1. 1 UNCTAD-YEDITEPE UNIVERSITY SEMINAR ON COMPETITION PROVISIONS IN REGIONAL TRADE AGREEMENTS: HOW TO ASSURE DEVELOPMENT GAINS Istanbul, Turkey 31st July - 1st August 2006

2. 2 PRIORITIES IN THE IMPLEMENTATION OF A REGIONAL COMPETITION LAW AND POLICY Prof. Dr. Erdal Türkkan President of Competition Association /Ankara

3. 3 THE PURPOSE AND THE SCOPE OF THE PRESENTATION * At present the method dominantly used for the implementation of competition law and policy at national, regional or international levels may be qualified as “peace meal approach”. The only realistic alternative of this method may be called as “priority approach”. *The purpose of my presentation is to show the weakness and superiority of peace meal approach and priority approach in the implementation of competition policies in regional and global integration issues. *The purpose of my presentation is to show the weakness and superiority of peace meal approach and priority approach in the implementation of competition policies in regional and global integration issues. *At the first part of my presentation I will try to explain the theoretical bases of peace meal and priority approaches. *At the second part of my expose I will try to clarify the policy implications of the priority approach at regional level.

4. 4 THEORETICAL BASES OF PEACE MEAL AND PRIORITY APPROACHES Peace meal approach as well as priority approach is used in general without any theoretical reference as empirical methods in policy studies. But in fact both approaches have common theoretical bases which is the second best theory. Peace meal approach as well as priority approach is used in general without any theoretical reference as empirical methods in policy studies. But in fact both approaches have common theoretical bases which is the second best theory. Peace meal approach means, the implementation of any part of a set of necessary policies to be pursued for the realization of a definite objective (i.e. maximization of economic welfare). Peace meal approach means, the implementation of any part of a set of necessary policies to be pursued for the realization of a definite objective (i.e. maximization of economic welfare). A Second Best solution and peace meal approach become necessary in case of the impossibility of the simultaneous realization of the totality of necessary and sufficient conditions of a desirable (optimal) position. A Second Best solution and peace meal approach become necessary in case of the impossibility of the simultaneous realization of the totality of necessary and sufficient conditions of a desirable (optimal) position. Priority approach means, the implementation of a well ordered set of necessary policies predetermined according to their impact on the realization of a definite objective. Priority approach means, the implementation of a well ordered set of necessary policies predetermined according to their impact on the realization of a definite objective. Up to the end of 1950’s the validity of peace meal approach was generally accepted for reaching a second best or third best solution. Up to the end of 1950’s the validity of peace meal approach was generally accepted for reaching a second best or third best solution. Second best theory which is formulated by LIPSEY&LANCASTER in 1957 express openly the end of the validity of peace meal approach and allude the necessity of the priority approach Second best theory which is formulated by LIPSEY&LANCASTER in 1957 express openly the end of the validity of peace meal approach and allude the necessity of the priority approach

5. 5 The Impasse Created By the Second Best Theory Findings of the Second Best Theory Created Two Important Theoretical and Practical Questions: Findings of the Second Best Theory Created Two Important Theoretical and Practical Questions: 1)Impossibility of application of first best rules in welfare or competition policies*. 1)Impossibility of application of first best rules in welfare or competition policies*. -Uncertainty of the consequence of an arbitrary competition policy on the welfare. This problem constitutes an important point because of the simplicity and guiding property of first best rules. -Uncertainty of the consequence of an arbitrary competition policy on the welfare. This problem constitutes an important point because of the simplicity and guiding property of first best rules. -Uncertainty of the consequence of market imperfections on the welfare level. -Uncertainty of the consequence of market imperfections on the welfare level. 2)Complexity and difficulty of implementation of second best rules. At least a part of existing deviations from the optimal rules may represent the second best solutions (Optimal deviations). Then, under certain circumstances the competition authority’s interventions may have harmful effects rather than desirable effects. 2)Complexity and difficulty of implementation of second best rules. At least a part of existing deviations from the optimal rules may represent the second best solutions (Optimal deviations). Then, under certain circumstances the competition authority’s interventions may have harmful effects rather than desirable effects. *If simultaneous realization of all conditions of optimum is impossible, we can not say anything about the impact of the realization of one or more additional condition of optimum on welfare level.

6. 6 Concept of Workable Competition as a Second Best Solution Model The concept of workable competition may be defined in general as a second best market structure. The concept of workable competition may be defined in general as a second best market structure. General and observable features of the concept : General and observable features of the concept : -Producers are not price taker. -Producers are not price taker. -Goods and services are not homogeneous, -Goods and services are not homogeneous, -Free entry and exit condition is the rule, -Free entry and exit condition is the rule, -The State may intervene for remedying market failures. -The State may intervene for remedying market failures. The main particularity of the concept of workable competition defined in the framework of second best theory is that. The main particularity of the concept of workable competition defined in the framework of second best theory is that. -It may not have a unique or universal definition. -It may not have a unique or universal definition. -It may not have a static definition. -It may not have a static definition. -It may not have a partial definition and implication. -It may not have a partial definition and implication. The characteristics of the concept of workable competition may change in time in parallel to the development of the nature of irremediable non desired deviations. The characteristics of the concept of workable competition may change in time in parallel to the development of the nature of irremediable non desired deviations.

7. 7 Practical Solutions to Reach a Second Best Solution and Determination of Priorities: 1)Identification of the Most Important Deviations For the determination of priorities in the implementation of competition policies, the first step is the measurement of deviations from the first best solution. For the determination of priorities in the implementation of competition policies, the first step is the measurement of deviations from the first best solution. -Deviations from the marginal cost pricing (price = marginal cost rule) or, -Deviations from the marginal cost pricing (price = marginal cost rule) or, -Deviations from the perfect competition conditions (zero market power rules) may be used -Deviations from the perfect competition conditions (zero market power rules) may be used -In international relations, a practical way for the measurement of the deviations from the first best, may be the use of opportunity cost which is expressed by international market price in general. -In international relations, a practical way for the measurement of the deviations from the first best, may be the use of opportunity cost which is expressed by international market price in general. The second step for the determination of the priorities is the identification of the most important deviations from the first best solution. The second step for the determination of the priorities is the identification of the most important deviations from the first best solution. The second best theory suggests that the deviations between the biggest and smallest size may be a useful second best deviation The second best theory suggests that the deviations between the biggest and smallest size may be a useful second best deviation

8. 8 Practical Solutions to Reach a Second Best Solution and Determination of Priorities: 2)Identification of Strategic Deviations The determination of strategic deviations constitutes an important aspect of the priority approach. The determination of strategic deviations constitutes an important aspect of the priority approach. We must make a distinction here between two kinds of deviation or distortion: We must make a distinction here between two kinds of deviation or distortion: -Independent deviations the existence of which may not be explained by the existence of any other deviation.This kind of deviations my be moved only by direct specific measures. -Independent deviations the existence of which may not be explained by the existence of any other deviation.This kind of deviations my be moved only by direct specific measures. -Dependent deviations or distortions the presence of which may be explained by the impact of other deviations. This kind of deviations may be moved by eliminating the related deviations. Direct action is not necessary. -Dependent deviations or distortions the presence of which may be explained by the impact of other deviations. This kind of deviations may be moved by eliminating the related deviations. Direct action is not necessary. We can now define the concept of strategic deviation as an independent deviation the existence of which creates a high number of dependent deviations. Consequently, the elimination of a strategic deviation permits to eliminate a high number of dependant deviations. We can now define the concept of strategic deviation as an independent deviation the existence of which creates a high number of dependent deviations. Consequently, the elimination of a strategic deviation permits to eliminate a high number of dependant deviations.

9. 9 Strategic Deviations The most widely observed strategic deviations are : High inflation, High inflation, High indirect and direct taxes and insufficient taxation system, High indirect and direct taxes and insufficient taxation system, Over evaluated or under evaluated national currency, Over evaluated or under evaluated national currency, Excessive deviation of the price of internationally marketed basic goods and services from the opportunity cost, Excessive deviation of the price of internationally marketed basic goods and services from the opportunity cost, Non regulated state aids, Non regulated state aids, Lack of competition in public procurements, Lack of competition in public procurements, Existence of privileged public sector and public monopolies, Existence of privileged public sector and public monopolies, Natural monopolies, Natural monopolies, Imperfections in the customs system and protectionism, Imperfections in the customs system and protectionism, Existence of an important underground economy, Existence of an important underground economy, Bureaucratic entry barriers to new markets etc. Bureaucratic entry barriers to new markets etc.

10. 10 Cost Benefit Analysis For the Determination of Priorities Cost –Benefit analysis may always be used for the determination of priorities as well as for assessing the relative desirability of different policies or projects. Cost –Benefit analysis may always be used for the determination of priorities as well as for assessing the relative desirability of different policies or projects. The first step of the analysis is the calculation of costs and benefits and the Benefit/ Cost ratio. For the desirability of any project or policy, the ratio must be greater than one. The first step of the analysis is the calculation of costs and benefits and the Benefit/ Cost ratio. For the desirability of any project or policy, the ratio must be greater than one. If we calculate the Benefit /Cost Ratio of alternative projects or policies, it is possible to determine the priorities. But for assuring a significant comparison in the light of the second best theory, alternative policies must cover all possible big deviations. If we calculate the Benefit /Cost Ratio of alternative projects or policies, it is possible to determine the priorities. But for assuring a significant comparison in the light of the second best theory, alternative policies must cover all possible big deviations. In general the determination of benefits is more problematic than the determination of costs. That is why in some cases least cost or cost effectiveness analysis is used for the determination of the best alternative. In general the determination of benefits is more problematic than the determination of costs. That is why in some cases least cost or cost effectiveness analysis is used for the determination of the best alternative. The second step in the determination of priorities by using Cost-Benefit analysis is the comparison of the Benefit/Cost ratio. If the costs and benefits are appropriately calculated, the B/C ratio may be used for the determination of priorities. In case of a simplified cost benefice analysis, complementary criteria may be used for the determination of priorities The second step in the determination of priorities by using Cost-Benefit analysis is the comparison of the Benefit/Cost ratio. If the costs and benefits are appropriately calculated, the B/C ratio may be used for the determination of priorities. In case of a simplified cost benefice analysis, complementary criteria may be used for the determination of priorities

11. 11 POLICY IMPLICATIONS OF THE PRIORITY APPROACH AT REGIONAL LEVEL Methodologically, the priority approach has three implications: Methodologically, the priority approach has three implications: *First, the priority approach necessitates taking into consideration the totality of non desired big deviations or distortions. *First, the priority approach necessitates taking into consideration the totality of non desired big deviations or distortions. *Secondly, the priority approach implies the evaluation and comparison of the totality of non desired deviations or distortions according to a well defined criteria (for example deviation from marginal cost or zero market power) in order to arrange them in a priority order. *Secondly, the priority approach implies the evaluation and comparison of the totality of non desired deviations or distortions according to a well defined criteria (for example deviation from marginal cost or zero market power) in order to arrange them in a priority order. * Third, the elimination of distortions must be realized according to a predetermined priority order. * Third, the elimination of distortions must be realized according to a predetermined priority order. At regional level, we can express these implications by four conditions: At regional level, we can express these implications by four conditions: *The realization of a workable regional market economy; *The realization of a workable regional market economy; *The creation of an appropriate economic reference for competition policies; *The creation of an appropriate economic reference for competition policies; *The harmonization of competition policies, *The harmonization of competition policies, *Finally the predetermination of priorities. *Finally the predetermination of priorities.

12. 12 Realization of a Workable Regional Market Economy Elimination of Barriers to Regional and International Trade:The liberalization of foreign trade and the opening up of the national economy to the outside world market. Elimination of Barriers to Regional and International Trade:The liberalization of foreign trade and the opening up of the national economy to the outside world market. Fair distribution of gains from international trade and specialization. The application of the compensation principle may resolve questions related to the fair distribution of gains. Fair distribution of gains from international trade and specialization. The application of the compensation principle may resolve questions related to the fair distribution of gains. Elimination of barriers to international factor movements. The free movement of capital constitutes of course the first step. In regional integration movements, the partial or total free movement of labor also may be possible. Elimination of barriers to international factor movements. The free movement of capital constitutes of course the first step. In regional integration movements, the partial or total free movement of labor also may be possible. The minimization of market failures and government failures. The minimization of market and government failure necessitates the use of the concept of strategic deviation in the framework of the priority approach because of the very large number of theses failures. The minimization of market failures and government failures. The minimization of market and government failure necessitates the use of the concept of strategic deviation in the framework of the priority approach because of the very large number of theses failures.

13. 13 Determination of an Appropriate Economic Reference for Competition Policies at Regional Level Regional or international economic integration necessitates a common appropriate economic reference for competition policies of participating nations. This reference may be expressed in terms of: Regional or international economic integration necessitates a common appropriate economic reference for competition policies of participating nations. This reference may be expressed in terms of: *Maximization of welfare (Total Surplus =Consumer Surplus + Producer Surplus) of member countries or, *Maximization of welfare (Total Surplus =Consumer Surplus + Producer Surplus) of member countries or, *Efficiency in the resource allocation process at regional level or, *Efficiency in the resource allocation process at regional level or, *Creation of a workable regional market economy. *Creation of a workable regional market economy. Existing references may be compatible or not compatible with the priority approach. Existing references may be compatible or not compatible with the priority approach. *Competition policies without precise reference or multipurpose competition policies (Not compatible) *Competition policies without precise reference or multipurpose competition policies (Not compatible) *The dominance of legal considerations may constitute an obstacle for the use of the priority approach. *The dominance of legal considerations may constitute an obstacle for the use of the priority approach. *The existence of exceptions and exemptions based on social considerations creates important difficulties for the implementation of the priority approach. *The existence of exceptions and exemptions based on social considerations creates important difficulties for the implementation of the priority approach. *In some cases international obligations reflect priorities in the implementation of competition policies at national as well as at regional levels (WTO,EU,UN-UNCTAD,IMF-WORLD BANK) *In some cases international obligations reflect priorities in the implementation of competition policies at national as well as at regional levels (WTO,EU,UN-UNCTAD,IMF-WORLD BANK) *Competition policies based on international competitiveness and attractiveness considerations may not be compatible with the implications of priority approach. *Competition policies based on international competitiveness and attractiveness considerations may not be compatible with the implications of priority approach.

14. 14 Enlargement and Harmonization of the Scope of Competition Policies The enlarged modern definition may be considered as the most appropriate competition policy concept for the application of the priority approach at regional level. This definition include: The enlarged modern definition may be considered as the most appropriate competition policy concept for the application of the priority approach at regional level. This definition include: *Antitrust Regulation: *Antitrust Regulation: -The elimination of agreements which restrict competition (e.g. price-fixing agreements, or cartels, between competitors) -The elimination of agreements which restrict competition (e.g. price-fixing agreements, or cartels, between competitors) -Prevention of abuses of the dominant position by firms who hold a dominant position on the market. -Prevention of abuses of the dominant position by firms who hold a dominant position on the market. -Merger control: The control of mergers between firms (e.g. a merger between two large groups which would result in their dominating the market). -Merger control: The control of mergers between firms (e.g. a merger between two large groups which would result in their dominating the market). *State aid control. *State aid control. *Liberalization: Introducing competition in monopolistic economic sectors. *Liberalization: Introducing competition in monopolistic economic sectors. *Minimization of the causes and negative effects of government failures. *Minimization of the causes and negative effects of government failures. *Creation of independent regulatory bodies at national level *Creation of independent regulatory bodies at national level * Adoption of the competence of a regional or international independent regulatory authority which supervises national regulations and aims to harmonize related regulations. * Adoption of the competence of a regional or international independent regulatory authority which supervises national regulations and aims to harmonize related regulations.

15. 15 Predetermination of Priorities: Need for a Research Oriented Competition Institute Priority approach necessitates the realization of important research at national, regional and international levels, for the determination of the size, nature and effects of existing deviations from the ideal solution. Priority approach necessitates the realization of important research at national, regional and international levels, for the determination of the size, nature and effects of existing deviations from the ideal solution. Competition authorities can not realize this continuous and semi- academic function. Then the realistic solution is the creation of a research oriented Competition Institute. Competition authorities can not realize this continuous and semi- academic function. Then the realistic solution is the creation of a research oriented Competition Institute. In case of a regional integration project, a regional institute may be created with branches at national level. In case of a regional integration project, a regional institute may be created with branches at national level. The competition institute is necessary not only for the determination of priorities, but also for the determination of an appropriate economic reference and for the definition of the optimal scope and harmonization level etc. The competition institute is necessary not only for the determination of priorities, but also for the determination of an appropriate economic reference and for the definition of the optimal scope and harmonization level etc. This institute may play also an important role in the formation process of the experts in related regulatory bodies This institute may play also an important role in the formation process of the experts in related regulatory bodies

16. 16 Concluding Remarks -The priority approach is much more complicated than the peace meal approach in which we are not obliged to take into consideration the totality of distortions. -The priority approach is much more complicated than the peace meal approach in which we are not obliged to take into consideration the totality of distortions. -But as the second best theory suggests, competition policies implemented in the framework of the peace meal approach may give rise frequently to non desired harmful consequences, while the priority approach has the advantage of being safer concerning its results. -But as the second best theory suggests, competition policies implemented in the framework of the peace meal approach may give rise frequently to non desired harmful consequences, while the priority approach has the advantage of being safer concerning its results. -As the second best theory suggests, by the use of the peace meal approach the realization of the process of regional integration may be slow and difficult. The priority approach promises a more rapid and efficient process for the realization of regional integration. -As the second best theory suggests, by the use of the peace meal approach the realization of the process of regional integration may be slow and difficult. The priority approach promises a more rapid and efficient process for the realization of regional integration. The establishment of a Competition Institute seems necessary not only as an implication of the priority approach, but also for ameliorating the application of the peace meal approach. The establishment of a Competition Institute seems necessary not only as an implication of the priority approach, but also for ameliorating the application of the peace meal approach. In fact this research suggest that a more careful and conscious application of the peace meal approach also permits to eliminate an important part of its inconveniences. But this necessitates again more extended research in the implementation of competition policies. In fact this research suggest that a more careful and conscious application of the peace meal approach also permits to eliminate an important part of its inconveniences. But this necessitates again more extended research in the implementation of competition policies.