Project Summary
As a result of self-realisation and other externalities, developing countries are legislating and/or revising their competition and sectoral regulatory laws, which has become an integral component of governance in these countries. It is now well recognised that competition and regulatory laws in developing countries need to be different from that in the developed world in both its form and implementation: the “one size and type does not fit all” argument. However, while good laws are drafted, the implementation is not as good due to peculiar political economy problems. There are both good and bad examples in the developing world, which are not captured in research as cogently as would be desirable for new institutions elsewhere to apply in their own context. Further the public discourse is nearly absent. As a result research on competition and regulatory issues in the context of developing countries remains limited.

Several efforts are currently under way to impart necessary knowledge and skills to the developing world. However, most of the existing efforts focus on capacity building and technical assistance, while the more substantive issues concerning developing countries remain low on the priority.

With this backdrop, CUTS has envisioned a long-term research programme on competition and regulatory regimes in the developing world, with a strategy to motivate researchers, in particular from the developing world, to undertake such research and participate in the accompanying symposia.

The project will be implemented through biennial research cycles comprising of call for papers and writing of research papers, publication of research volume and biennial symposia. The scope of research would cover issues relating to problems that developing countries face in implementing their competition and regulatory regimes. Certain problem areas concerning developing countries will be selected as the theme of each cycle. Based on the findings, views and experiences of the first research cycle, further cycles will be organised on different themes. The research findings will be disseminated through a regular publication and biennial symposia. A research agenda for the next cycle and an action agenda comprising key recommendations will be prepared at the end of each cycle.

The project seeks to enable developing countries in improving the effectiveness of their competition and regulatory regimes. This would ensure that people, especially the poor are linked to markets and markets function efficiently, without distortions. Furthermore, the project seeks to make research on competition policy and regulatory issues popular among the research community in the developing world, which presently remains neglected.

I. Background

1.1 Competition policy is an integral part of economic policy and seeks to promote competition as a means to ensuring efficient allocation of resources, resulting in the best possible choice of quality, the lowest prices and adequate supplies to consumers. Nonetheless, competition may not necessarily promote these objectives, as it is recognised that in certain sectors, for reasons that characterise market failure, competitive markets may not exist or yield desirable results. Because of market failure, a case is made for some form of intervention in the market process to bring about competitive outcomes. Thus, sectoral regulation becomes an integral component of competition policy.

1.2 Several developing countries have either enacted or substantially revised existing competition laws as a follow up to their market oriented economic reforms. Thus, about 50 developing countries completed legislation for competition laws in the 1990s, and another 27 are in the process of doing so. Additionally, most of the countries have adopted regulatory laws in several sectors as they opened up these sectors for private players.

1.3 The biggest challenge in the developing world today is to get rid of abject poverty. An important approach to poverty reduction is to link the poor to markets and make the markets work for the benefit of the poor people. As stated in the World Development Report 2002,

“Markets work for the poor because poor people rely on formal and informal markets to sell their labour and products, to finance investment, and to insure against risks. Well-functioning markets are important in generating growth and expanding opportunities for poor people”.

1.4 As Nobel Laureate Joseph Stiglitz observed: “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”.

1.5 Unfortunately, drafting of competition and regulatory laws in most developing countries has been influenced by similar existing laws of developed or other developing countries. Nevertheless, it is now recognised that competition regimes in developing countries need to be different from that in the developed world in both its form and implementation. A competition law should not simply be transplanted from a developed country, or even from another developing country.

1.6 The matter is even more critical to small developing countries where the establishment of competition and regulatory agencies presents many challenges, due to their size. In such a scenario, the institutional arrangements adopted in the developed and larger developing countries are inappropriate, calling for innovative solutions. One possibility is to establish a hybrid agency for competition matters and utility regulation, as tried in Barbados.

1.7 The mere adoption of a competition law and a regulatory law is a necessary but not a sufficient condition for it to be part of the market reform and poverty reduction agenda. Implementation is equally important. A study on the effective implementation of competition laws estimated that competition authorities in advanced countries are 40 percent more effective than their counterparts in developing countries.

1.8 Developing countries pose unique challenges for competition and regulatory law enforcement. Their low level of economic development, which is often accompanied by institutional design problems and complex political-economy considerations and bureaucracy, creates real-world challenges that have to be recognized before the successful implementation of competition and regulatory laws.

1.9 Thus, fulfilling development objectives while implementing competition and regulatory laws in a developing country is not an easy task. This requires understanding and knowledge of how to do it, which is presently absent. This scenario in turns leads to several unfounded misconceptions in the developing world. Hence, it is not surprising that often competition and regulatory laws are adopted, under external influence, with a lack of ownership. Some countries have done it in a hurried manner, ending up copying from developed countries. While some others have even been ambivalent to the adopting of such laws. Malaysia, for example, thought that it might conflict with its Bumiputra Policy (reservations for the sons of the soil) that it has been following vigorously for quite long.

1.10 This lack of understanding on competition policy and regulatory issues is compounded by the absence of public discourse on these issues. As a result research on competition and regulatory issues in the context of developing countries remains limited.

1.11 There is thus a strong need to address all the challenges and misconceptions in developing countries with respect to the implementation of competition and regulatory regimes to instil trust in the policy community and their people. This requires providing adequate support and space to developing countries in formulating competition policy and regulatory laws, and in developing and strengthening the regulatory institutions suitable to their needs.

II. Identifying Policy-Relevant Knowledge Gaps

2.1 Most of the existing efforts emphasise on capacity building and technical assistance of competition authority officials’ with very little discussion on substantive issues relevant to developing countries. Even in such limited discussion on substantive issues, by and large, developed world experts and practitioners are involved to share their knowledge and experiences, with very little exposure to other stakeholders, in particular the research community from the developing world. Furthermore, in cases where the focus of research is on issues concerning the developing world, most of the existing research is confined to researchers from the North with no strategy to encourage researchers from the South to put forward their perspective and develop research capacity in the process.

2.2 There is thus a clear vacuum for undertaking focused and cogent research on issues concerning the implementation problems in the developing world and providing a platform to strengthen research capacity in developing countries. A recent OECD document calls for more policy research concerning developing countries to build and disseminate the evidence base, which is largely absent as of now.

III. A Proposal to Stimulate Research on Competition and Regulatory Implementation Issues in Developing Countries

3.1 With this backdrop, CUTS has envisioned a long-term research programme on competition policy and regulatory regimes in the developing world, with a strategy to motivate researchers, particularly from the developing world to undertake research and participate in the accompanying symposia.

3.2 The project will be implemented through biennial research cycles comprising of call for papers and writing of research papers, publication of research volume and biennial symposia. Each biennial research cycle will select some problem areas concerning developing countries as its theme. The scope of research would cover issues relating to problems that developing countries face in implementing their competition and regulatory regimes. Based on the findings, views and experiences of the first research cycle, further cycles will be organised on different themes, while taking stock of the effects/outcomes of the earlier cycles.

3.3 The project is unique in its approach, as it would facilitate focused and cogent research on issues concerning developing countries, which is currently absent, with an in-built agenda of building research capacity in developing countries. The emphasis will be on issues relating to the developing world, with an agenda to be set from the perspective of the developing world. At most other forums, discussions centre on capacity building and technical assistance, while the proposed research project will upfront substantive issues concerning developing countries. This would ensure identification of solutions, relevant to developing countries.

3.4 This project would make a major contribution by not only bringing together the experiences and analysis of competition and regulatory regimes in developing countries but also revealing the qualitative differences in conditions that exist in developing countries that may require different responses.

3.5 The project will help create and sustain a network of researchers, primarily from developing countries, in the area of competition and regulatory issues. People from various disciplines such as law, economics, political science, behavioural science, people with knowledge of facts and realities of markets in developing countries will be encouraged to make contributions. Furthermore, one of the target groups will be media. It is expected that the research findings and deliberations at the symposia will sensitise the media, which will lead to better coverage of competition and regulatory issues in the media.

3.6 The main focus will be on Africa and Asia, while Latin America will also be involved in a smaller way due to cost considerations. The targeted stakeholders will include: a) academicians and practitioners b) policy community from developing countries, which will include opinion leaders, parliamentarians, regulators, civil servants, and other stakeholders (advocacy groups, researchers and media), and c) intergovernmental organisations.

IV. Objectives

4.1 Immediate Objectives

4.2 Long-term Objectives

V. Scope

5.1 The scope of research would cover issues relating to problems that developing countries face in implementing their competition and regulatory regimes. The focus would be to bring to fore models and experiences that have proved to be useful in dealing with competition and regulatory issues/problems in developing countries.

5.2 The first cycle is proposed to be held during 2005-07 on the theme of “Institutional Issues in Implementing Competition and Regulatory Regimes in Developing World”. Following research areas have been identified under this theme:

5.3 Based on the findings, views and experiences of the first research cycle, further cycles would be organised on different themes. Following are some of the research areas that could be taken up in subsequent cycles:

1. Identifying and Overcoming Political Economy and Governance Constraints to the Effective Implementation of Competition and Regulatory Laws

There exists a strong nexus between the state apparatus, political elite and the business. Such an arrangement ensures that the existing businesses are relatively protected, making entry of competitors a difficult proposition hence hindering the growth of the economy. This is reinforced by the fact that the Government decisions are often not transparent or effectively implemented, and a high level of inertia and corruption exists in the domain of public administration. Such a political economy situation not only hampers promotion of competition in the domestic market, but also erodes a country’s international competitiveness. Besides, the economies of developing countries are often characterised by small-sized markets with high level of openness. The domestic players normally possess very low capital, management and technological capabilities. This has led to a situation where the corporate sector is dominated by a relatively small number of transnational corporations (TNCs) and a small number of domestic companies controlled by the economically privileged few.

In such a politico-economic system, the will to implement competition and regulatory laws is weak. This low level of willingness could be attributed to the lack of confidence among policy-makers that an appropriate competition law and regulatory law would ultimately lead to better economic outcomes. The objective of competition and regulatory laws is to break down economic power to the extent that individual economic agents cannot by their own actions control market outcomes. This means that the implementation of competition and regulatory regimes is unlikely to gain favour from the present political and economic elites.

Key Research Questions:

1. Are competition and regulatory laws a necessity for developing countries?

2. What political-economy factors impede the adoption and/or implementation of competition and regulatory regimes in developing countries?

3. What has been the impact of government’s socio-economic thinking on the adoption and/or implementation of competition and regulatory regimes?

4. In what ways are the objectives of competition and regulatory authorities influenced by political-economy considerations and/or political compulsions/pressures?

5. How do problems such as corruption, nepotism, etc. affect the adoption and/or implementation of competition and regulatory laws in developing countries?

6. What has been the impact of these factors on the effectiveness of competition and regulatory authorities?

7. What measures/approaches have been undertaken to tackle these constraints?

8. What should be the appropriate regulatory framework in developing countries, considering the various political-economy and governance constraints?

9. What type of competition regime will suit the requirements of small developing economies?

2. Independence of Competition and Regulatory Agencies: Feasibility? Practicality? and Necessity?

There is, by and large, a consensus that, for proper functioning, the competition and other regulatory bodies should have both functional and financial autonomy. In developing countries, where state-owned enterprises are still existent such autonomy for regulatory agencies is even more important as its absence might lead to favourable treatment for the state-owned enterprises, thus, distorting competition. The World Bank-OECD model law on Competition suggests that the enforcement agency should be independent from any government department and should receive its budget directly from (and report to) the legislature. In most countries of course, such bodies are de jure independent from any government department. Some even have adequate financial autonomy. However, the fact that they are not dependent on a government department for its finances does not necessarily mean that they are free from government influence.

One source of government or political influence over these bodies is the selection process for the personnel including the members/commissioners. In many countries such selection process is neither properly defined nor transparent thus leaving the system prone to be captured by people who may not function independently. There is also the issue of business capture, where people with significant business interests or connections get into the regulatory bodies. Another source of government influence is that in many countries government retains the power to issue policy directives to the regulatory bodies, a provision which is very often misused.

The other side of the same concern is that autonomy must go hand in hand with accountability. What is the guarantee that a fully autonomous regulator will function with responsibility and accountability? How one would deal with the situation where an independent regulator is not able to function to a minimum standard? If the government cannot be trusted in the matter of impartial and fair regulation then what is the chance that an independent regulator—who is in any case appointed by the government--can be trusted. Moreover, the government may finally be accountable to the people even for the functioning of an independent regulator especially in a democratic system. It is indeed a challenge to find an appropriate institutional mechanism that can take care of all these concerns.

Key Research Questions:

1. Is government controlled institutional mechanism better than independent mechanism?

2. Is independence a necessary or sufficient condition for effective regulation?

3. What are the various characteristics of independence and how to ensure these, considering the political-economy situation prevailing in developing countries?

4. Should there be absolute autonomy or a bounded one? If so, then what should be the boundaries?

5. In what ways do governments intervene in the functioning of competition and regulatory authorities and how does it impact on regulatory efficacy?

6. Does government’s role as policy maker and service provider (through state-owned units) affect the independent functioning of regulatory agencies?

7. Should competition and regulatory authorities be made accountable? If yes, to whom? and How?

8. What should be the right balance between independence and accountability of competition and regulatory agencies and how to ensure this?

9. Are there any evidence of the ‘revolving door phenomena’ and other means of regulatory capture by regulated industries in developing countries?

3. What should be the Priorities of Competition and Regulatory Authorities?

Often competition authorities in developing countries find a huge number of anti-competitive practices all around. It is physically impossible to handle all of them simultaneously due to their limited resources and capabilities. Obviously, they need to prioritise on picking up nature and types of cases to deal with. This, however, is not an easy task. They may tend to take up cases, which are more important and harmful to the economy and society. However, these cases may be more difficult to solve and by taking up such cases, the competition authorities may fall short in overall achievements which is so important for moving forward with their agenda.

Thus, competition authorities need to select cases very carefully, taking into considerations its likely impact on the economy, number of people affected, relative ease with which such cases can be solved. Competition authorities also need to make another kind of trade-off. Along with enforcement of law, many competition authorities also engage in compliance education as well as advocacy activities, which may not bring immediate dividends but may be more useful in the long run. They need to get an appropriate mix of such functions. This kind of situation and problems are valid for the sectoral regulatory authorities as well.

Key Research Questions:

1. What factors need to be considered by regulatory agencies in prioritising their work?

2. What is the influence of political-economy considerations and resource availability on prioritising the work of regulatory agencies?

3. Which practices are more damaging from developing country perspective? Which cases are easier to solve?

4. Interface between competition law and sectoral regulation

In recent years, most developing countries have complemented the trend of economic deregulation by sector specific measures designed to regulate public monopolies or to open up strategic sectors such as telecommunications, electricity distribution etc. for regulations. There is some cross-country empirical evidence to suggest that in many sectors the introduction of competition has led to significant decreases in costs and prices; an increase in the diversity of services offered to consumers; and higher economic growth. The notion of sectoral regulation is based on the premise that it is needed to address the absence of competition in the sectors where conditions of natural monopoly exists or that they are inherently prone to market failures. Thus, in principle, the function of the regulators in such sectors is to get competitive outcomes even though competition as a process cannot be ensured.

Obviously, there will be areas of overlap between the competition authority and the sectoral regulators. Some decisions by regulators are on matters that affect competition. In these cases their decisions should reflect competition principles. If not, there can be distortions in the use of national resources that can harm consumers, including the poor. There could be situations when both the agencies would claim to have jurisdiction or competence. There can also be situation where more than two regulators can also be involved. There can also be situation where, if the situation is very complex and difficult to handle, none of the regulators would like to accept the responsibility. How to resolve such jurisdictional or competence problems is a big challenge especially in developing countries.

Key Research Questions:

1. What factors determine convergence/divergence in decisions of competition authority and sectoral regulators with respect to competition issues in regulated industries?

2. How to resolve jurisdictional overlaps between competition authority and sectoral regulators in addressing competition issues in regulated industries?

3. What has been the experience of developing countries in resolving this conflict?

4. What are the ‘pros’ and ‘cons’ of different approaches followed?

5. What are the ingredients of the right relationship between competition authority and sectoral regulators and how to ensure this?

5. Consumer level competition abuses and market failures having a direct impact on poor.

Competition authorities around the world focus on maintaining competition at a macro level. However, consumers come in contact of the suppliers of goods and services at numerous places spread over the length and breadth of a country. There might be adequate competition among the manufacturers but not in the distribution network through which the goods have to pass to reach the consumers. Similarly, in several service sectors there are many providers operating at local level. Hence, monitoring and maintaining competition in such sectors becomes quite difficult and competition abuses are rampant at the local level.

Thus, at retail level it is not difficult to find instances where the downstream distribution chain acts in a collusive manner and charge prices higher than those suggested by the manufacturers. Often, acting in a collusive manner, the retailers extract exorbitant margins from the manufactures. This process often leads to situations where retailers try to push the products or brands for which they get higher margins thus bringing a new dimension to the competition process and distorting it. Similarly, there can be many other types of market failures that occur at the local level and the national level regulators may not even be aware of.

Key Research Questions:

1. What type of competition abuses and market failures exist at consumers’ end in developing countries?

2. What are the sectors or services where such abuses abound and their impact on consumers, in particular poor?

3. What has been the effectiveness of competition authority and sectoral regulators in dealing with these problems?

4. In what ways can such abuses/practices be tackled effectively?

5. Some have argued that to tackle local-level competition abuses would require putting in place local-level enforcement agencies. To what extent can these claims be substantiated from the experience of developing countries?

6. Competition policy and law and business welfare

Business lobbies have generally been against the adoption or strengthening of a competition law almost everywhere. For, they fear that their enterprises or profits will be curbed due to such a law, which seeks to create better markets. However, this need not be true if seen from a macro-perspective. If one looks at the major anti-competitive arrangements, it were some business entities that had to face the brunt of such practices first and consumers felt the impact only at a later stage. Indeed, companies engaged in production or trading of raw materials often find it easier to carry on with anti-competitive arrangements like cartels or market sharing. Since, such goods are not directly bought by general consumers, they fail to attract much of media attention or publicity. Moreover, such goods are generally homogenous in nature, which facilitates price and market fixing. Worldwide, the goods that have received the dubious distinction of being prone to cartelisation are basic goods like steel, cement aluminium, basic chemicals etc., used across various industries as raw materials. Obviously, buyers of such goods are other businesses.

One ubiquitous problem encountered in most countries is that often traders including wholesalers as well as retailers operate in a collusive manner and extract heavy trade margins from the manufactures. Recently, it was found in India that the retail prices of several medicines are often as high as 10-15 times than the wholesale prices. These kinds of practices raise the prices artificially hurting not only the consumers but also the manufacturers.

In several economies, the share of intermediate consumption is in excess of 50 percent of total output. This amply indicates the costs of anti-competitive practices that are incurred by the businesses themselves. These users are intermediate goods and services, who are not always able to pass on the enhanced costs of their raw materials to the final consumers. Moreover, even if they are able to do so, increased costs of raw materials leading to high price of their products may have a negative impact on the demand for their product and thereby impeding the long-term growth of the industry they are engaged in. An appropriate competition policy is thus good for business as well.

Key Research Questions:

1. What kind of anti-competitive practices affect business interest? How does competition and regulatory regime address these concerns?

2. What is the affect of competition and regulatory laws on units operating in the informal sector? Is competition law a useful tool for unorganised sector?

7. Impact of home country mergers in host country

Large companies merge in the developed world and consequently, their subsidiaries and associates in developing countries too end up in a new combination. This can result in unhealthy concentration of the market in developing countries and create a position of dominance for a firm that could result in abuse. Moreover, developing countries may also be affected by merger and acquisition (M&A) activity that takes place outside their territory without any local presence. These companies can also adversely affect developing country markets because they operate in multiple markets.

Developing countries, to our knowledge, have dealt only with first type of cases, i.e., subsidiaries of multinational companies in these countries merged as a result of merger of the parent companies in home countries. The competition authorities have shown a lenient attitude towards such mergers. For example in Sri Lanka, the competition authority did not even take up the case of merger between Glaxo Wellcome and SmithKline Beecham, saying that it did not have the jurisdiction, even though both the companies had commercial presence in the country.

Key Research Questions:

1. What has been the impact of cross-border mergers and acquisitions on developing country markets?

2. What has been the experience of developing countries in dealing with cross-border mergers and acquisitions?

3. What constraints are faced by developing countries in addressing cross-border mergers and acquisitions?

4. What is the appropriate mechanism to deal with cross-border mergers and acquisitions, considering the constraints faced by developing countries?

VI. Research Methodology and Implementation