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	Table of Contents
p. 69 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia III. Promoting competition for long-term development Introduction Benefits of competition Competition policy regimes Consistency with other development objectives Competition policy in the context of regional and global integration Issues for implementation Effects on government finances Toward a competitive future Summary and conclusions Endnotes and references Statistical appendix

Asian Development Outlook 2005 : III. Promoting competition for long-term development

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Competition policy regimes

Once one allows for the possibility that private firms can create barriers to entry or foreclose entry to a market by new firms, then improving dynamic economic performance may well require enforcement of policies to promote or ensure competition.

Objectives

Competition policy is concerned both with private anticompetitive practices and with government measures or instruments that affect the state of competition in markets. For example, trade barriers, barriers to FDI, and licensing requirements (among others) can influence the extent of competitive pressures in markets and so are often seen as appropriate concerns of competition policy.

Barriers to trade and FDI, as well as stringent licensing and registration requirements, can influence the extent of competitive pressures in markets and so are seen as legitimate concerns of competition policy. Thus, as Peter Lloyd has put it: "Policies relating to the liberalization of international trade, reduction in restrictions on foreign direct investment, privatization, deregulation and the protection of intellectual property rights are all relevant to the promotion of competition in markets" (Lloyd 2001).

Not all countries are driven by the same objectives when adopting competition policies. Some countries adopt competition policies to protect market processes and grant equal rights for firms to engage in commerce. This generally involves the removal or prevention of restraints on competition to enhance consumers' freedom of choice and to give firms freedom to trade and to access markets. Other countries impose competition laws aimed at securing economic efficiency improvements, both static and dynamic. This implies that the economy's resources are allocated to the activity that provides the highest value; that production is done at minimum possible cost; and that innovation and technological progress allow the expansion of the economy's feasible production set.

Thus, competition policy is usually aimed at enhancing consumers' freedom of choice and firms' freedom to trade and to access markets, balancing short-term (static) efficiency improvements with long-term, dynamic efficiency and development. This is illustrated in five of the six countries studied (endnote 2), which already have the relevant legislation in place and explicitly identified the objectives for their competition laws.

The People's Republic of China (PRC), India, Korea, Thailand, and Viet Nam all mentioned free competition, or the protection or promotion of effective competition, as the main objective of their competition laws (Table 3.1).

The stated purpose of Korea's competition act is to promote fair and free competition, encourage creative enterprising activities, protect consumers, and strive for balanced development of the national economy by preventing the abuse of market-dominating positions by enterprises and the excessive concentration of economic power, and by regulating undue collaborative acts and unfair trade practices.¹⁰ Similarly, Thailand's competition act aims to promote fair and free trade with a competitive environment, and to prevent business structures from creating monopolies and conducting unfair trade practices.¹¹ Viet Nam's competition law was approved by its National Assembly in November 2004. The main objectives of the law are to regulate unhealthy competitive practices and practices in restraint of competition.

To date, Malaysia has not passed any economy-wide competition legislation. Since independence, it has relied on sectoral regulations to enforce competition in markets.

Thus, the objectives of competition law are not confined to include static efficiency considerations and, in many cases, extend to include dynamic economic performance. Moreover, competition law is only a subset of a nation's competition policies and should not be confused with other policies that affect the intensity of competition in a nation's markets. The governments of most of the countries studied have envisaged their competition laws as supportive of their national development objectives. Each one consequently views the prevalence of competition as contributory to the country's economic development.

Is competition policy necessary or appropriate for developing countries? For the full benefits of competition-induced efficiency to be realized, well-functioning input markets (especially those for capital and labor) play a critical role. Unlike industrial countries, many developing economies do not have well-functioning factor markets--such as stock exchanges and bond markets--and have often been unable to create institutions that support the operation of markets, such as bankruptcy codes, efficient contract enforcement, and the like (Laffont 1998). These "missing markets" and "missing institutions" alter the optimal degree of competition in an economy and, therefore, have implications for the vigor and manner with which competition policy should be enforced. These considerations are especially important when efforts to achieve dynamic efficiency drive policy making.

The competition laws of PRC, India, and Viet Nam, for instance, do not have specific provisions against monopolies. However, the PRC's competition act does have a provision preventing monopolies from forcing others to buy their goods. It also has a couple of provisions relating to the protection of intellectual property. In a similar vein, Viet Nam's competition law subjects monopolies, even if they are state owned, to the same prohibitions as private enterprises holding dominant market positions in the same sectors. Prohibitions include selling below cost, fixing prices, restricting production or distribution, and bundling unrelated obligations into a contract, among others. India's Competition Law does not directly ban cartelization, but prohibits collusive behavior among firms that adversely affects competition.

In comparison, the competition law of Thailand expressly forbids the creation of monopolies and devotes a full chapter to specifying antimonopoly and anticompetitive provisions. Korea's competition law is also unambiguous in its intent to promote competition in monopolistic or oligopolistic markets by regulating abusive market-dominating behavior and by controlling mergers.

Instruments

In many countries, the anticompetitive effects of government measures are addressed through the instrument of competition advocacy activities. This involves the conduct of activities by competition authorities related to the promotion of a competitive market environment through nonenforcement mechanisms, such as by establishing close relationships with other government agencies to influence their activities in pro-competitive ways and by increasing public awareness of the benefits of competition (ICN 2002).

The potential contribution of competition advocacy activities to national economic performance has been discussed extensively at the International Competition Network, at the Organisation for Economic Co-operation and Development (OECD), and in the World Trade Organization (WTO) Working Group on the Interaction between Trade and Competition Policy. An overview of the different types of competition advocacy is provided in Box 3.3.

Notwithstanding the importance attached to competition advocacy in both national competition regimes and in the work on competition policy in international organizations, another instrument--namely competition law and its enforcement--is at the center of competition policy in many countries.

Competition law refers to the set of rules and disciplines maintained by governments relating either to agreements between firms that restrict competition, or to the abuse of a dominant position (including attempts to create a dominant position through mergers) (Hoekman and Holmes 1999). UNCTAD (2002) provides a list of firms' actions that may fall within the purview of competition law, five of which figure prominently in most laws:

• Measures relating to agreements between firms in the same market to restrain competition. These can include provisions banning cartels as well as provisions allowing cartels under certain circumstances.
• Measures relating to attempts by a large incumbent firm to independently exercise market power (sometimes referred to as abuse of dominant position).
• Measures relating to firms that, acting collectively but in the absence of an explicit agreement between them, attempt to exercise market power. These are sometimes referred to as measures against collective dominance.
• Measures relating to attempts by a firm or firms to drive one or more of their rivals out of a market. A law prohibiting predatory pricing is an example of such a measure.
• Measures relating to collaboration between firms for the purposes of research, development, testing, marketing, and distribution of products.

This list of five instruments is not supposed to be exhaustive, nor is it meant to suggest that each element is given the same weight or referred to in the same terms in each country with a functioning competition law.

While it is important to know what issues competition law covers, it is just as essential to stress that the following government interventions fall outside competition law:

• most consumer protection laws, such as those relating to faulty products, warrantees, and misleading advertising;
• unfair trade laws, such as laws on antidumping and countervailing duties, and measures to protect national industries against surges in imports;
• government policies toward the registration of new businesses and taxation and corporate governance oversight of existing businesses; and
• most trade and FDI policies. (Note, however, that policies toward mergers and acquisitions fall within the scope of competition law.)

Despite the distinction between what falls within and beyond the scope of competition law, competition laws (in those jurisdictions that have them) do not cover all economic sectors. Some sectors--often including those involving state-owned firms--are exempted by law from the disciplines of competition. Other firms that engage in anticompetitive practices at the behest of the government are also often exempt from competition law. In addition, many competition laws include provisions that allow the government or an independent agency to grant exemptions to firms or sectors after the competition law has been enacted.

An important point is that competition law and advocacy are not entirely separate spheres--in many countries, advocacy activities are explicitly authorized by relevant national legislation. The Competition Law of India, for example, contains specific provisions relating to competition advocacy activities.

The Competition Act extends the mandate of the Competition Commission of India beyond merely enforcing the law. Under the advocacy provisions of the act, the commission will be able to participate in the formulation of the country's economic policies and in the review of laws related to competition. The provisions allow the central government to refer existing or proposed laws to the commission for an assessment of their effects on competition. The commission must respond to such a request within 60 days. The commission will therefore be assuming the role of competition advocate, acting proactively to bring about government policies that lower barriers to entry, promote deregulation and trade liberalization, and enhance competition in the marketplace.

The Competition Act seeks to bring about a direct relationship between competition advocacy and competition law enforcement. One of the main objectives of competition advocacy is to foster conditions that will lead to a more competitive market structure and business behavior, thus avoiding the need for intervention and enforcement by the Competition Commission of India (Chakravarthy 2005).

The mix of competition policy instruments used, and the manner in which they are employed, will depend on a country's broader development objectives, its historical and institutional background, and the international context.

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