Competition Policy in ASEAN
G.Sivalingam[1]
I. Introduction
This paper discusses the structure of competition in several sectors of the economies of the ten countries that are members of the Association of Southeast Asian Nations (ASEAN). The ten countries are at various stages of development and of these only three have a competition law, while the most advanced that is Singapore does not have a competition law. The reluctance of governments to introduce competition law is that it conflicts with the strategy of economic development that they have adopted. Most of the countries have evolved from a communist, socialist, authoritarian, feudal or colonial past and state intervention in the economy is quite pervasive. Their experience is in managing mixed economies as most governments have to be concerned with distributional issues because of the need to avoid social unrest and political turmoil.
The Asean countries have however been undergoing a process of change from a “growth with distribution strategy’ to a market oriented economic strategy. The role of the government has been dominant in the “growth with distribution” strategy and as a consequence the transition to a market economy has been marked by tensions between the market and the government. Not all countries in ASEAN have similar economic systems but they have several features in common, that is, opening up to foreign trade, being more responsive to deeper integration with the global economy, liberalizing their investment regime to compete for foreign direct investment, closing of strategic sectors of the economy to foreign competition, reducing tariff barriers consistent with the demands of the Asean Free Trade Area (AFTA) and the World Trade Organization (WTO). Most of them have also embarked on a strategy of privatizing state owned enterprises and building institutions to sustain a market economy.
The rolling back of the role of the state has been due to government failure to generate growth; corruption and mismanagement of state owned enterprises. The 1997 East Asian financial crisis also exposed the vulnerabilities and weaknesses of the financial and broader economic strucutures. This together with the decline in Foreign Direct Investment flows, which went to China has made it mandatory for the Asean countries to undertake far reaching reforms to strengthen institutions that will facilitate the operation of a market economy. The reforms include improving standards of corporate governance and the rule of law.
In this chapter we review the recent economic strategy followed by most of the Asean countries before we look atexternal pressures for reform of these economies. We then discuss the origins of the call for competition policy and theories of competition policy before describing the status of competition policy and law in these ten countries.
II. Growth with Distribution Strategy
The Southeast Asian economies are in a process of transition to a market economy as a result of the deeper integration of these economies with the global economy and as a consequence of membership in multilateral organizations especially the World Trade Organization, ASEAN, AFTA and APEC (Lloyd and Associates, 1999:27) . In the 1970s, with the threat of communism looming high as the Vietnam War escalated, the prevailing doctrine was that the market was not efficient at distributing the gains from economic growth. The allocation of resources was not Pareto optimal because winners did not compensate losers. The Kaldor-Hicks criteria sought to overcome this oversight by providing some ground rules for the winners to compensate losers so that nobody was made worse off as a result of economic growth and change. Even though winners could compensate losers theoretically, using the Kaldor-Hicks criteria, in practice the compensation did not take place and hence the need for government intervention.
Absolute poverty was perceived as increasing and income inequality was worsening and this posed a threat to the world capitalist system as the probability that the impoverished may opt for a communist state was high. The capitalist growth strategy, which ignored distributional concerns and alienated or marginalized the poor was abandoned for a growth with distribution strategy, which required government to correct market failure and distribute the gains from growth more evenly by facilitating the participation of the poor in the development process in the form of employment and in some cases in the form of equity ownership in listed and unlisted incorporated companies.
The main instrument for achieving the redistribution goal were public enterprises or state owned enterprises as they are known in several countries. However, by the early 1980s it was realized that these public enterprises distorted incentives when they intervened in the market to set “politically correct” prices that did not recover costs and promote sustainable development. It was also realized that they depended on government subsidies and government protection from competition as they were inefficient and generally loss making (Khemani and Dutz, 1995) as they pursued political and not economic goals (Shleifer and Vishny, 1998). As a result of government industrial policy and subsidies, dominant enterprises or public monopolies arose (Khemani and Dutz (1995), which resulted in a loss of consumers’ surplus.
At the same time that public enterprises were intervening in the economy to correct for market failure, many of the more developed Asean countries were liberalizing their investment laws to attract labor intensive foreign direct investments to generate exports and economic growth. Asean countries, most of whom had historically depended on natural resources to generate growth, provided more and more attractive incentives to foreign investment, at various stages of their development, as commodity prices fell. The initial import substituting industrialization strategy gave way to a more labor intensive and export oriented industrialization strategy as import substituting industries could not generate sufficient jobs as they were capital intensive and the domestic market was too small for these industries. Today, the multinationals engaged in manufacturing in several Asean countries, for example, Singapore, Malaysia, Thailand, Philippines, Indonesia, Vietnam and Cambodia account for a large portion of the export earnings generated in these countries.
III. Industrial Policy
The governments’ industrialization strategy was also guided by either an explicit or implicit industrial policy. The economic plans gave a large role to the public sector and industrial policy coordinated by the government guided the process of industrialization. Some of the governments also chose “national champions” or “captains of industry” and cultivated close relationships with the conglomerates they created and emulated the Japan Incorporated model by labeling themselves, for instance, as Singapore Incorporated, Philippines Incorporated and Malaysia Incorporated.
Industrial Policy, it has been alleged, has been used consciously by governments to discriminate against foreign competition in the domestic economy. Industrial policy created two economies, that is, the enclave export processing zones dominated by multinationals and the domestic economic sector dominated by small and medium enterprises that depended on government subsidies and soft commercial loans. The linkages between the foreign and domestic industrial sectors was not strong. The foreign multinationals were not treated as national companies.
The multinationals were only given incentives to produce for exports and competition in the domestic economy was discouraged in some countries. The hoped for liberalization and deregulation of the domestic sector as a result of the large presence of multinationals in the export processing zones did not occur. The domestic economy remained fairly closed and dominated by inefficient monopolies. This was because of barriers to entry and exit erected by governments of several countries.
According to the World Bank, “the main institutional barrier to domestic competition are government regulations on entry and exit of firms. Even in the tradable sector, international competition may not lead to domestic competition, partly because institutional barriers to competition, such as government regulations in product and factor markets that deter firm entry, exit and growth. Excessive and costly government regulations also facilitate corruption and lead to adverse distributional consequences by inducing workers and firms to escape into the informal sector” (World Bank, 2001:135).
Marcus Noland of the Institute for International Economics argues that not only was the foreign firm discriminated against in the domestic economy but the government also affects the level, composition or form of foreign investment, “through official prohibitions, restrictions or official approvals processes, in which the government intervenes directly” and sometimes by the “behavior and practices of private parties, facilitated by government policies not directly aimed at foreign investment”(Noland, 1999:1).
Several sectors of the domestic economy including the services sector were not opened until recently to foreign entry. These included telecommunications, water, power and financial services which are characterized by important dominant positions by incumbent firms where contestability of markets is limited because of large fixed costs. The utilities, for example, water, telecommunications, power were considered as natural monopolies before technological changes occurred and as such were considered as appropriate to be left to public provision. New banking licenses were seldom issued and foreign banks were denied entry. Government and family owned banks dominate in many of the Asian countries. Wholesale and retail trade was also protected from foreign competition and kept as a national preserve.
Industrial policy was also pursued to protect domestic industries that were not competitive internationally. Ross in reviewing research in this field reports that Gifford and Matsushita (1996) found that the most frequent and widely experienced conflicts between industrial policy and competition policy occur in circumstances where domestic industry is subject to competition from foreign competitors after having lost its international competitiveness. Under such circumstances , governments may intervene to encourage the restructuring of the domestic industry and to temporarily protect the local industry from foreign competition. The restructuring often consolidates domestic firms, reducing domestic competition as well as preventing foreign firms from acquiring the assets of these firms no longer able to compete with foreign firms (Ross, 2003:3). Sometimes the infant industry argument has also been used to justify protecting domestic firms from foreign competition until they reach a certain degree of dominance in the domestic market to compete in the international market.
The industrial policies pursued by the various governments in a creating a dual economic structure came under pressure as commodity prices collapsed in the mid 1980s. Governments dependent on natural resources had to provide more incentives to attract labor intensive, export oriented industries to substitute for the loss of export earnings from primary commodity production and to provide employment to the growing labor force. At the same time the multinationals were campaigning for national treatment in the host countries and to roll back the role of the state and to allow resources to be allocated by market forces worldwide so that resources will flow to their most valued users or uses.
IV. Neo Liberalism and Competition Policy
The ideological underpinnings of the current reversal of policy to roll bank the role of the state and to make the private sector the engine of growth in most or all the Asean countries can be found in the Reagan-Thatcher doctrine enunciated in 1983 in which the virtues of privatization and the market economy were enunciated. The Reagan-Thatcher doctrine provided support for the Washington Consensus as a strategy of global resource allocation. The focus of the Washington Consensus according to the person who coined the term in 1990, that is, John Williamson of the Institute for International Economics was: fiscal discipline; a redirection of public expenditure priorities towards fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education and infrastructure; tax reform to lower marginal tax rates and broaden the tax base; interest rate liberalization, a competitive exchange rate; trade liberalization; liberalization of inflows of foreign direct investment; privatization; deregulation to abolish barriers to entry and exit and secure property righ (Williamson, 2004). Privatization is perceived to be pro-competition as it opens entry to private participation in the production of goods and services under competitive market conditions.
The theoretical justification for the Reagan-Thatcher doctrine and the Washington Consensus was provided by the ChicagoSchool. In the 1970s, Milton Friedman and the Chicago School economists developed free market ideas based on deregulation and privatization similar to the laissez-faire capitalism of the nineteenth century (hence the term neo-liberalism). This was to become the economic orthodoxy of globalization. In the early 1980s, the full political resources of corporate America were mobilized to regain control of the political agenda and the court system. Reagan and Thatcher, using the ChicagoSchool ideas, made the world safe for corporations. They dismantled the social contract through tax cuts, ignoring unemployment, rolling back social welfare and increasing privatization. The debt crisis of 1982 gave the USA its chance to dominate the world economy and for the rich nations to re-subordinate the global South through structural adjustment via the World Bank and the IMF (New Internationalist, 2002:2).
In support of rolling back the role of the state, Ronald Coase (1991) of Chicago argued that the market is the most efficient allocator of scarce resources. According to Coase if property rights are clearly defined and enforceable and if economic agents had full information and transaction costs are low or zero and if there is a market to buy and sell these property rights than these resources will flow to their most valued uses. There is no need for government intervention to correct for externalities because the economic agents can bargain to achieve a Pareto optimal allocation of resources. Furthermore, the ability of economic agents to achieve the Pareto optimal allocation does not depend on which economic agent is given the property right. This argument was recast into what is today the most cited theorem in economics, that is, the Coase theorem (Stigler, 1989) for which the author won a Nobel Prize awarded to the science of economics in early 1991 (The Bank of Sweden, 1991).
The Coase theorem gave a powerful reason to roll back the role of the state and to define private property rights and to create market institutions and a sympathetic court system so that these property rights could be traded continuously so that they could be used efficiently. Even if one distributed assets to someone who did not know how to manage them well, in a society with well defined property rights that person would have an incentive to sell to someone who could manage the assets more efficiently. However, when property rights are vested in public enterprises or State Owned Enterprises they cannot be bought and sold and as a result the probability is high that they would not be used efficiently.
The Coase theorem as stated earlier provide theoretical support for the Washington Consensus to push for reducing tariff barriers and free trade so as to reduce transaction costs and to facilitate the free flow of resources to their most valued users. The three big ideas of the Washington Consensus were macroeconomic discipline, market economy and openness to the world (Williamson, 2002:2). The formation of the World Trade Organization in 1995, provided an opportunity not only to reduce tariff barriers but also to push for measures that would open domestic economies to competition. The need for liberalizing the domestic investment regime had been discussed at WTO Ministerial Meetings in Singapore, Doha and Cancun. The issue of competition policy had been classified together with investment, transparency in government procurement and trade facilitation as the Singapore Issues, which were brought up in Doha and Cancun but not resolved.
V. WTO and Competition Policy – The Singapore Issues
The Working Group of the WTO on the Singapore Issues summed up the need for competition policy as follows: “as government barriers to trade and investment have been reduced, there have been increasing concerns that the gains from such liberalization may be thwarted by private anti-competitive practices. There is also a growing realization that mutually supportive trade and competition policies can contribute to sound economic development, and that effective competition policies help to ensure that the benefits of liberalization and market-based reforms flow through to all citizens” (WTO,2004:1)
The Working Group looked at the interaction between trade and competition policy including the impact of anti-competitive practices of enterprises and associations on international trade; the impact of state monopolies, exclusive rights and regulatory policies on competition and international trade; the relationship between trade related aspects of intellectual property rights and competition policy; the relationship between investment and competition policy and the impact of trade policy on competition. It also addressed the issue of the contribution of competition policy to achieving the objectives of the WTO including the promotion of international trade.