considering only Latin American countries.

It is a hard task to reconcile these findings. The authors offer some potential explanations such as the accurateness of the indicators used, the preference of macroeconomic policy over competition policy (which both reduces the relative effects of competition policy on growth and the priority that governments give to the former). What is curious is that the indicator used in this study captures the perception of the intensity of local competition and not the effectiveness of competition policy so the explanations address why competition itself has a negative impact on growth. In addition, the reasons put forward argue for a reduced effect of competition policy but do not explain the “wrong” sign of this variable in the regression results.

Another aspect of competition policy is its advocacy pillar. The relationship between certain reforms usually advocated by antitrust authorities and growth has been vastly explored. Openness to trade was found to have a positive significant association with investment rates in Levine and Renelt (1992) and Brunetti and Weder (1995). Bailey, Graham and Kaplan (1985) find that the deregulation of the airlines industry in the 70’s explains most of its growth in productivity. However, it is worth pointing out that an important issue would be to measure the effectiveness of the advocacy efforts of the authority in ensuring reforms that promote growth.

Competition authorities rely on the studies that show its net positive effects on economic performance to claim a central role in the formulation of public policy and to receive more resources to expand the scope of their enforcement and advocacy activities. And to be fair, there is no shortage of such studies. However, this is only part of the story. Competition policy conceived as an instrument to enhance consumer welfare is not conclusively proven to promote growth and, least of all, development.

Possibly as a result of this, there is an emerging literature that addresses the issue of whether a different competition policy can be designed that fits the needs and priorities of developing countries. Some prominent scholars on the issue include Eleanor M. Fox and Michal S. Gal. Both scholars are co-authors of an influential paper on the subject, where they explore some of the specific economic and social characteristics of developing countries that warrant an adjustment of antitrust law and policy (Gal and Fox (2014)). Some actual examples of adapting competition policies to meet development goals are China and South Africa.

To conclude, I would like to stress that the positive net effects of competition policy on economic growth are not conventional wisdom. It is still an open question and invites academics and practitioners to contribute to the clarification of such an important matter.

* Co-editor, Developing World Antitrust

@Paco_Beneke

[1] The International Competition Network has member authorities from 115 different economies. This number is not exhaustive of all countries that have a competition law because, for example, the Chinese antitrust agencies are not members of the network. However it is still a good approximation. The number of the advanced economies from the International Monetary Fund is 40. This latter number includes two economies without an antitrust statute: San Marino (a country of approximately 31,000 inhabitants) and Macao (a special administrative region in China). This leaves us with some 77-plus developing countries that have an antitrust statute.

References

Bailey, Elizabeth E.; Graham, David R.; and Kaplan, Daniel P. Deregulating the Airlines. Cambridge, Massachusetts. MIT Press (1985).

Bolaky, Baineswaree. “The Effectiveness of Competition Law in Promoting Economic Development.” International Journal of Economics and Finance Studies, Vol. 5, No. 1, (2013).

Brunetti, Aymo, and Weder Beatrice. “Investment and Institutional Uncertainty: A Comparative Study of Different Uncertainty Measures.” Weltwirtschaftliches Archiv 134.3 (1998): 513-33.

Dutz, Mark and Hayri, Aydin. “Does More Intense Competition Lead to Higher Growth?” CEPR Discussion Paper 2249, C.E.P.R. Discussion Papers (1999).

Gal, Michal S. and Fox, Eleanor M., “Drafting competition law for developing jurisdictions: learning from experience”. New York University Law and Economics Working Papers. Paper 374 (2014).

Levine, Ross and David Renelt. “A Sensitivity Analysis of Cross-Country Growth Regressions.” American Economic Review Vol. 82, No. 4, pp. 942-63 (1992).

Petrecolla, Diego; Greco, Esteban; Romero, Carlos; and Vila-Martinez, Juan P. “Economic Structure and Competition Policy Application in Latin American Countries.” In The Economic Characteristics of Developing Jusrisdictions: Their Implications for Competition Law. Gal, Michal S. et al, Eds. Edward Elgar Publishing, Northampton, Massachusetts (2015).

Voigt, Stefan “The Economic Effects of Competition Policy: Cross-Country Evidence Using Four New Indicators.” Available at SSRN: http://ssrn.com/abstract=925794 (2006).

Young, Andrew and Shughart, William. “The consequences of the US DOJ’s antitrust activities: A macroeconomic perspective,” Public Choice, Springer, vol. 142(3), pp. 409-422, March (2010).

 

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