Role of Competition reforms in socio-economic development in developing countries Pradeep S. Mehta CUTS International Role of Competition reforms in socio-economic development in developing countries 1

“Strong competition policy is not just a luxury to be enjoyed by rich countries, but a real necessity for those striving to create democratic market economies”. -Joseph Stiglitz

Defining Competition OECD Glossary of Statistical Terms: “A market situation in which firms or sellers independently strive for the patronage of buyers in order to achieve a particular business objective e.g., profits, sales and/or market share” Effective competition commonly achieved when:  Reasonable number of players in the relevant market  Barriers to entry/exit are low  Products are largely homogeneous 3

Socio-economic growth and Undistorted Competition “…if countries eliminated the policies that distort competition, they could grow rapidly” -William Lewis in Power of Productivity “…In many market oriented economies, especially developing economies, government restrictions give rise to rent-seeking behaviour leading to a suboptimal utilisation of resources and a loss of welfare” - Anne Krueger in The Political Economy of the Rent Seeking Society Study of IDA countries: the world’s poorest countries tend to have low levels of competition in domestic markets and a high degree of market dominance (FIAS, 2007) 4

Continued… Outcomes of effective competition:  Economic gains: Higher GDP, Industrial Growth, Variety and Innovation  Social gains: Lower prices, improved accessibility, more jobs Over 120 countries have adopted a competition law today as opposed to 35 in

…Continued Firms and sectors more likely to be competitive internationally if they operate within competitive domestic markets. (OECD Report on Promoting Pro-Poor Growth: Private Sector Development (2006) Competitive markets more likely to provide the poor with newer opportunities for employment..e.g. South Africa has a well-developed and regulated competition regime based on best international practice. Competition authorities take into account both competitiveness and general public interest - including black economic empowerment. 6

Competition reduces prices and improves accessibility.e.g. In India the effect of competition on price and accessibility is best illustrated by the case of telecommunications with teledensity increasing from a mere 2.32% in 1999 to 47.89% in December 2009 and tariffs falling from Rs.16 to less than Re.1 per minute. Competition creates rivalry leading to more consumer gains For the past decade Safaricom has been the dominant phone service provider with an average of 80% of the market belonging to them in Kenya. With entry of Bharti Airtel, Essar Telecom and Telkom Kenya in recent years, there has been a price war in Kenyan mobile market benefiting consumers. 7

Continued… In a study, Bayoumi et al. (2004) have estimated that differences in levels of competition account for more than 50 per cent of the current gap in GDP per capita between the Euro area and the United States. A study by the Australian Productivity Commission estimated expected benefits from competition to lead to an annual gain in real gross domestic product (GDP) of about 5.5 per cent, or A$23bn, where consumers would gain by almost A$9bn besides seeing increases in real wages, employment and government revenue. 8

Continued… When competition was introduced in generic drugs in South Africa, prices for antiretroviral drugs fell by up to 88% since 2003 and access increased from 20,000 to 155,000 Competition introduced in sanitation services in Tanzania resulted in lower charges and increased access 9

When is Competition Distorted? Anticompetitive practices by firms.e.g. price-fixing agreements, cartels, abuse of dominance cases and anti- competitive mergers at times. Existing policies, statutes and regulations of the government that restrict or undermine competition E.g. policies related to trade, procurement, labour, investment etc. 10

Some Global Costs of Competition Distortion As a result of price fixing conspiracies during the 1990s, developing countries paid approx. $ billion in excessive prices (Jenny, 2003) Fink, Mattoo and Neagu concluded in a study that a breakup of price- fixing arrangements among private carriers could reduce transport prices by 20 per cent on U.S. routes and a fall in the import bill of developing countries by $2.3 billion in maritime transportation Overcharge paid by India due to anti-competitive practices in the global potash market. Under a competitive scenario, the price of potash would decline from $574 per tonne in 2011 to $217 by 2015, and subsequently increase to $488 by However, in the continuing presence of fertiliser cartels, the price of potash would steadily increase from $574 per tonne in 2011 to $734 in 2020 (Jenny, 2011) 11

Outcomes of distorted competition:  Higher prices  Restricted Output  Rent-seeking  Lower productivity  Welfare loss 12

Comparing Outcomes Outcomes under effective competition Outcomes under distorted competition Higher outputLower output Greater production=more jobsLower production=lesser jobs Lower pricesHigher prices Greater product variety/better service due to rivalry No incentive to offer variety/better service Prevents inefficiency (allocative, productive) Protects and promotes inefficiency (allocative, productive) Economic growthDeadweight loss 13

Case Studies On the eve of Eid in Bangladesh, the staff of the government-owned Bangladesh Inland Water Transport Corporation indulged in price gouging by charging 1,800 takas instead of 1,200 takas per cattle-laden truck to ferry them across to Dhaka from another location. Action to curb it has been missing until now. Zambia has very high domestic sugar prices when compared to other countries, which is detrimental to Zambian consumers, due at least in part to the monopolistic market structure of the sugar industry in Zambia, where one firm yields significant market power and is protected from external competition by barriers to imports. 14

Continued… In India where competition law is fairly new, one major cause for distortion of the level playing field between private and public sector pertains to policies across several sectors that favour private sphere over public and vice versa. (Competitive Neutrality) In 2010, the Reserve Bank of India (RBI) had asked several state governments not to give new businesses, which could generate thousands of crores of income, to private sector banks. The central bank did not spell out the reason for its decision. Ghana at present does not have a competition law but a draft. Ghanaian businesses today face challenges of high capital (interest rates), energy (electricity),transportation (fuel) and communication (telephone and internet) costs. There is limited competition amongst service providers and collusion in some cases for example Ghanaian banks collude to charge high interest rates and consumers have no choice at present as no action can be undertaken against them when there is no law to discipline such actions. 15

Challenges and Way Forward Balancing the interest of an industry (economic interests) on the one hand and consumer/public interest (social interests) on the other: Challenge before policymakers Implement a competition regime Create a mechanism to assess the impact of government policies on competition (Competition Assessment Framework/Toolkit) Build a culture of competition through advocacy and enhanced role of civil society Build capacity of competition agencies 16

Thank you for your attention 17