Published: The Economic Times, March 30, 2004,
By Pradeep S Mehta
While competition policy became a victim of the failure of the WTO ministerial at Cancun, Mexico held in September, 2003, the World Commission on Social Dimension of Globalisation, in its report released in February, 2004, has inter alia supported the need for a multilateral competition policy.
The Commission has disjointedly also lent its weight to a development-friendly investment accord. This is in spite of the fact that the developing world has rejected proposals on both competition and investment at the WTO. However, that doesn’t reduce the need for an international competition policy. Considering the existing producer bias in the WTO and increasing integration of world economies, competition policy can provide the necessary balance.
Why is it necessary to have a competition regime? Apparently the answer lies in the fact that many countries are either enacting a law or modernising the existing one. When the WTO came into being in 1995 about 35 countries had a competition law. Today the number is around 100 with many more in the queue. This is because, the times are changing quite rapidly and business malpractices are crossing borders unabashedly.
Examining a small number of international cartels which were discovered and prosecuted in the 1990s, a World Bank study has estimated that developing countries imported goods and services worth US$80bn per annum from these sectors. These firms would have collected monopoly rents in the range of $20bn-$24bn per annum from the developing world — roughly half of the development aid that the poor countries get.
Why cooperation at international level? Because, many in the developing world who realise the impact of these cartels know about their helplessness to act against them. No wonder, when the tide was against a competition agreement at the WTO, before the Cancun meeting began, the Federation of Indian Micro and Small & Medium Enterprises (FISME) of India had asked the Government of India to agree to negotiate the same from among the four contentious Singapore issues, stating: “Having realised the importance of to curb anti-competitive activities of cartels, we in India have already adopted a new competition law.
The activities of these cartels at the global level are much more damaging, which cannot be controlled by one nation and need to be restrained and penalised through a multilateral agreement.The benefits of such an agreement would result not only in improved market access for Indian products, but also help help reduce the prices of raw materials where cartels operate.”
One of the most notorious cartels which were exposed related to bulk vitamins. Three European companies were fined over a billion dollars for having colluded to rig prices by competition authorities in various countries. This cartel caused harm of no less than US$3bn to developing countries alone. But, other than Brazil, not a single developing country tried to prosecute the perpetrators.
Cartels are not an international phenomenon alone. The cement industry everywhere loves to cartelise because of excess capacities, and they have been hauled up before every possible competition authority in the world. The resultant media coverage has thus increased awareness across countries to curb such anti-competitive activities.
Competition is key to increased FDI flows. FDI comes into countries through two major routes: greenfield investments and through mergers and acquisitions (M&As). It is the latter which too has an international dimension. Furthermore, when large companies in the west merge, they present a fait accompli to their subsidiaries in developing countries to combine.
In the west such merging companies go through a rigourous examination by competition authorities to check if the merged entity becomes a dominant player in the market, prone to anti-competitive behaviour. This has often been a bone of contention between US and European authorities, the two most important global powers. They have now arrived at an understanding to cooperate on merger reviews. What is missing is whether such a cooperative effort would include developing and other countries where the merging firms operate.
Why should developing countries be involved in the merger review process? Empirical evidence shows competition authorities in developing countries often acting in an inconsistent manner: quite effectively at times, and sometimes not at all. Not only mergers, but there are many more areas, such as export and import cartels, abuse of dominance etc. Thus international cooperation is an imperative, rather than a disadvantage to the developing world. Granted that the WTO has an overloaded agenda and other problems of equity and transparency, but that is no ground to negate the dire need of an international competition policy.