COMPETITION POLICY IN DEVELOPING COUNTRIES:
THE CASE OF MEXICO
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By the Mexican delegation:
The competition policy in developing countries
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The growing reliance on market mechanisms to promote economic progress has been a dominant trend in the world economy in the past years. Particularly, there is an increasing trend of developing countries and transition economies to move from closed economies, large and inefficient state-owned sectors, highly concentrated industries, toward more open economies, and implementation of internal reforms to increase the role of competition in their economies. As a matter of fact, the main areas of the economies reform programs are focused in: trade liberalisation, deregulation and privatisation.
For example, at the end of the 80��s, the group of countries that had well-developed competition law systems was largely limited to developed countries. In recent years, however, a large and increasing number of developing countries and economies in transition have adopted new or substantially improved competition legislation.
Competition policy has been an integral part of economic reform programs in developing transition economies around the world: approximately 35 countries have adopted or strengthened their competition laws during the last decade.
The increasing importance of competition policy in developing countries and economies in transition reflects a growing appreciation of the relationship between the objective of competition policy and those of market oriented reforms, including both internal reforms and trade liberalisation. In particular, reforms adopted in most of these economies in recent years have the broad objective of improving the performance of markets and adapting their industry to international competition. Competition policy is a tool that reinforces the beneficial effects of such reforms in promoting efficiency gains and helping to ensure they are passed on to consumers.
There is a large body of evidence that suggests that the international competitiveness of domestic firms is likely to be enhanced by the existence of substantial competition in home markets, as the exposure to competition domestically assists firms in upgrading their products and marketing techniques and adapting quickly to changing market conditions. The existence of a healthy competitive environment and the availability of competition policy may enhance the attractiveness of host countries for foreign investment and for technology transfer.
The adoption of competition laws per se is only one of the available means by which countries can strengthen the role of market forces in their economies. Other important tools include liberalisation of trade and investment, deregulation and privatisation. Indeed, competition policy undoubtedly works most effectively when it is introduced in conjunction with other market oriented reforms.
However, the process of reform is far from over and the issues that it has raised are not exclusive to transition and developing economies since even advanced economies that have had competition laws for many years are continuing to remove barriers to entry and market rigidities erected by private firms as well as government bodies.
It has also been argued that in developing and transition market economies, even if competition law-policy is desirable, there is also a high probability that a new competition authority would apply competition provisions improperly given its lack of expertise, or that authorities would misuse their powers and would be captured by external interests, private or public.
This paper will address this issues generally. First I will expose the importance of the adoption of competition laws and policies, followed by a discussion about the changing role of the state as a reason for their adoption in developing and transitional economies. Next, the role of competition policies in different stages of economic development will be addressed. Afterwards, I will present two sections addressing the discussion of the role of competition policies in an economy which is undergoing a process of market oriented reform characterised by trade liberalisation, deregulation and privatisation.
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The design of competition laws in developing and transitional economies is a matter of concern for policy-makers. Most new competition laws are based either on the European Union model or some modified form of the United States model. It is important for developing countries to be cautious in adopting their competition rules from those models. Theoretically, there is probably no need for different rules. However, some distinctions need to be considered.
- In the United States the Sherman Act was originally passed because the Congress feared that there was too little regulation of business activity. The opposite is the case in many countries adopting competition laws today: they are moving from highly regulated societies toward deregulation and stronger market economies.
- In the United States economy the problem of monopoly has not been the most significant part of the antitrust law. Monopoly and oligopoly have by contrast been serious problems in many smaller and less open economies.
- The United States experience has shown that the level of antitrust enforcement is a serious matter. If there is too little enforcement, the problem of horizontal agreements will arise easily. If there is too much enforcement, the antitrust authorities risk becoming too regulatory.
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Defendants of the state intervention claim that a closer integration of business and government is needed to ensure that firms are large enough to compete effectively in international markets, and that this argument validates intervention in the economy. In this view, governments must lead the market by identifying strategically important industries and selecting a few large firms that can act as ��national champions�� and engines of growth. It then follows that competition policy may hinder the ability of domestic firms to become competitive because it is difficult for them to co-ordinate their business policies and consolidate operations through such strategies as mergers and acquisitions. Thus, the ��infant industry�� argument for exemption from the application of competition laws is a serious challenge for competition authorities in most developing and transitional economies.
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It is generally recognised that, as technologically sophisticated industries become more and more important to an economy, there is a movement away from government intervention and toward increased reliance on market mechanisms. At such stage, competition policy becomes extremely relevant.
However, it muse be noted that in all stages of economic development, competition policy can play an important role in attracting foreign investment. Multinational companies are used to operate within the practice of competition policy, so the absence of competition law (or a poorly designed or enforced one), can act as a barrier to trade and foreign investment in a country.
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The Effects of Trade Liberalisation on Competition
An improvement of the competition process is a consequence of trade liberalisation in countries in which it is undergone. In general, domestic monopolists or oligopolists will lose their ability to exercise market power in the presence of foreign competition. The absence of trade barriers reduces the feasibility of anticompetitive business practices even in economies with high level of industry concentration.
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The Effects of Competition Policy on Trade Liberalisation
Absent an appropriate competition law-policy, not all the benefits of trade liberalisation can be achieved. The pro-competitive effects of tariff reductions may be diluted by a variety of circumstances, and competition policy can be very useful in preventing such dilution or in counteracting it.
Example of such circumstances include horizontal agreements and vertical restraints in the importing country. Horizontal agreements might occur to segment markets, which would otherwise have integrated, in order to impede foreign competitors from entering a market by means of price collusion and the allocation of quotas or geographical segmentation agreements. Vertical restraints may impede market access in the form of abuses of dominant position such as tied sales and exclusive dealing arrangement.
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Effects of competition policy on international anticompetitive practices
Domestic competition laws can be used as effective weapons to alleviate the problem of international anticompetitive practices in at least two ways:
- They can deter international cartels from operating on the territories of the Countries which have adopted such laws; and
- they may enable the authorities of those countries to prosecute international firms adopting anticompetitive practices on their territories (either by themselves or in co-operation with competition authorities of the country where the firms are located).
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The experience of Mexico
Protecting competition and freedom of access requires co-ordination between the competition and the foreign trade authorities and the removal of obstacles to external competition. To this end:
- The FCC participates on the Foreign Trade Commission, this Commission
approves all measures regarding foreign trade. Additionally, the FCC signed and administrative collaboration agreement with SECOFI (Department of Commerce and Industry Promotion), which allows the antidumping authority to request the FCC opinion regarding the repercussions for competition of investigations concerning unfair trading practices and countervailing measure.
- The FCC monitors market dynamics to prevent and combat monopolistic practices that counteract the effects of commercial liberalisation, such as the closure of distribution channels.
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The reconsideration of the concept of ��national monopolies��
The concept of ��natural monopolies�� has come under attack in the presence of recent technological developments for such developments have made traditional sectors such as electricity or telecommunications no longer bear the characteristics of ��natural monopolies��. Nevertheless, there is still a legitimate need for regulating certain aspects of economic activity in the context of competition policy. The nature of both regulation and competition objectives calls for co-ordinated activities among their respective authorities.
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The experience of Mexico
In Mexico, some economic sectors have recently undergone a process of restructuring. These sectors have been traditionally regulated, managed or owned by the State, and now they have been opened to competition.
During 1995-96, Mexico enacted new versions of its Federal Telecommunications Law, Civil Aviation Law, Railroad Service Regulatory Law, Airports Regulatory Law, and Natural Gas Regulation. The new regulatory framework either allows or substantially expands private investor participation in those sectors. Competition policy has a very important role in this developments and the work of the FCC has been intense in preparing drafts of bills, decrees, and other regulatory provisions, as it has participate in inter-government for a dealing with the liberalisation and privatisation mechanisms suitable to Mexico��s needs.
The design and implementation of the measures and actions needed to strengthen market forces and incentives in those sectors sets major challenges for competition. Indeed, there is a need to propose formulae that will allow increased competition and market freedom within sectors that currently involve only one or very few participants or that are highly extensive and largely indivisible. Given this state of affairs, the FCC strives to assure that the legal and administrative provision, along with the privatisation and deregulation processes themselves, include criteria for safeguarding competition. These criteria include the following:
- Establishing rules that strengthen the Commission��s role in developing and protecting conditions of competition.
- Privatisation schemes designed to favour the development of conditions of competition in the provision of services.
- Transfers of rights granted under concessions or permits for exploiting nationally owned property and for providing public services must receive the Commission��s approval.
Another aspect of reform is the removal of regulations that unnecessarily increases the cost of doing business, impose artificial barriers to entry or grant preferential treatment. Deregulation helps the proper functioning of markets, and more particularly, the competitiveness of domestic industry. With this aim, in Mexico the Commission is working closely with SECOFI.
Preserving a competitive environment with clear, transparent, and predictable rules stimulates the technological modernisation of industry. The Commission in Mexico is assisting the development of this important issue by enforcing competition law. Therefore, when dealing with mergers and acquisitions that have an anticompetitive slant but would nevertheless lead to technological improvements, the Commission assigns top priority to identifying solutions that will eliminate their anti-competitive aspects but not affect the gains in competitiveness arising therefrom.
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Countries
State enterprises have often been granted immunity from the application of competition law. As a result of this, many have allegedly engaged in anticompetitive business practices.
Privatisation and restructuring of state enterprises provides opportunities for competition offices to play a constructive role in fostering and strengthening the competitive process. Particular attention needs to be focused on ensuring that State monopolies are not simply transformed into private ones without adequate structural and regulatory safeguards.
The experience of Mexico
Mexico has undergone a process of privatisation of some important previously owned state enterprises. Airline companies have been privatised in the 80��s, basic telephone services in 1990. Port services, railroad services, natural gas distribution and satellites are other sectors privatised or in the process of being privatised.
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Economic reform undertaken in most transitional and developing countries shares the common trait of pursuing competitive market structures through the process of privatising state enterprises, liberalising trade and eliminating excessive regulation. To that end, competition policy acting simultaneously with such pro-market reforms plays a central role in ensuring that efficiency gains and consumer welfare are effectively achieved.