Competition Policy and Development: Evidence from the Asian Region

1. Competition Policy and Development: Evidence from the Asian Region Presentation by Douglas H. Brooks June 27, 2006

2. Outline • Introduction • Country Experiences • Competition policy regimes • Consistency with other development objectives • Lessons Learned

3. Introduction • Results of 6 country studies • PRC, India, Korea, Malaysia, Thailand, & Viet Nam • Selection based on diversity of their income levels and experiences with competition policy, including competition law

4. Comparative Statistics:General Economic Indicators

5. Country Experiences:Competition Policy Regimes • Competition policy objectives • PRC: to safeguard development of socialist market economy • India: to prevent practices with adverse effects on competition • Korea: to promote fair and free competition • Malaysia: growth with equity, which is the general development objective • Thailand: to promote free & fair trade with a competitive environment • Viet Nam: to promote an equitable & nondiscriminatory competitive environment

6. Country Experiences:Competition Policy Regimes • Implementation Problems • Laws too broad and vague • Differences in interpretation, especially if implementation is decentralized • Need for supplemental regulations to clarify law

7. Country Experiences:Competition Policy Regimes • Implementation Successes • In Korea, corrective measures and penalties have been imposed on chaebols • Campaign in PRC to counter anticompetitive acts by public utilities resulted in a large number of antitrust cases, especially involving bid rigging.

8. Country Experiences:Competition Policy Regimes • Passage of competition laws has informed consumers and small enterprises of their rights, instilling a competition culture. • Competition advocacy activities have been implemented to raise public awareness.

9. Country Experiences:Consistency with Development Objectives • Industrial policy and competition policy • Korea promoted the establishment of chaebols, allowing them to gain political and economic power. This resulted in inefficient operations and reduced opportunities for new entrants, necessitating the introduction of competition policy.

10. Country Experiences:Consistency with Development Objectives • PRC has been pursuing industrial policies since the late 1970s. It promoted the establishment of large conglomerates to achieve economies of scale and compete with MNEs. At the same time, in domestic markets, inter-firm rivalry is encouraged.

11. Country Experiences:Consistency with Development Objectives • In India, adopting a planned strategy for economic development involved controlling the direction of private investment through the use of industrial licensing, protecting the small-scale sector, and controlling firm closures and labor retrenchment. By 1991, industrial policies underwent substantial change and were geared towards liberalization. These catalyzed competition in manufacturing and services.

12. Country Experiences:Consistency with Development Objectives • In Malaysia, growth with equity is the primary economic objective, and redistributive policies were adopted. Industrial policies to promote national champions, however, have limited competition in some sectors. This was partly offset by the adoption of market liberalization in both tradable and nontradable sectors.

13. Country Experiences:Consistency with Development Objectives • Thailand’s industrial policy encourages companies that employ advanced technology, invest in R&D activities, provide training programs, utilize available domestic resources, and promote industrial linkages. But many state rules (eg, high tariffs & surcharges on competing imported products, exclusive rights, etc.) pose entry barriers to certain industries.

14. Country Experiences:Consistency with Development Objectives • Industrialization and modernization are Viet Nam’s strategic development objectives, with strong emphasis on government-led industrialization policies. For a long time, competition was limited and special preference was given to SOEs. At the same time, conglomerates are being promoted to face increasing competition from foreigners.

15. Country Experiences:Consistency with Development Objectives • Trade policy and competition policy • Until 1970s in India, trade policy promoted import substitution and domestic industry protection. Reforms since 1991 centered on licensing and tariffs. To meet its WTO commitments, quantitative restrictions and nontariff barriers were removed. Tariffs were also reduced. These measures enhanced market competition.

16. Country Experiences:Consistency with Development Objectives • Korea also liberalized trade since 1980s. After the Asian financial crisis, it redoubled efforts. In line with its agreement with IMF and its Uruguay Round commitments, quantitative restrictions and export subsidies were removed. Trade liberalization is thus likely to have rationalized the market by allowing inefficient firms to exit.

17. Country Experiences:Consistency with Development Objectives • In Malaysia, where competition concerns are addressed through sectoral regulations, there are some strains between trade liberalization, industrial policy, and competition pressures. A particular case is its commitments to AFTA and its desire to support the national car industry.

18. Country Experiences:Consistency with Development Objectives • While Thailand is an open economy, it still maintains high tariffs compared with other ASEAN countries. Its commitments under AFTA and other bilateral FTAs, however, has allowed increased competition from its trading partners.

19. Country Experiences:Consistency with Development Objectives • Viet Nam has moved towards a more open, transparent, and enabling trade regime, but some price controls and quantitative restrictions remain. These controls created barriers to entry that led to high market concentration in affected sectors.

20. Country Experiences:Consistency with Development Objectives • Local protectionism is prevalent in PRC. This involves imposing taxes on commodities made in other provinces and banning exports to other regions of local raw materials in short supply or of high quality. This has led to duplication of investments and excess capacity.

21. Country Experiences:Consistency with Development Objectives • FDI policy and competition policy • In PRC, FDI is encouraged but entry is far from free, as foreign investors are subject to numerous regulations. Merger notifications are also required only of foreign investors. This has led to widespread concern that future antimonopoly legislation may not be equally applied to foreign and domestic firms.

22. Country Experiences:Consistency with Development Objectives • Korea undertook liberalization in the 1980s, and further liberalization was undertaken after the Asian financial crisis. This has, however, led to some tightening in market concentration in some sectors.

23. Country Experiences:Consistency with Development Objectives • FDI is an important source of capital in Malaysia’s development. While it is encouraged in manufacturing, it is restricted in service sectors that may drive out home-grown small businesses.

24. Country Experiences:Consistency with Development Objectives • The Thai economy is likewise open to foreign investment except for a negative list of sectors where foreign ownership is prohibited or limited.

25. Country Experiences:Consistency with Development Objectives • Viet Nam’s FDI policy has become liberal in recent years, but restrictions still exist that effectively limit competition. These include restricted sectors and forms of operation, performance-based requirements, and regulations in the financial and land markets.

26. Lessons Learned • Undertaking industrial policies for development should be accompanied by an effective competition policy. • Openness to trade and FDI do not always lead to increased competition, as government regulations sometimes create barriers to entry and protect domestic industries.

27. Potential cross-country comparisons • Role of FDI in shaping how officials and analysts perceive the current and future role of national competition law (PRC, India, Malaysia). • PRC and Viet Nam on competition law and its role in moving towards a greater market-based economy. • Role of industrial policy in shaping the design and debate over national competition law (PRC, India, Malaysia, Viet Nam). • Experience with enforcement of competition law (Korea, Thailand)