Catalog

	Table of Contents
p. 70 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

---

Consistency with other development objectives

During economic transition or reforms, the benefits of an open market economy cannot be fully realized unless restrictions on competition are removed. Sectors with characteristics of natural monopolies, such as utilities and telecommunications, need to be subjected to competition law or regulation to prevent abuse of firms' dominant positions. Price liberalization that is not accompanied by competition policy can lead to price increases if monopolistic structures are allowed to remain. Trade and investment liberalization may bring in more market players, but those agents can abuse their dominant positions if no competition policy is in place. Competition authorities can watch out for practices such as market-sharing agreements, predatory pricing, and cartelization, which allow the benefits of liberalization to accrue to firms instead of to consumers. Without adequate competition, such issues can be difficult to resolve (Box 3.4).

Several objections about the use of competition policies have been raised, e.g., competition policy does not allow state authorities adequate discretion in relation to other development policies, particularly trade or industrial policies; its effective contribution to economic efficiency is relatively small; and it gives too much weight to efficiency relative to other societal goals such as environmental protection, income distribution, etc.

Thus, one argument often proposed that restricting competition can enhance dynamic efficiency is that in the case of young industries, firms may need to finance growth and reducing rivalry will result in higher prices that, in turn, can generate the internal funds to attain this goal.

A variant of this argument was advanced by Amsden and Singh (1994) as practiced in Japan. They observed that:

In general, whether competition was promoted or restricted [in Japan] depended on the industry and its life cycle: in young industries, during the developmental phase, the government discouraged competition; when the industries became technologically mature, competition was allowed to flourish. Later, when industries are in competitive decline, the government again discourages competition and attempts to bring about an orderly rationalisation of the industry (p. 945).¹²

Restraining competition to bolster investment in a developing country setting is not necessarily more effective and less costly than offering firms an investment subsidy or tax credit, or taking measures that encourage banks to lend to firms. Reducing rivalry has the effect of increasing prices paid by customers. In contrast, an investment subsidy or tax credit that stimulated investment by the same amount as the reduced rivalry would not have the same adverse effect on customers' welfare. The investment subsidy or tax credit would, though, have implications for the government's budget, highlighting the importance of initial country conditions.

A related possible trade-off between competition policy and dynamic efficiency occurs when firms need to attain a certain size to compete effectively in world markets. Some advocates of industrial policy argue that domestic firms "need" profits to finance foreign expansion. If true, this might imply that the enforcement of competition laws related to cartels and merger review should place greater weight on export competitiveness than on domestic customers' welfare.

While monopoly profits could in theory have a beneficial effect by providing a source of funding for the investment necessary for a firm to compete internationally, several criticisms of this argument can be made.

First, capital markets are a more efficient source of funds for investment abroad than monopoly profits derived from domestic consumers. Tapping capital markets through either bonds or equities also increases discipline on the firm's investment decisions by imposing obligations, controls, and incentives on the shareholders and managers of firms. In contrast, when a firm has access to monopoly profits, it has less incentive to invest rationally and efficiently either at home or abroad.

Second, if monopoly profits are necessary to fund a foreign investment, then in effect the investment is only viable because of a cross-subsidy from domestic consumers. The overall effect on the domestic economy would consequently be negative as the investment would in reality be financed by a tax on domestic consumers to subsidize competition in export markets.

Third, a firm may seek to expand externally following a domestic merger and, as a consequence, the merger raises monopoly issues in one product market. If the firm produces more than that one product, rather than blocking the whole merger it would be more appropriate to apply competition remedies to the specific domestic market power abuse (Ireland 2003).

Finally, the assumption that larger domestic firms have greater export competitiveness is questionable, especially when the creation of those larger domestic firms results in a substantial reduction in the degree of rivalry between incumbent firms. Intense competition in the domestic market can build discipline that leads to success abroad. Firms that have to compete domestically know how to cut costs, operate efficiently, attract customers, and fight for market share. This discipline gives them an advantage when expanding into foreign markets.

Some argue that, for firms to reach the appropriate size, state action is called for, essentially to create or foster "national champions." These state actions may include forced mergers and acquisitions, or state-encouraged mergers and acquisitions by private firms. Even in this case there is an issue as to what should be the appropriate competition law enforcement regime for national champions after they have been formed.

An important feature of policies employed to create national champions is that they can involve discrimination against foreign firms. The discrimination can be de jure, for example, when foreign firms are simply banned from acquiring or merging with domestic firms in certain sectors. Also, a foreign firm's proposal to buy or to merge with a domestic firm may be reviewed under a different and potentially more stringent procedure than when two domestic firms decide to form a single combination. Alternatively, the discrimination could be de facto, for example, when merger review procedures are implemented in such a way that proposed combinations involving domestic firms are treated differently than those involving at least one foreign firm.

Industrial policy, competition, and competition policy

Concepts

A recurring concern in the debate over the efficacy of competition law in developing countries is that its enforcement may compromise important industrial policy goals, creating an inherent tension between the two. However, the characterization of industrial policy in the literature is considerably less precise than that of competition law, and can be a source of considerable confusion in discussions on development policy.

No single accepted definition of industrial policy exists, but a persistent theme is that industrial policy in developing countries is intended to facilitate a structural transformation of their economies. As Ajit Singh (2002) puts it, the crucial importance of industrial policy is to achieve structural changes required for development. Likewise, structural change in favor of industry has been viewed as a prerequisite for developing countries' modernization and growth, and developing countries' industrial policies were aimed to speed up the industrialization process to achieve levels of industrial development that were comparable with those in Europe and North America (Dervis and Page 1984).

The ultimate objectives of industrial policy are generally taken to be faster national economic growth and economic development, while the intermediate objectives are to expand the output of those sectors with high value added or the potential for considerable growth of value added. Not every industry targeted needs to be identified as high value added or having prospects for fast growth. Furthermore, nothing in principle prevents a nonindustrial sector--such as services or agriculture--from being so identified.

After all, industrial policies are supposed to have been confined to the trashbin of history in modern and modernizing economies, along with other outmoded policies like central planning and trade protection. The reality is that industrial policies have run rampant during the last two decades--and nowhere more so than in those economies that have steadfastly adopted the agenda of orthodox reform. If this fact has escaped attention, it is only because the preferential policies in question have privileged exports and foreign investment--the two fetishes of the Washington Consensus era--and because their advocates have called them strategies of "outward orientation" and other similar sounding names instead of industrial policies. Anytime a government consciously favors some economic activities over others, it is conducting industrial policy. And by this standard, the recent past has seen more than its share of industrial policies (Rodrik 2004, pp. 28-29).

As with competition policy, there appears to be no accepted set of instruments that are always considered to be part of industrial policy. Several characterizations of industrial policy instruments can be found in the literature. In his analysis of East Asian industrialization, Wade (1990) differentiates between sectoral and functional industrial policy instruments. He defines sectoral industrial policy instruments as those aimed at directing resources into selected industries so as to give producers in those industries a competitive advantage. In contrast, he defines functional policy instruments as those that affect either economy-wide factors (such as the supply of engineers or the price of energy) or in principle alter in the same manner firms' or investors' incentives, irrespective of the industry or sector in which they operate. An example of a functional instrument of industrial policy would be an economy-wide investment subsidy or tax credit.

Pangestu (2002) presents perhaps the most exhaustive categorization of the instruments of industrial policy--external, product, and factor market interventions. External market interventions, aimed at protecting domestic industries from imports, include import tariffs, quotas, local content requirements, and export promotion measures. Product market interventions, intended to foster competition in domestic markets, include competition policy (to ensure fair competition between domestic and foreign players) and domestic market-entry regulations. Factor market interventions, often designed to influence the operations of foreign affiliates so that the host country realizes a net benefit from FDI, include policies such as performance requirements and restrictions on FDI.

Pangestu's characterization of the instruments of industrial policy is of interest for several reasons. First, her characterization highlights how the enforcement of competition law is one of the large number of policy instruments associated with industrial policy. This is important because it implies that the preponderance of industrial policy instruments falls outside the domain of competition law. Second, Pangestu presumes the goal of competition policy here is to promote rivalry and not to restrain it, as Tilton (1996) had suggested. This hints at divergent views as to the contribution to economic development of rivalry between firms. Third, the fact that she feels the need to list so many policy instruments to accurately characterize the term industrial policy suggests that the term is so wide-ranging as to be of little more than descriptive value.

Tilton (1996) identified two types of industrial policy instrument in his analysis of postwar Japanese economic performance. The first instrument, which is similar to Wade's sectoral policy instruments, is described below:

The principal way industrial policy functions here is by allocating resources to favoured sectors. It can do so through policies that directly provide resources to industries, such as tax breaks, loans, subsidies, and import protection. More important, however, have been policies to reduce competition between firms. … Industrial policy may also support industry by providing or helping to circulate information about market or technological opportunities (pp. 2-3).

He adds:

A second form of industrial policy, strategic trade policy, seeks to appropriate the benefits of strategic industrial sectors by promoting them at home and helping them gain a larger share of world markets (p. 3).¹³

For the purposes of this chapter, Tilton's characterization of industrial policy is important because it highlights the fact that some competition policy and trade policy instruments are also seen by some as industrial policy instruments.

Overall, then, … government did play a variety of roles in the successful Japanese industries. However, these roles were very different from what is closely associated with Japan, and they were not the Japanese policies that have been the most widely emulated. Not only was there little of the intervention in competition associated with the received government model; in some successful industries, such as automobiles, the industry actually spurned government's efforts to suppress competition (Porter et al. 2000, p. 31).

In light of these findings, it would be misleading to argue that there is an intellectual consensus behind the proposition that limiting rivalry promoted Japanese economic development. Moreover, in a contribution to the WTO Working Group on the Interaction between Trade and Competition Policy in 2001, Japan itself argued that intrafirm rivalry has previously played and continues to play an essential role in Japan's development:

While it has been commented that Japan's post-war economic development was achieved by subordinating competition policy to industrial policy … much of Japan's economic dynamism has in fact been rooted in the robust market mechanisms created through competition among firms. Industrial policy and competition policy coordinated mutually and developed an environment that allowed companies to engage in free and fair competition. The introduction of competition policy early in Japan's economic reconstruction, as well as the subsequent evolution of this in response to economic development, was a great factor in Japan's rapid economic growth in the past. Even today, it is those sectors where competition has been intensive - the automobile industry, for example - which tend to have the greatest international competitiveness (Japan 2001, p. 2).

The Japanese experience is not unique. In Korea, it also appears that the costs of creating such a cadre of large firms have become increasingly evident over time. It is said that these large firms used their market power at home to frustrate entry by rivals, to raise prices, and to resist the enactment and enforcement of competition laws that could have put a stop to these adverse outcomes. These points have been made with some force in a submission by Korea to the WTO Working Group on the Interaction between Trade and Competition Policy in 2001, noting that:

Korea's experience demonstrates that it is better to introduce a competition regime at the initial stage of economic growth, when monopolies have not yet gained political and economic power. Despite their merits of achieving economy of scale, large monopolies, if left unchecked, are very likely to engage in excessive facility investments, cause price hikes resulting from their inefficient operations, and hinder opportunities for new entrants. This eventually necessitates the introduction and enforcement of competition policy to remove anti-competitive elements in the market under the political and social pressure stemming from the rising public discontent against the unbalanced distribution of wealth (Korea 2001, p. 3).

In addition,

With the progressive liberalization of world trade, developing countries can no longer resort to the export-oriented economic growth policy through the protection of domestic industries. Therefore, competition policy should be put into operation from the early stage of economic development to respond pro-actively and promptly to the rapidly changing economic conditions at home and abroad. Greater competition will ensure that unrestrained interaction of competitive forces will yield the best allocation of economic resources, thereby helping promising small and medium enterprises to grow on market-driven foundations and form a healthy industrial platform (Korea 2001, pp. 3-4).

The widespread use of industrial policies in developing Asia highlights the importance of examining their interaction with competition and competition policy. This is illustrated in Box 3.5.

People's Republic of China

Ever since the start of its open-door policy in the late 1970s, the PRC has persistently pursued industrial policies by, for example, identifying and providing preferential treatment to what have been termed sunrise industries. Industrial policy objectives are embedded in various policies covering the fields of FDI, science and technology, education, land use, and taxation policies, among others. According to Jiang (2002, p. 49), the central Government published more than 80 detailed industrial policies from 1978 to 1997, pertaining to virtually every government department and industry. Jiang divided them into the following three categories: those designed to reform the industrial landscape, those with interventionist measures, and those intended to support or restrict industries and enterprises. He argues that the PRC's industrial policies have undergone three stages of development in relation to their interaction with competition:

• From the late 1970s to the mid-1980s, they promoted competition by encouraging entry of new firms, particularly in nonstate sectors, introducing competition among existing enterprises and relaxing price controls.
• From the mid-1980s to the mid-1990s, they limited competition by restraining establishment of new small and medium enterprises, restricting competition between rural and state-owned enterprises (SOEs), and providing preferential treatment to large SOEs.
• Since the mid-1990s, they have promoted and limited competition in concert, by promoting competition in monopolistic industries, on the one hand, and instituting measures to rescue SOEs that were facing difficulties, on the other.

Until the mid-1990s, policy makers regarded industrial policies as the cure to many economic problems and the key to long-term economic development. Whenever a shortage or surplus occurred in the marketplace, or excessive competition existed (as manifested in, for example, price wars or a large number of loss-making enterprises), the public expected the Government to step in with proper industrial policies.

During the first stage of economic reform (late 1970s to mid-1980s), a primary goal of the Government was to improve firms' performance by introducing competition (relaxing price controls, removing entry barriers, and so on). Such measures were generally successful. From the late 1970s until the mid-1990s, market mechanisms were only regarded as supplementary to central planning. As competition intensified, new small-scale entrants (mostly nonstate owned) began to crowd out large SOEs. Toward the latter part of this period, the Government introduced new industrial policies to protect SOEs from increasing competition. The second stage in Jiang's analysis corresponds to such a correction period. After a period of consolidation, industrial activities consequently slowed down, and a new round of industrial policies was introduced to restimulate industrial production.

In October 1992, the Government decided to replace its traditional central planning approach (supplemented by markets) with one aimed at establishing a "socialist market economy." Gradually, market mechanisms began to be accepted as another, perhaps better, solution to economic problems. The Government still uses industrial policies, but they are no longer regarded as a panacea for the country's economic ills.

In spite of the adverse effects of the 1997-98 Asian financial crisis, particularly on Korea, the PRC Government still considers setting up large-scale domestic enterprises as a top priority. Unsurprisingly, a large number of large-scale mergers or acquisitions that took place in recent years were government managed. For example, in a government-ordered merger in 2002, the Civil Aviation Administration of China pushed nine domestic airlines directly under its supervision to form three super groups: China National Aviation and China Southwest became subsidiaries of Air China; Yunnan Airlines and China Northwest became subsidiaries of China Eastern; and China Northern and Xinjiang Airlines became subsidiaries of China Southern. Under the administrative transfer technique, these three "super groups" secured the assets of the regional carriers for free.

As far as competition in its domestic markets is concerned then, PRC industrial policies have shifted toward encouraging interfirm rivalry. This has been accomplished without compromising another stated government goal: that of building a cadre of large firms able to withstand competition on world markets. Moreover, to the extent that enhancing competition in the domestic markets is a prerequisite to having firms perform well on global markets, PRC industrial policies toward rivalry in domestic markets could well have underpinned the exporting prowess of this select group of firms.

India

Somewhat similar to the PRC, since the early 1950s India has had a planned strategy for its economic development. The Industries (Development and Regulation) Act, 1951 (IDR Act) empowered the state to channel the direction of private investment through the extensive use of industrial licensing. Entry into industries, capacity expansions, and choice of product mix and technology were effectively subject to state control. The intention was to reallocate resources from production of consumer goods and into the production of machine tools and capital goods. Only small-scale industry was exempted from licensing to encourage labor-intensive consumer goods production in rural areas. By the late 1960s, policies to protect the small-scale sector against competition from the large-scale sector were in place.

Additional Indian legislation, particularly the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) and the Foreign Exchange Regulation Act, 1973 put in place more barriers to entry. The Industrial Disputes Act, 1947 controlled firm closures and labor retrenchment, effectively creating barriers to exit. At the same time, the public sector was made responsible for the development of infrastructure and was given control over key sectors such as defense and defense equipment, iron and steel, energy, power, transportation, and telecommunications. Central government departments and public sector enterprises were mandated to accord price and purchase preferences to the public sector.

In 1991, India's industrial policies underwent a substantial change. The Industrial Policy, 1991 liberalized FDI, foreign technology agreements, and compulsory industrial licensing. Licensing in all but 18 industries was abolished, and an additional 12 industries were subsequently delicensed. Only industries relating to strategic or environmental concerns remained subject to licensing. In the same manner, the monopoly of public sector industries was abolished, save for industries dominated by security and strategic concerns, such as defense equipment, railway transport, and atomic energy and nuclear minerals. These measures catalyzed competition in industrial manufacturing and services. However, a number of commodities remained subject to price and quantity controls, such as sugar, fertilizers, pharmaceuticals, and cement. As a result, even in some industries with a private sector presence, market conditions and outcomes are not truly competitive.

Korea

Accounts of Korean economic development show that the Government, differentiating between domestic and foreign competition, undertook steps to promote the development of large firms that could compete on international markets while at the same time encouraging fierce competition between these firms. These measures are thought to have secured the benefits of large firm size without the costs associated with diminished competition. In recent years, however, this argument has fallen out of favor.

Rodrik (1995) summarized Alice Amsden's (1989) thesis on Korea's economic development since World War II as an incentive system based on an effective balance between carrots and sticks. The Government adopted measures such as trade protection, selective credit subsidies, export subsidies, export targets (for individual firms), public ownership of the banking sector, and price controls aimed at acquiring technological capacity and building world-class industries. At the same time, it set stringent performance standards in exchange for the subsidies and protection. Penalties (such as rationalization) were imposed on poorly performing firms, and rewards (such as subsidized credit) were offered to firms fulfilling government targets. This kept the system free of the rent seeking that has proliferated in other regimes. Amsden and Singh (1994), in describing the implications of this apparent mix of policies, contend that the Government encouraged big business through licensing and subsidized credit, but ensured that no collusion existed between big businesses by allocating subsidies only in exchange for adherence to strict performance standards.

High and growing concentration ratios appear to be the result of these policies. Smith (2000) reported a trend of growing chaebol market power from 1970 up to the mid-1980s. From 1977 to 1994, the 30 largest chaebol accounted for between 32% and 40% of total national output. In 1994, total sales by the top five chaebol were 49% of national income. Amsden (1989) showed that in 1982, only about 18% of 2,260 commodities, or 30% of all shipments, were produced under competitive conditions. The result was an industrial structure different from one that a market economy would have produced. Large, diversified business groups, which were less subject to the discipline of the market than to the discipline of managerial hierarchies, dominated the economy (Smith 2000).

Over time, the costs of creating such a cadre of large firms became increasingly evident, as these large firms used their market power at home to frustrate entry by rivals, to raise prices, and to resist the enactment and enforcement of competition policies that could have put a stop to these practices. Early efforts to introduce competition laws in the country were easily thwarted by lobbying from the corporate sector, as the monopolies had already gained political and economic power. Although some were able to achieve economies of scale, the monopolies, if left unchecked, were more likely to over-invest, over-diversify, and over-price due to their inefficient operations. The Government takes the view that the 1997 financial crisis and the problems now besetting the chaebol are somehow caused by the lack of a competitive economic environment in the past decades. To correct the situation, the Government is exerting extra effort to establish a more competitive market structure through stricter implementation of competition and related laws. However, it is facing difficulties in the process as vested interests resist change. This experience highlights the importance of having faith in the benefits of competition from an early stage of economic growth and of incorporating competition policy based on the functioning of markets into the basic framework of economic policy (Korea 2001).

Malaysia

In Malaysia, growth with equity has always been the primary economic objective. Race riots in 1969 prompted the Government to adopt an interventionist long-term development policy--the National Economic Policy--aimed at reducing poverty and redistributing wealth among the different ethnic groups. Over time, the objective of wealth redistribution received greater attention than poverty reduction. Specific ownership targets were set for commerce and industry. Outright purchases, licensing, quotas, and government procurement regulations were implemented to meet these ownership targets for the bumiputra community. Large SOEs and state development corporations were also established to accumulate corporate assets on behalf of that community.

In the agriculture sector, several marketing boards were established under the National Economic Policy to reform distribution networks. The Government believed that persistent poverty in the agriculture and fishery sectors was due to the exploitative behavior of rural traders with monopolist or monopsonist positions. The exclusionary nature of government policies to redistribute wealth reduced, to a certain extent, the degree of competition in some sectors, such as government procurement.

The Government also employed industrial policy to further develop its economic sectors. Policy measures included: (i) trade-related instruments such as import tariffs, import licensing, export promotion or processing zones, and export-related equity or ownership incentives (Box 3.6); (ii) industry promotion instruments such as pioneer status, investment tax allowance, research and development (R&D)-related tax incentives, and local content programs; (iii) national champion-type investments such as Proton (the national automobile project, see Box 3.7); (iv) factor market-related instruments such as foreign labor policy, priority sector lending guidelines, and provision of industrial areas; and (v) regulatory interventions in domestic markets such as licensing, price ceilings, government procurement, moral suasion on mergers, and market liberalization.

In general, export-oriented industrial policies and factor market-related instruments appear to have had a neutral impact on competition in Malaysia's domestic market. In contrast, import substitution strategies have raised issues related to market access, as for instance, in the automotive sector. The national champion-type investments that are supported by these strategies tended to reduce competition.

Eventually the Government realized that the painful trade-offs accompanying redistributive policies could be softened by economic growth propelled by the FDI-driven export sector. This approach resulted in the adoption of pro-growth policies, such as market liberalization in both tradable and nontradable sectors that increased the degree of competition in affected markets. However, in anticipation of greater competition from foreign firms, the Government also took steps to consolidate various industries (most notably banking) via mergers, to partially offset the competitive impact of liberalization.

Thailand

Thailand's industrial policy focuses mainly on promoting companies that employ advanced technology, invest in R&D activities, provide training programs, utilize available domestic resources (including labor), and promote industrial linkages. Firms with such qualifications are likely to receive incentives from the Board of Investment.

However, many state rules and regulations pose barriers to entry to certain industries. Manufacturing industries that display high market concentration usually receive state protection in various forms, including high tariffs and surcharges imposed on competing imported products, stringent licensing conditions making new entry difficult, or a change in the excise tax regime that benefits the incumbent monopoly.

Certain laws or cabinet decisions also grant exclusive rights to SOEs to provide services to the public. For example, until recently the law granted a statutory monopoly in the ownership and operation of all telecommunications services to state enterprises. Private participation was subject to build-transfer-operate agreements, whereby private operators built the networks and then transferred ownership of the networks to the state enterprises in exchange for exclusive rights to operate the networks for a specified period of time. Under such an arrangement, the private concessionaires could not claim any assets and were subject to operating conditions set by the state enterprises, some of which restricted competition. With the enactment of the Telecommunications Act in 2002, the statutory monopoly is now void.

Similarly, the state-owned metropolitan and interprovincial bus operators hold exclusive rights to provide services on main routes. But unlike telecommunications, the monopoly is granted by the executive--i.e., through a cabinet decision--rather than through legislation. Again, private operators can only operate under concessions from the state enterprise and therefore must pay a royalty fee that can either be a fixed fee or a profit-sharing scheme.

Viet Nam

Industrialization and modernization have for a long time been strategic development objectives for Viet Nam. Although there has been a significant shift in development priorities at the central level, there is still a strong emphasis on the adoption of government-led industrialization policies, similar to those previously applied in Japan or Korea. This has an important implication for competition policy in Viet Nam, since for many years competition was limited and special preference given to SOEs was quite persistent. The objectives of self-sufficiency and self-reliance remain dominant forces in the Government's choice of policies, particularly in the promotion of certain key industries where the state takes a lead role.

In response to increasing competition from foreigners in domestic and international markets, the Government has adopted a policy of promoting conglomerates. General corporations (GCs) have been established to take control of SOEs with the aim of strengthening accumulation of capital and increasing competitiveness, abolishing the administrative dependence of SOEs on the relevant ministry or local administrative authority, leveling the playing field for central and local SOEs, and strengthening the management of SOEs. In effect, each GC will perform the role of management team for a group of SOEs.

A GC allocates capital from the Government to its SOE members, who have full autonomy in using these resources for their business activities. GCs, however, can adjust the allocation of funds to ensure the smooth operation of the whole group. GCs also determine how the markets are divided among their members, effectively limiting competition from nonmembers. They impose price ceilings for imports and floor prices for exports. As a result, some GCs, such as Viet Nam Airlines and Viet Nam Post and Telecommunications, act as monopolies, which allows them to earn large profits. As the GCs significantly limit competition in certain sectors, the Government is now considering privatizing them and encouraging competition.

Complementarity with industrial policies

For present purposes, the issue is not whether governments should or should not promote national champions. Nor is the issue whether M&A activity actually attains the efficiencies and cost reductions envisaged, a matter that has been debated extensively in the literature on industrial organization. Rather, the question is whether, in order to promote national champions, governments need, or are well-advised, to relax the enforcement of competition law. In most cases the relevant market is wider than the national market and hence an accurate competition assessment, i.e., one based on the wider market, would not identify a competition problem. Furthermore, to the extent that creating national champions substantially increases concentration in a domestic market, there may actually be a stronger reason for enforcing competition law than would otherwise be the case. Small economies have all the more reason to apply competition rules more vigorously in the import and distribution sectors. Doing this would ease any adverse domestic implications from national champions.

The purpose here is not to undertake an evaluation of industrial policy per se, but rather only to examine the competition implications involved. The experience of these six Asian nations does not show that restricting interfirm rivalry is a common and consistent component of national industrial policies. In fact, some countries' industrial policies have taken no steps to alter interfirm rivalry between domestic firms, though other countries' policies at times have done this. None of this is to say that industrial policy has been ineffective, nor that domestic firms have not been shielded somewhat from rivalry from abroad, although even the latter protection has been diminishing over time.

A (remarkably) broad range of scholarly analysis of East Asian experience--and in particular the Korean experience--suggests that industrial policy measures to create national champions should be complemented with state measures to promote vigorous competition within the country in question.

In the instances where policies to curtail domestic interfirm rivalry were employed in Asia, they were principally directed toward a small number of declining industries or markets with over-capacity--not to infant industries. The tension between the objectives of competition law (promoting rivalry) and industrial policy (promoting the growth industries of tomorrow) is more apparent than real.

In an attempt to support other development objectives, sectors with dominant SOEs are often exempted from the disciplines of competition law. The railways in India, for instance, continue to be a state-owned monopoly with administered prices and very limited competition despite the existence of competition law. Similarly, Viet Nam's competition law expressly indicates that the state will continue to control SOEs operating in declared state monopoly sectors and will dictate production and prices for these enterprises. In other countries too, firms engaged in anticompetitive practices at the behest of the government are 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.

It should be noted that the greater the extent of any sectoral or general exemptions from a national law banning hard core cartels, the smaller the overall benefits of adopting such a provision. Moreover, such exemptions may have a "beggar-thy-neighbor" aspect to them as is likely to be the case in certain international transportation sectors. In particular, government-inspired or government-tolerated cartels are rife in ocean liner shipping conferences, involving cooperative working arrangements as well as agreements to set prices.

The state offers another form of encouragement to private international cartels. Many nations, such as India, appear to have taken the view that their own firms can cartelize markets, provided that those markets are abroad. In fact, numerous jurisdictions have explicitly exempted export cartels from their domestic competition laws--essentially providing legal privileges and immunities to their own nation's firms that are members of export cartels.

Initially, such export cartel exemptions were supposedly justified on the grounds that small exporters could join together to share costs of marketing their products abroad. If these cartel exemptions were specifically to aid small firms, then one might have expected the relevant legislation to be confined to these firms. Invariably, it has not been. In recent years some nations have repealed such exemptions--in part, perhaps, because they fear that if their firms adopt the habit of cartelizing foreign markets then there is a greater risk that the same firms will attempt to cartelize the home market too.

Sectoral policies, regulation, and deregulation

Regulation is a type of intervention in sectors with market failure where the existence of competition law is insufficient to correct the market failure. In such cases, government regulation of firms may increase welfare. To clarify:

Sometimes, however, Government regulations--and the rules of self-regulatory bodies--block competition. This may be for very good reason. For example, laissez faire cannot be guaranteed to deliver food safety, so there is clearly a need for basic food safety regulation. In a sense this stops unsafe food from competing with safe food. But regulation should not block competition and its good incentive properties more than is necessary to achieve public interest goals. Indeed competition is generally helpful in advancing, rather than at odds with, those goals (Vickers 2003, p. 5).

Unfortunately, regulation in practice often differs considerably from the regulation that would be optimal in theory, and sometimes makes market inefficiencies worse. Thus, regulatory policies sometimes conflict with competition objectives (Box 3.8). Restrictions imposed by government agencies on licensing of new firms, for instance, hamper competition and reduce consumer welfare. Imposing uncommon norms and standards, as well as prohibiting foreign ownership in certain industries are other examples of entry restrictions that inhibit competition. Other regulatory barriers to competition may take the form of public subsidies or monopoly rights. The costs of administering regulations may exceed the benefits, even where they are properly applied. Meanwhile, exempting specific industries from competition laws or favoring certain firms in public procurement can also affect the market operation of competing industries or firms.

In view of the potential conflict between regulation and competition, many developing countries have begun to implement regulatory reforms that serve public interests better and support competition more. These reforms have included privatization efforts by governments, as well as removal of market entry restrictions, in order to broaden the scope for markets to allocate resources. Deregulation is aimed at reducing market distortions caused by government intervention. Introducing competition into previously regulated industries has significantly strengthened the efficiency of firms and improved economic performance over time. Interfirm rivalry provides incentives for efficiency-enhancing restructuring. In general in Asia, deregulation and privatization have increased economic efficiency and raised public welfare.

Greater competition between firms resulting from deregulation can encourage managers and capitalists to focus on improving their enterprises' performance so as to maximize profits or at least to stave off threat of bankruptcy, takeover, or other loss of control. Indeed, more intense competition in product markets tends to intensify the pressure on firms to lower costs. Competition agencies should thus be involved in governments' regulatory reform efforts, playing the roles of competition advocate, consumer protector, and regulatory police to ensure that complementarities between competition and regulation are maximized. However, competition authorities and regulatory agencies are not substitutes, i.e., one cannot just replace the other. Both should coexist and work together to protect consumer welfare.

Back Competition policy regimes	Next Competition policy in the context of regional and global integration