NEED TO CONTROL RBPS AT GLOBAL LEVEL

6:18 AM Oct 26, 1994

NEED TO CONTROL RBPS AT GLOBAL LEVEL
Geneva 24 Oct (Chakravarthi Raghavan) -- Fundamental economic reforms being adopted worldwide by countries, "motivated by role of the market and of the private sector in the efficient functioning of economies at all stages of development", need strengthened competition policies to control activities of private operators in the market.

In presenting this view, the secretariat of UNCTAD that while adhering to basic universally valid principles, competition policy in countries have also be applied with flexibility in the light of specific circumstances in individual countries, and taking into account efficiency considerations and need to win confidence of the public and the business community.

The secretariat's view is in a revised study, "Role of Competition Policy in economic reforms in developing and other countries", for the Intergovernmental Group of Experts on RBPs meeting here under UNCTAD auspices.

In opening the session, the Officer-in-charge of UNCTAD, Carlos Fortin stressed Monday the need for updating the Set of Principles for Control of Restrictive Business Practices to reflect many changes since they were adopted as well as for control of RBPs affecting competition and trade at global level.

The Set of Principles, a non-binding instrument, was negotiated under UNCTAD auspices and adopted by the UN General Assembly in 1979. Efforts of developing countries for over a decade to make them binding have been resisted so far by the industrialized countries.

Fortin who was opening the 13th session of the Intergovernmental Expert Group (IGE) on RBPs (which runs till Friday) underlined that this focus on RBPs and competition policy had become all the more important in the light of the conclusion of the Uruguay Round of trade negotiations and the trade liberalization envisaged by it.

While the various agreements concluded in the Round had references to competition and RBP issues, an overall framework and approach was needed, Fortin said.

Besides developing a global measures to control RBPs, there was also need to reconcile the various legal regimes of countries in the area of competition and their effects on trade competitivity, reconciling legal doctrines and problems of extra-territoriality, and improving consultations and dispute settlement.

The secretariat study has noted that while strengthened competition is a key element for success of deregulatory economic reforms being adopted worldwide, such competition policy, while adhering to basic universally valid principles has to be applied flexibly in light of specific circumstances of each country.

The common aspiration underlying the reform moves are that reducing governments' direct involvement in the economy and giving enterprises more freedom would result in productive resources being allocated more efficiently and flexibly by decentralised decisions of the market operators rather than by government direction or through rent-seeking activity.

But such aspirations would be fully realized only if enterprises act under spur of competition so that consumer dissatisfaction could provide a market sanction for poor performance.

Hence, strengthening of competition, in conjunction with measures to stimulate consumer awareness, is a key element in ensuring success of economic reforms.

Competition authorities should therefore be able both to control RBPs by private firms as well as act as advocates of competition policy in the elaboration of other government policies, UNCTAD says.

But while adhering to basic universally valid principles, the competition policy should be applied with flexibility in the light of the specific circumstances in individual countries -- taking into consideration efficiency considerations, growth and development as well as need to win confidence of the public and business community.

While generally deregulation increases competition opportunities, liberalization alone would not suffice to overcome other disincentives to market entry. Due to low level of demand which can support only a few firms with minimum economy of scale, domestic markets in most developing countries are highly concentrated.

There are also other obstacles to market entry for new firms, both in developing and transition economies: limited number of private entrepreneurs and production inputs, inefficient distribution and communication systems and poor information flows.

During a process of stabilization and structural adjustment programmes, reforms are likely to be sequenced and there could be a lag before sufficient competition is generated to create self-correcting market forces -- a lag during which incumbent firms could engage in RBPs to block market entry for others.

Arguments that, at least initially, efficient monopolies best serve development process, and that competition could come later, ignores objectives of consumer welfare. There is also no evidence of a systematic correlation between firm size and efficiency.

Most efficiency gains are achieved at relatively small size of operations, while large conglomerates have often been associated with inefficiency.

And in countries with shortages of capital or entrepreneurs, it is not guaranteed that new market entry will palliate effects of failing to create competitive industry. And even if it does, this may be at the cost of over-capacity in industrial plant and higher prices.

The secretariat notes that while there is some evidence that price-cost ratios, taking as an index of gross return to capital, are positively correlated with market shares of individual firms and industrial sector concentration ratios in developing countries, it is not clear whether this is due to relative efficiency or lack of competition.

In any event competition policy could be implemented to take into account efficiency considerations.

Experience has shown that competitive markets could not be achieved through complete laissez faire, but requires 'rules of the game'. The more one removes direct government controls over the economy, the more must one ensure maintenance of competition in their place.

Thus even the most advanced countries, with long tradition of liberal economic policies and with large markets where entry is relatively easy, have found it necessary to maintain active competition policies and keep adapting them to new challenges.

However, competition policy need not be formulated or implemented in a doctrinaire and inflexible manner or through a commitment to a particular competition theory, the study says.

Several countries with long experience take action on RBPs after thorough economic analyses, taking into account behavioural factors rather than just market share data, including possibilities of product substitution and market entry, and impact of technological change.

In the case of developing or other countries undergoing economic reform, proper economic analysis and flexibility in applying competition policy may be even more necessary so as not to impede efficiency, growth or development goals, the study advises.

Competition policy has to take account circumstances of individual countries and cannot operate in a vacuum divorced from the pressing realities of countries undergoing economic adjustment.

Referring to the role of trade and investment, the report notes that trade and foreign investment liberalization, while increasing international competition in many sectors, may reinforce oligopolistic global market power in others, including some high technology sectors. this may be difficult for individual competition authorities to control.

Strengthened cooperation among competition authorities would assist in ensuring the accountability of such oligopolistic global firms, in minimizing tensions among countries relating to competition and trade issues, in providing market access opportunities to firm from all countries and in protecting global economic efficiency and consumer welfare.

"There is also scope for using competition concepts and philosophies for mitigating the protectionist bias of trading regimes; this would necessitate multilateral action to follow up on the Uruguay Round Agreement.

"The elaboration of universal principles on the objectives and application of competition policy, to complement the Set's provisions, would assist competition authorities in advocating competition at the national level and facilitate multilateral liberalization as a followup to the Uruguay Round."