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Competition Policy Foundations for Trade Reform, Regulatory Reform, and Sustainable Development

Final Report Summary - CPFTR (Competition Policy Foundations for Trade Reform, Regulatory Reform, and Sustainable Development)

In the field of competition law, it is fair to say that policy initiatives have proceeded far ahead of the underlying empirical base, especially in developing countries. This is as true of purely domestic competition law-related matters as it is for the interaction between competition law and other important forms of economic regulation, in particular trade policy, investment policy, state enterprise and privatisation policies, and price controls.

The first deliverable involved the creation of a database of as many studies of economic reform episodes as possible that took place after 1990 and involved reforms in, or affecting, Latin America, Eastern Europe, South and East Asia. The goal was to learn what consideration, if any, was given by scholars to the possible effects of market structures and anticompetitive business conduct on the impact and evaluation of economic reforms. The goal was to go beyond a standard literature review and to use objective measures to classify the contents of existing research studies and their findings. Are there any blind spots in the literature? Do some types of research study give more emphasis to market structure and business conduct than others? Simon J. Evenett and Krista Lucenti were responsible for conducting the research for deliverable number one.

The second deliverable is a paper that uses the first deliverable to ascertain which reforms, on the basis of existing scholarship, appeared to be most susceptible to being eroded by anti-competitive practices. In addition to addressing this matter, the persons responsible (Julian L. Clarke, Simon J. Evenett, and Krista Lucenti) also examined which sectors appeared to be most vulnerable and which types of anti-competitive acts were alleged to have occurred more often than others. The resulting paper compares the results from the analysis of the database of academic studies (deliverable number one) with a database of newspaper reports of alleged anticompetitive practices in the same developing countries and regions. This proved instructive.

The third deliverable focused on the interaction between open trade policies and the exercise of market power in international markets. Specifically, an econometric analysis of the pricing power of European exporters of differentiated manufacturing products to four South East Asian nations was conducted. The critical question here is whether pricing power can survive in markets where there are relatively low trade barriers. The analysis was set up in such a way as to enable comparisons across the destination countries, enabling the authors to check whether market power was exercised by European firms more in those national markets in East Asia which are widely-believed to have weaker competition law enforcement regimes. The econometric analysis, which employed well-accepted techniques for estimating parameters that reveal the degree of market power, was conducted by Simon J. Evenett and Krista Lucenti.

The fourth deliverable involved a change of region (to Latin America) and a change in policies (from trade policies to domestic regulatory policies). Manuel Naessl and Damien Neven examined the responsiveness of the productive efficiency of the telecommunications sector in various Latin American countries to different mixes of government regulation, competition in the market for corporate control, whether competition in (traditional) fixed line services was permitted, and whether competition in substitute services (such as mobile phones) was allowed. This type of analysis helps identify not only if a competitive market environment matters, but which type of competition matters most (as firms can potentially compete in more than one way). The expectation was that deliverables number three and four would add to the small econometric literature that seriously considers the interactions between inter-firm rivalry, competition law and policy, and other key public policies (such as trade reforms, investment policies, and policies towards utilities, including privatisation).

The fifth deliverable addresses the definition, scope, rationale, form, and potential effectiveness of competition advocacy, which is a function of competition agencies that is strictly distinct from (yet can be related to) its enforcement activities and that seeks to encourage state bodies to adopt measures that foster inter-firm rivalry.

Competition advocacy has assumed greater significance in recent years because many experts and officials from industrialised economies have recommended that developing country competition agencies should concentrate on this activity, at least at first when their agencies are relatively inexperienced. Julian L. Clarke and Simon J. Evenett were responsible for bringing together the highly dispersed literature on competition advocacy and for discussing some of its elements in detail. In so far as competition advocacy is directed towards sectoral regulation and other government measures to regulate commerce at the border, this paper addresses similar topics as the others in this work package. However, rather than address what should be done in principle, the fifth deliverable also examines what has been done in practice.

One means by which competition policy can be used to secure beneficial economic reform is to ensure that promoting consumer welfare becomes a priority in the legislative process. Whenever the legislated is implemented and employed, the competition authority can then argue that the consumer welfare mandate should be respected. It is perhaps not surprising, therefore, that many writings on competition advocacy emphasise the opportunities and threats created by the legislative process and the rights of competition agencies in this respect.

Binding these various claims together is the philosophy that the competition advocacy function is beneficial because consumers are often too disparate to organise themselves into an effective lobby group on their own behalf. The theory of regulatory capture asserts that small groups with an interest in modifying the regulatory framework are effective at lobbying and organising in their own behalf than a large disparate mass. In this way, the competition authority replicates the actions of small, cohesive lobby groups but acts on behalf of the population in general rather than a select interest group. Yet, the ability to make a case in no way guarantees that others will listen, and when they do, that they are persuaded. When considering the effectiveness of competition advocacy the real question is how such activities alter the political-economy of policy-making in an economy. As competition agencies do not directly represent interest groups, the strategic use of information appears to be the most potent tool available in this regard.

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