Competition Policy for Small Economies in the Financial Crisis

1. UNCTAD work on COMPETITION POLICY WITH A DEVELOPMENT APPROACHCHALLENGES FOR SMALL ECONOMIES IN THE CURRENT FINANCIAL CRISIS Ana María Alvarez Competition and Consumer Policies Branch DITC/UNCTAD 13 May 2009 Presentation at the Visit of the University of West Indies Palais des Nations, Geneva

2. Outline • Competition Law and Policies in Latin America and the Caribbean: national and regional context • Competition policy in small economies: challenges • UNCTAD work on competition and consumer protection policies

3. Development of competition laws and institutions in Latin America and the Caribbean • Competition institutions in the 90s • Argentina, Brazil, Colombia, Chile, Costa Rica, Jamaica, Mexico, Panama, Peru, Venezuela • The new competition institutions • Barbados, El Salvador, Uruguay • Countries that have recently adopted/developed competition laws • Ecuador, Honduras, República Dominicana, Trinidad & Tobago • Countries with competition projects • Guatemala, Paraguay 3

4. - Argentina (1980) Barbados (2005) Bolivia (Decreto Ley, 2008) - Brazil (1960) - Chile (1973, rev. 1980) - Colombia (1992) - Costa Rica (1992) Domiinican Republic (2008) Ecuador El Salvador (2005) Honduras (2006) - Jamaica (1993) - Mexico (1992) - Nicaragua (2007) - Panama (1990) Peru (1992) Trinidad &Tobago (2007) Venezuela (1991) - Guatemala * - Paraguay * * Projects in preparation Status of competition law and policiesin the LAC region 4

5. The need for regional and international cooperation • National Law enforcement stops at the borders while • Anti-competitive practices are increasingly cross-border: • International cartels • (e.g. export and import cartels and bid-rigging) • Vertical restraints by dominant firms • (e.g. prohibition of parallel imports) • Mega Mergers and Adquisitions take place abroad, may be authorised there but often have anti-competitive effects in third countries

6. Types of cooperation agreements a) Bilateral (formal) and Agency to Agency agreements • Arrange Comparable economies • Imbalance of interest if large with small economy • Risk of inconsistencies and heavy burden in case of proliferation of bilateral agreements b) Regional Integration Negotiations in many regions; some involve common competition rules as a longer-term objective (e.g. CARICOM, COMESA, Andean Community)

7. Competition in regional trade agreements National Competition Laws Africa Asia Latin America and the Caribbean • Competition provisions in regional agreements • - CEMAC • - COMESA • UEMOA • SACU • - ASEAN • SAARC • APEC • - MERCOSUR • ANDEAN COMMUNITY • CARICOM * • NAFTA (+ US & Canada) *The Caribbean Community is in the process of operationalizing a regional competition authority, the CARICOM Competition Commission. Jamaica, Barbados, Guyana, St Vincent and the Grenadines and Trinidad and Tobago have competition laws in place, but Jamaica was the only country with significant enforcement practice. Other members of Caricom need to set up national competition regimes to be in compliance with the 1973 CARICOM Treaty. The Dominican Republic Competition Law entered into force in January 2008 (see UNCTAD. Investment Policy Review. Dominican Republic. UN, 2009.

8. Negotiations of an EPA - CARIFORUM Why did CARIFORUM initial a comprehensive rather than an interim or partial agreement? • The need to sign some form of agreement before the expiration of the Cotonou waiver because of the probable disruption of CF exports to the European Union (EU) from 1st January 2008. Avoid that a number of products would have been subject to tariffs. • The need to conclude an agreement in trade in goods • An EPA package, incorporating Development Cooperation, Trade in Goods, Trade in Services, and Trade related issues (SPS etc): ensure CARIFORUM ability to use progress in one area & to gain leverage   • The importance of maintaing integrity of the region and avoid separate bilateral or sub-regional agreements with the EU.

9. Competition Chapter in the CARIFORUM – EPA text • Objective: to agree on common principles to ensure that markets are not distorted by anticompetitive practices by companies. • Due to the lack of national competition regimes in most of the Cariforum countries, there is a transition period of five years to put such laws and authorities in place (art. 127). • Anti-competitive practices covered by the Agreement: The types of anti-competitive conduct by companies that are prohibited (art. 126) are: • 1) cartels and other "concerted practices" ("agreements and concerted practices between undertakings which have the object or effect of preventing or substantially lessening competition on the market" of one of the parties); • 2) abuse of dominant position ("abuse by one or more undertakings of market power" in the territory of either the EU or Cariforum). Mergers and State Aid are not covered. In the light of the very different development level between the EU and Cariforum, it was considered that such inclusion was not necessary at this stage. Provisions on public enterprises and so-called "enterprises with special rights" 3 (art. 129). Such enterprises are of course not prohibited The agreement expressly states that parties have the right to design or maintain public or private monopolies. However, such enterprises must respect competition laws to the extent that the application of these laws does not obstruct the execution of the special task assigned to them. Following the request of the Cariforum countries, certain specific sectors are exempted from this provision on public enterprises (art. 129.3). http://trade.ec.europa.eu/doclib/docs/2008/october/tradoc_140976.pdf

10. Competition Chapter in the CARIFORUM – EPA text cont…. Enforcement • The above competition rules laws will be enforced by specific competition authorities: one for the Caricom countries (Caricom Competition Commission) and one for the Dominican Republic (Comision Nacional de Defensa de la Competencia) (Art. 125.1)6. • The enforcement cooperation provisions in the Cariforum EPA go less far than those in some other EU agreements, thus recognising the specific situation in the region Cooperation • The EU will provide technical assistance and capacity building, through assistance in drafting guidelines, manuals etc., training key personnel, provision of independent experts etc… (Art. 130). • Cooperation between Competition Authorities (mainly through exchange of information), which may be very useful in the case of anti-competitive behaviour by companies on an international scale, such as hard-core cartels (Art. 128).

11. Implementation issues • Supply-side constraints which have been negatively affecting competitiveness of Caribbean economies • In small developing economies, this include: • high production costs (usually related to small scale of operations); a limited export base dependent on one or two commodities; widespread operational inefficiencies; ineffective or non-existent regulatory institutions; and a general lack of international competitiveness. • In the case of CARIFORUM, the situation is exacerbated by the high inbound and outbound transport costs linked to the reality of small islands scattered across a vast expanse of ocean. • CARIFORUM states, as small economies, are increasingly dependent on the services sector • Negotiating capacities: the need to ensure consistency between trade and competition negotiations. See ECLAC also Competition Provisions in Regional Trade Agreements, www.unctad.org/competition/competition

12. Competition policies in small economies • Higher levels of concentration may be necessary (?) in order to achieve productive efficiency • Competition policy = sympathetic (temporarily?) toward the enhancement of output by individual firms, through either internal growth, mergers, or joint ventures Competition policy should strike the optimal balance between structural efficiency and competitive vigor so that firms may operate at efficient scales and transfer benefits to consumers See also M. Gal: Competition Policy for Small Market Economies. 2003.

13. SMEs:an economic force, employment opportunities Vulnerable to trade openness Face the proliferation of informal enterprises Face anticompetitive practices from both, domestic and multinational enterprises In a competition environnment, only competitive enterprises survive Competition Law and Policy and competitivieness of SMEs CLP contributes to ensure a level playing field 13

14. UNCTAD mandate on Competition Law and Policy • Havana (1946) • U.N. Code on TNCs (1970’s) • UNCTAD Code on TOT (1970’s) • UNCTAD Set of Principles & Rules on Restrictive Business Practices (RBP’s, (adopted in 1980 by UN G.A.) • WTO Working Group on Trade and Competition

15. International cooperation The UN Set on Competition 1980 Recommends countries to adopt and fully implement competition legislation Non-binding voluntary code: recommendations to States and enterprises including TNCs First attempt to raise cooperation with a DEVELOPMENT DIMENSION, in particular Special and Differential treatment Useful direction and inspiration for cooperation agreements 15

16. UNCTAD Model Law on Competition UNCTAD elaborated a Model Law A technical assistance tool to respond to developing countries and economies in transition technical assistance requests Implementation in full cooperation with national States and international organisations experienced in competition (OECD, World Bank, EU and WTO)

17. UNCTAD Adopted by the General Assembly in 1985 and reproduced in UNCTAD series on issues in the field of Competition Law and Policy Internationally agreed statement of laws necessary for consumer protection Promote consumer rights - for example, through education and the provision of consumer information. Emphasise the need for consumers to be protected: safety, freedom from exploitation, redress, and access to basic goods and services. Promote competition through: -Enhancing production and consumption patterns responsive to the needs and desires of consumers - Curbing abusive business practices which adversely affect consumers - Promoting the development of market conditions which provide consumers with greater choice at lower prices. UNITED NATIONS GUIDELINES FOR CONSUMER PROTECTION 17

18. UNCTAD research activities • Competition for development, as seen by developing countries themselves: IDRC studies on Competition, Competitiveness and Development • Mechanisms through which competition policy can contribute to improved economic performance by fostering enterprise development, investment, productivity and export performance. • Specific lessons from developing countries on the adoption and implementation of competition laws and policies. • Prerequisites for successful implementation of a development-oriented competition policy. • Case studies: South Korea, Brazil, Peru, Thailand, South Africa, Nepal, Tanzania and Zambia

19. COMPAL PROGRAMME Strengthening Institutions and Capacities in the area of Competition and Consumer Protection Policies in Latin America : Bolivia, Colombia, Costa Rica, El Salvador, Nicaragua, Peru exchange of experiences market studies Internships (COMCO) COMPAL conferences, seminars capacity building strengthening institutions research and substantive work See also competition.unctad.org/competition and http://compal.unctad.org

20. Some elements to appreciate the graduality and flexibility in the implementation of Competition Law and Policy Peer Review Cooperation on competition provisions Cooperation on case solving Enforcement of sanctions and remedies Law enforcement: investigations, analysis, data collection Flexibility in the implementation/ case by case analysis Training officers in charge of implementing the Law Design of the institution in charge of implementing the Law Competition Bill: consensus, consultations with the Legislative Authority, civil society, adoption of the Law. Advocacy Demand-driven technical assistance Sensitizing at the level of economic actors (Competition culture). Inventory of the Laws. Assessment of the socio-economic situation in each country

21. Competition Policy and the current financial crisis • The global financial crisis is spilling over into the real economy where goods and non-financial services are made and traded. • Economies are affected differently. Developing countries, which must deal with the effects on their domestic economies, appropriate steps include increasing private sector flexibility and market resiliency and continuing to improve the climate for investment • Competition law and policy is then crucial • Competition agencies need to take appropriate measures

22. Reaction to the crisis Source: Global Forum on Competition. OECD. Feb. 2009 The crisis could atract anti-competitive conduct. Cartels or monopolies may try to take advantage of the environment of economic distress. Suppliers that normally have no market power may gain substantial market power during periods of market crisis. Even a firm with a small market share has market power – the ability to raise price for a substantial period – when its rivals are capacity constrained or cannot react. Demand for staple foods and fuel is likely to be highly inelastic in the short run, so withholding only a small quantity from the market can result in large price increases Responses could be contradictory. • Stepped up enforcement of antitrust rules, but only against selected targets; • Relaxed enforcement of other antitrust rules, to permit mergers and export or recession cartels; • Rescue of weak competitors via mergers or subsidy; • Price controls; and • Import or export constraints; 22

23. Advocacy at a turning point • Economic downturn: • Loss of faith in markets? • More vulnerable consumers • Failing firms • Incentives for cartels

24. Competition Advocacy Initiatives Competition policy given lower priority by government alongside other policy goals? Pressure to circumvent or soften competition rules? Greater direct government involvement in markets Reduced confidence in markets and market outcomes among policymakers and consumers Turn the current situation into opportunities 24

25. Many thanks Ana María Alvarez ana.maria.alvarez@unctad.org