INTRODUCTION

In the 1980's the New Zealand Government embarked upon an economy wide restructuring process aimed at encouraging an economic environment which was flexible and responsive to changes in both the internal and external environment. The overall goal of the restructuring process was to promote economic growth. An essential element of this reform was to liberalize trade, with the objective of increasing competition and ultimately increasing the efficiency of New Zealand industries. The changing nature of the global economy however continues to present New Zealand, and indeed all APEC economies with new challenges. The challenge now extends beyond the challenge of liberalization alone. Increasingly there is a need to look beyond border issues and to more fundamental domestic issues which affect the efficient operation of markets. This paper attempts to address these issues.

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THE NEW ZEALAND EXPERIENCE

The focus of competition policy in New Zealand has changed significantly over the last 10 years. The New Zealand economy since 1984 has undergone a well documented structural change. The focus of the reforms have been to create an economic environment that is characterized by adaptability and flexibility. Microeconomic reforms were aimed at influencing the decision making behavior of individual firms to respond to market based signals and therefore improving economic efficiency. This involved eliminating distortions in incentives that had been created by the Government, which prevented signals of market conditions reaching firms and households. Macroeconomic reforms were aimed at providing consistency in policies and stability in the economic environment.

The key components of the economic policy over the last few years have been :

• a commitment to control inflation. The Government is committed to a long term approach to monetary policy that recognizes the importance of a low and sustainable rate of inflation. This provides certainty and contributes over time to lower costs of capital;

• a fiscal policy commitment to keep government expenditure under control and reduce debt. The Government remains committed to further tax and debt reduction. This will reduce the cost of capital and improve the competitiveness of the economy as a whole;

• labor laws that allow flexibility in the labor market. The Employment Contracts Act has moved employers and employees to more direct and better informed partnerships. The ECA has been an important part of the policy mix that has created the environment that has enable New Zealand;

• to become more internationally competitive;

• a commitment to expose the economy to international competition through a continuing tariff reduction programme;

The success of the economic programme can be seen by the fact that New Zealand is acknowledged as being internationally competitive. One World Competitiveness Report (from the International Institute for Management Development) rates New Zealand as eleventh out of 46 countries and describes New Zealand as a "remote but brilliant star". Over the last three years New Zealand has experienced its best economic performance in over a decade in terms of GDP growth.

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THE CHANGING GLOBAL MARKETS AND EMERGING CHALLENGES

Although considerable progress has been made in New Zealand to ensure that our businesses are operating in a more open and competitive environment, changes in the global nature of the world continue to provide significant challenges and opportunities to New Zealand if it is to become a truly competitive economy.

The international economy is increasingly generated by the globalization of production and global finance. The globalization of economic activity has blurred the distinction between domestic and international markets.

Globalization has been fueled by :

• increasing liberalization of international trade and investment under the new World Trade Organization and other international agreements, including commitment to regional free trade objectives of the APEC;

• the revolution in telecommunications which has removed many of the traditional impediments resulting from distance from markets;

• rapid technological change resulting in a new range of internationally tradable products; and services; and

• very rapid growth of the newly industrialized countries in the APEC region.

Increasingly we are hearing about so called "global industries". The globalization trend allows firms to locate its activities in the �alue chain' in separate locations. These are firms which pursue global strategies in which international activity is linked and coordinated on a world wide basis. Such global industries have a global vision and orientation that transcend definitions of national identity. Global industries source factors of production from all around the world, and similarly see the entire world as their market and customer base. The ease at which capital and technology can now cross national borders is increasing. The process of globalization has lead to further integration of both factor and production markets.

This process of globalization will shape government's policy framework into the next century, and has developed a new set of challenges for the New Zealand economy. The challenge now extends beyond the challenge of liberalization alone. It is increasingly recognized that open markets alone will not ensure that the economy is competitive and efficient. Increasingly business is demanding a trade and investment framework that will allow it to operate in a secure, consistent, predictable and transparent manner.

To ensure that economies are placed to share in the benefits that flow from the global environment government's must continue to focus on those issues which effect the competitiveness of domestic markets. Sustained economic growth is most likely to be achieved by an open and competitive economy functioning within a stable environment. An open and competitive environment creates profit making opportunities, while providing consumers with greater choice, and thus strengthening the incentives on firms to improve continuously their efficiency and innovation. An open and competitive environment will also facilitate global sourcing of key factors such as capital, technology and skilled labour.

Competitiveness depends on the ability of firms both (domestic and international) to contest particular economic activities. In essence the level of contestability in a market will depend on the degree to which barriers to entry exist. Hence a fully contestable market would be one where there are no substantial barriers to entry, in other words a situation in which the competitive process is unimpeded.

In this sense eliminating controls at the border will not alone achieve the objectives of competition policy. Even when such border controls are removed substantial barriers to entry continue to exist. Some barriers to entry are unavoidable and arise because of issues such as consumer loyalty, familiarity with local culture, and knowledge of the market place. However barriers to entry created by the Government or barriers created from anticompetitive and collusive strategic actions of private firms is an issue that the New Zealand Government must continue to address in the global environment. These issues are addressed in turn.

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BARRIERS TO ENTRY CREATED BY THE GOVERNMENT

Globalization has heightened the awareness of the effects of the domestic regulatory environment in a global setting. This has meant that there is growing international interest in a variety of issues that was previously the domain of domestic policy. Business is putting pressure on governments to increase transparency, lower compliance costs and adopt regulatory best practice to facilitate the operation of business across borders.

Regulation is defined as the full range of legal instruments by which governing institutions, at all levels of Government, impose obligations or constraints on private sector behavior. The regulatory environment has a direct impact on business growth. From a global firms perspective, the need to comply to different sets of regulations throughout world, can reduce investment incentives, and impede the flow of goods and services. Effectively the result is that the costs of doing business increases, and hence in the long run consumers lose out. However of greatest concern from a global perspective, because of the barriers to entry that is created, is when the cost of complying to an economy's regulatory environment is greater for foreign firms than the domestic market, resulting in unnecessary impediments to entry of foreign competition.

Such situations can occur when :

• regulation is applied exclusively to foreign firms;

• regulation are designed in such a way that although it is applied equally to both domestic and foreign firms, it creates significant disadvantages to firms which are not located in the country in which the regulation is imposed;

• domestic firms are more informed about the changing nature of regulations. Often compliance with regulations can involve significant sunk costs. When domestic firms have a greater awareness of the nature and forms of new regulations, there ability to adapt and adjust to the changing conditions at a faster rate, may create an advantage over foreign firms.

• economies opt for different approaches to achieving a particular regulatory objective. Where economies adopt regulatory approaches which are prescriptive in nature rather then flexible in terms of the fulfilling regulatory objectives, this will can lead to a significant disadvantage to firms who engage in international trade.

It should be recognized upfront that differences in the form and extent of regulation, may in certain circumstances be entirely justifiable and applied for legitimate reasons. Legitimate differences can occur as a result of among other things, different environments, cultures and values, or levels of national income. In such circumstances the benefits to the domestic market, of pursuing a particular form of regulation, may outweigh the costs.

Concern does arise, however, when regulatory differences occur as the result of lack of informed decision making, particularly about current trends in the global environment, or pressures placed on the Government to regulate in a particular manner due to political pressures. In such circumstances, unnecessary barriers to entry will occur, and overall economic efficiency is reduced.

While many of the regulatory barriers to competitiveness and innovation have been removed throughout APEC, we must continue to focus on those that remain. Where regulations is justified it is important to ensure that such regulation does not

• impose unnecessary costs;

• create uncertainty for businesses; and

• or impede the ability of firms to adjust.

Further, future developments in the area of regulation must take into account the international regulatory environment.

The need to promote transparency among APEC economies in the area of domestic regulation has already been identified in the Osaka Action Agenda on deregulation. Promoting transparency of regulatory regimes within APEC is an important first step. Transparency can not only reduce barriers created by information costs, but can be a useful tool in highlighting those areas of our regulatory regimes that may be inconsistent with the objectives of competition policy. Transparency will also provide an invaluable opportunity for APEC economies to learn from the each others experiences in the area of deregulation.

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ANTICOMEPETITIVE BEHAVIOUR

As mentioned earlier the competitiveness of a market depends on the ability of firms to contest particular economic activities. Anticompetitive and collusive strategic actions of private firms can create barriers to effective and competitive markets, by reducing the ability of new firms including foreign firms from entering the domestic market.

It is sometimes argued that free trade can be achieved simply by having an open economy. In New Zealand's experience this is not true. This argument relies on two premises that empirical research tells us are not sustainable. First, that the only forms of barriers to entry are government-imposed barriers. Secondly, that cartels are inherently unstable.

First, I consider barriers to entry. Other than government-imposed barriers to entry the experience of competition agencies in several economies indicates other forms of barriers can also cause market access problems. These include :

• sunk costs, particularly when they are accompanied by economies of scale and scope or significant marketing expenditure; and

• strategic behavior, including raising rivals' costs.

Examples of the latter include price cuts to punish a rival who refuses to join a cartel, setting up bogus independents, interference with a rival's bank credit, unfounded litigation and lobbying governments to impose entry barriers in the name of other public policy objectives such as environmental protection.

Second, are cartels inherently unstable? Undoubtedly there can be incentives on cartel members to cheat and not do things in accordance with what has been agreed. However, practical experience shows us that there have been very stable cartels in many economies that have successfully operated for years or even decades before being detected. They can do and have done a tremendous amount of harm to social welfare.

These are examples of why open markets alone will not fulfill the objectives of competition policy. Paradoxically, governments need to intervene to protect the competitive process. This can be achieved either through competition law or through market regulation. In our experience competition law is, by far, the most efficient and effective means of doing so, first because it means that the same standards of competition apply across the economy; secondly, because it avoids the need for large quantities of industry-specific regulation; and thirdly because industry-specific regulation can be unduly restrictive and cause significant misallocation of resources.

These issues need to be considered in the context of the Bogor Declaration. If we are to achieve the goals of free trade and investment then it is important to ensure that there are effective and well-enforced competition laws that prohibit domestic firms from behaving in a way that prevents overseas-sourced goods and services from competing on their merits.

As such there is a growing need for international cooperation in such areas as competition policy and competition law.

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CONCLUSION

To conclude, in New Zealand's experience, open markets is a necessary but not sufficient condition to achieve the objectives of competition policy. To ensure that economies are placed to share in the benefits that flow from the global environment Government's must continue to focus on those issues which affect the competitiveness of domestic markets. Eliminating controls at the border will not alone achieve the objectives of competition policy, because even when such controls are removed there can be significant barriers to entry. While some barriers are inevitable, barriers created by the Government in the form of regulation or barriers created by anticompetitive behaviour and collusive strategic actions of private firms should continue to be an important focus of competition policy.

In the area of regulation APEC must strive to find ways of minimizing any adverse effects of the regulatory environment on trade and investment in the most efficient way possible.

There is also a need for effective and well-enforced competition laws that prohibit domestic firms from behaving in a way that prevents domestic firms from behaving in a way that prevents overseas-sourced goods and services from competing on the domestic market.

As traditional barriers to entry are removed it is increasingly evident that APEC economies cannot achieve the objectives of free trade and investment independently. If we are to achieve these objectives there is a growing need for cooperation in the area of competition policy and law. As a first step we must recognize, and seek to agree on a common understanding of the interrelationships between various policies and their effect on competition.