Dr R Ian McEwin Visiting Professor of Law, National University of

1. Dr R Ian McEwin • Visiting Professor of Law, National University of • Singapore and Chulalongkorn University, Bangkok • Director, Global Economics Group, Chicago • Senior Economic & Regulatory Advisor, Rajah & Tann, Singapore ASEAN Competition Conference “Fostering the Promotion of Competition Policy for Regional Development”15-16 November 2011, Bali

2. Comments on Healey and Pasaribu • Both useful contributions on the benefits to Australia and Indonesia • Australia • Illustrates the importance of a co-ordinated economic policy approach to competition reform – Australia was a ‘basket case’ economically in the 1970s when competition law was introduced in 1974. • Started slow – regulator looked at anti-competitive practices – surprised at extent of cartels etc - then competition advocacy became important and led to the Hilmer reforms – based on sound economic analysis by the Productivity Commission and think tanks like the Centre for Policy Studies at Monash University. • Shows importance of fundamental economic research to policy • Australia has done much better than Europe and the U.S. due to good competition policies • Indonesia • Empirical work shoes competition is good for consumers, economic growth and development (also to firms – as they become more efficient their market opportunities increase) • Important to quantify benefits – too little empirical work around the world – particularly good results on SMS cartel - KPPU is to be congratulated on doing this work – not much done by other competition authorities around the world • Important that benefits be shown to consumers but also to firms

3. Likely Challenges in ASEAN • Introducing regulation of competition into countries without a culture of competition is difficult • Better to have simple clearly understood laws– business and legal certainty is important – best achieved by using an economics effects approach to the law – that way legal certainty is increased – so legal institutions matter • Enforcement should focus on issues that have an immediate impact on economic welfare e.g. cartels - which people can understand if price reductions follow • But some business will fight it because they have made considerable profits from lack of competition in the past – particularly in Asia where obtaining protection from competition from the top guarantees big profits. • Resisting interference – particularly at the political level – commissions need to be independent and have commissioners who understand the importance of competition to overall economic welfare and development – what to do when consumers in other ASEAN countries benefit more from domestic reform? • Big rewards to economic growth and development from an economics focussed competition law – even those who stand to lose in the short-term gain in the long term – if they are as good as they say they are. 

4. Competition law and Economic Performance Arguments that Competition Law Hinders Economic Performance • Cartels good because they prevent price competition – good on social stability grounds and also help to finance investments needed for growth • Mergers are needed to promote national champions • Unconstrained rivalry in certain industries like banking sector and network industries is inefficient • Allowing local companies to behave predatorily towards overseas companies is good Arguments that Competition Law Promotes Economic Performance • Cartels not the best way to finance investment – better to use investment credits, subsidies. Social costs of increase competition can be ameliorated by higher incomes, transfer payments • Larger firms do not have greater productivity levels and growth – better to compete at home to compete overseas (Porter) No. • Argument for a sectoral exemption from general competition law but not from competition policy • Overseas companies force local companies to be efficient and so be internationally competitive

5. Introducing Competition Policy • Competition policy is less interventionist than other mainly industrial policies adopted by many developing countries. • Greater reliance on markets is inevitable as economics develop because central planners do not have sufficient information to know what is happening • For example, Graham notes that: "When the leading export sector of a nation becomes increasingly complex, industrial policy fails to work as well as it apparently did at earlier stages of development. Hence in order to continue to develop internationally competitive export industries, government... have found that as a pragmatic matter, adoption of less interventionist policies has been necessary.“ Graham “Competition policies in the Dynamic Industrialising Economies: the case of China, Korea and Chinese Taipei” Mimeo prepared for OECD Development Centre.

6. Why Did Countries Introduce Competition Policies ? • Palim (1998) looked at reasons why 70 countries implemented competition policy • He found that the implementation of competition policy was associated with economic reform and increased level of development • In Europe, Palim found that the implementation of competition law was significantly associated with: • Europe’s market unification attempts (for relevant countries), • dramatic economic crises (debt default), and • the transition from a planned to a market economy • Palim found no evidence that: • foreign aid had a positive influence on the implementation of competition policy • the implementation of competition policy was related to international trade

7. The Importance of Legal Institutions • Legal and institutional structures are important to economic growth. Where property rights are properly protected, competition law helps to promote efficient firm growth because they can capture the returns from their investments. • Competition law can help to ensure that firms cannot take advantage of their market power to reduce the profitability of other, more efficient firms. Businesses will have greater confidence that they can compete on the merits and so efficient firms will not be deterred from entering a markets. Knowing that other firms will have to compete on the merits forces other firms to behave competitively and efficiently. • Competition law can help to protect developing countries against anticompetitive practices by overseas companies. In the early stages of development and a limited industrial base, developing countries have to rely on imports. To the extent that such imports are subjected to anti-competitive practices either by domestic firms or by foreign suppliers of these imports, importing countries will face higher import prices. Not only are final consumers disadvantaged but if local firms use higher priced imports in production then their products will be less competitive both locally and in export markets • Competition law helps to ensure that both local and foreign investors feel more confident about protecting their investments. This will lead to more foreign investment as they will feel better protected by anti-competitive conduct by less efficient firms. • Competition policy helps to allow firms to compete on the basis of relative efficiency, and therefore provides the incentive to improve internal efficiencies, and invest to promote dynamic efficiency.

8. Evidence on the Relationship Between Competition Law and Economic Performance • Dutz and Hayri (1999) studied the strength of association between intensity of economy wide competition and growth. To capture intensity of economy wide competition, they constructed three types of variables related to policy, structure and mobility. • Policy measures capture the quality of the microeconomic incentive regime and the enabling legal and regulatory framework in areas that directly promote competition. • Structure variables reflect the extent to which market structure is concentrated from an economy wide perspective. • Mobility variables capture the ease with which new enterprises can enter and grow in any market. • Their results indicate that there is a strong correlation between the effectiveness of competition policy and growth. They concluded that the effect of competition policy on growth is robust and goes beyond that of trade liberalisation, institutional quality and a generally favourable policy environment.

9. Evidence on the Relationship Between Competition Law and Economic Performance • Bee San and Changfa Lo (2002) examined the social and economic impact of the implementation of the Fair Trade Law (FTL) on Taiwan's economy. They utilised a multi-equation system taking into account FTC's statistics on decision with sanctions, together with key macroeconomic indicators. Their results showed that the implementation of the FTL in Taiwan would significantly enhance Taiwan's international competitiveness and its exports. In addition, the implementation of FTL would also create more job opportunities and stimulate more innovation efforts.

10. Dutz and Vagliasindi (2000) European Economic Review Vol 44, May 2000, pp 762-772 • Between 1990 and 1996, competition laws were adopted in 22 of the 26 transition economies of eastern Europe and the former Soviet Union. They define a range of competition policy implementation criteria relevant for transition and developing economies • They assessed the effectiveness of competition policy implementation across 18 countries based on data from each country's competition authorities and supplemented with assessments by legal practitioners. • They related three dimensions of the effectiveness of competition law • Enforcement • competition advocacy and • institutional effectiveness) to indicators measuring the intensity of competition (measured by economy-wide enterprise mobility). • They found a robust positive relationship between effective competition law implementation and intensity of competition (i.e. the expansion of more efficient private firms) • NOTE: They found most important factor in effective competition was institutional effectiveness which highlights the importance of independence (from pressure groups), transparency and the effectiveness of appeals

11. Evidence on Relationship Between Competition law and Economic Performance • Dutz and Hayri (2001) also examined whether economy-wide anti-trust policy or measures of concentration are significantly and robustly correlated with higher rates of per capita economic growth • They used data from over one hundred countries during 1986-1995. The effectiveness of anti-trust policy was measured by answers to a large survey of top executives in 53 countries, posing questions about anti-monopoly policy in their country, as well as a measure of mobility of the largest firms. • They found that measures of effective antitrust policy are positively associated with residual growth (that is, growth that is not explained by variables for which there is some consensus that they lead to higher economic growth – trade openness, human capital and investment in physical capital). • Additional sensitivity analysis indicates that effective anti-trust policy has an impact distinct from that of trade openness. In a previous study using the same data set, Dutz and Hayri (2000) had also established that there is a strong correlation between the effectiveness of competition policy and growth. Their analysis suggests that the effect of competition on growth goes beyond that of trade liberalisation to institutional quality and a generally favourable policy environment. Dutz, A. and Hayri, A (2002), Does Effective Anti-trust Policy Spur Economic Growth? Paper presented at the OECD Global Forum on Competition February 2002

12. Kee and Hoekman “Imports, Entry and Competition Law as market Disciplines World Bank (2003) • Kee and Hoekman (2003) investigate the effect of competition law on the contestability of markets in 42 countries over a period of 18 years. They find that competition law has no direct impact on industry markups. However, they find some evidence of competition law having indirect impact on industry markups in the long run by promoting a larger number of domestic firms. The authors also make the startling suggestion that the reduction of trade barriers and government regulation over entry-exit conditions yield a higher level of benefit compared to the implementation of competition policy.

13. Michael W. Nicholson “An Antitrust Law Index for Empirical Analysis of International Competition PolicyJnl of Competition Law & Economics (2008) 4 (4): 1009-1029. • The Antitrust Law Index maps the presence of “laws on the book” into a numerical measure of competition regimes by assigning binomial scores for the presence of particular laws in a jurisdiction, and then summing the individual components to yield a total score. • The key result is that strong laws do not necessarily represent effective antitrust policy. There appears to be a nonlinear relationship between adaptation of antitrust laws and the size of national economies. • The results suggest that the impetus for adopting antitrust laws appears to be related to the guidelines of “model” laws and highlights the gap between de jure legislation and de facto implementation.”

14. “THE EFFECT OF COMPETITION LAW ENFORCEMENT ON ECONOMIC GROWTH” Tay-Ceng Ma, Jnl of Competition Law & Economics (2011) • Tries to identify the effect of competition law on productivity growth by conducting a cross-country study using a sample of 101 countries that enforce competition law. • The evidence shows that the effect exhibits an asymmetrical pattern depending on the stage of development of each country. • For the poor less developed countries (LDCs) whose institutional frameworks do not exceed a threshold level, competition law has a very limited effect on changing economic activity, and its legislation is neither harmful nor helpful in terms of market competition or economic growth. • For developed countries (DCs) and middle-income LDCs, although their institutional frameworks have passed a threshold level, the effect of competition law on growth still depends on the law enforcement efficiency of the government. • That is: “Without an efficient enforcement scheme, a stronger competition law not only cannot support productivity growth, but might also slow down the potential path of growth.”

15. Conclusions • Competition law enforcement is critical to productivity and economic growth – vested interests can hinder growth • Competition authorities should focus on the economic effects of conduct – not just apply the rules – mistakes made for long-time in the United States (up until the 1960s) and Europe (up until the 1990s) • Significant benefits for everyone in ASEAN - particularly by changing attitudes to competition and rivalry – as happened in Australia from the 1980s onwards