Justifications and limitations for adopting divergent competition policy and law in emerging economies.

• Author: Chen, Andy C.M.

1. INTRODUCTION

   Regardless of the failure to become part of the World Trade Organization ("WTO") agenda, (1) competition law and policy and its relevance to economic development continue to interest researchers and have been documented in-depth by international organizations. (2) In addition, certain fundamental principles in competition law, such as eliminating entry barriers, promoting broader market access, or controlling market power that has been unfairly garnered, have been incorporated into several envisioned trade treaties, including the Transatlantic Trade and Investment Partnership ("TTIP") and the Transpacific Partnership ("TPP"). (3) Those developments highlight the value of an active policy of competition law enforcement as a complement to the process of trade liberalization.

   To enhance the living standards in poor countries, it is typically insufficient to simply make the people in those countries wealthier. If the business environments in developing economies are characterized by highly asymmetrical information available for market transactions, or are inundated with unscrupulous business practices because of market power protected by cronyism, any increases in income may be substantially offset by unjustified price augmentation. For example, studies have shown that cartels have been associated with price increases of 10% to 45% in developing economies. (4) Potentially aggravating the problem, approximately 3.7% of total imports to developing countries in 1997 originated from cartelized industries. (5) Therefore, how to make markets an "asset" for the poor, (6) including the formulation of a sound competition policy and law that fits the needs of the emerging economies, is becoming increasingly critical for economic development.

   Various approaches have been suggested in the literature to accommodate developmental variances into the design of competition policy in emerging economies. For example, emerging economies may need to prioritize their scrutiny of market misconducts in the industries crucial to their development, such as food supplies and health care, and continue to advocate for increased competition to stimulate popular interest in improving competition. This paper elaborates further on the likely responses to the challenges of incorporating developmental variances into competition policies and rules tailored to the needs of emerging economies. (7) The paper categorizes the features that might prompt emerging economies to adopt rules distinct from those of developed economies into economic (e.g., smaller market scale) and noneconomic (e.g., corruption or cronyism) features. The unique competitive problems caused by these features are discussed in the following section. In particular, the paper examines how developmental variances could influence the formulation of competition policies and substantive rules and standards in emerging economies. For example, it has been suggested that more prevalent corruption or cronyism in emerging economies may cause cartels in those states to be more stable and market-dominating power less likely to be challenged. (8) Therefore, emerging economies should rely less on potential market entrants to address inefficiency from anticompetitive business arrangements.

   This paper concludes by raising certain limitations for the preliminary findings. From a policy perspective, continual efforts of competition advocacy by governments to make free competition a more widespread and favored value is crucial for the resolutions of the competitive problems caused by the unique features of emerging economies. The key to success is professionalism in persuading skeptics and a transparent enforcement environment that allows public discussion and dissemination of information. Otherwise, competition policies in emerging economies could be misleadingly characterized by politicians as probusiness and laissez-faire to serve their unfounded populist agendas. With respect to the reviewing rules and standards for evaluating violations, the consideration of developmental variance in antitrust investigations could gradually lead to a regulatory landscape with increased focus on conduct-based reviews of the investigated cases in emerging economies. This development benefits resource-strapped competition agencies in emerging economies by reducing the need to undergo the onerous effect-based evaluation process frequently required by the rule of reason. (9) However, this could also misguide agencies to treat certain competitively neutral conducts in developed economies as illegal per se. Therefore, this paper proposes the following suggestions.

   First, the connection between developmental variances and the unique competitive harms to emerging markets needs to be substantiated before divergent legal proposals are introduced. Otherwise, the emphasis on divergence could entail the risk of over-deterrence. The probability of over-deterrence increases as the enforcement landscape becomes more conduct-based.

   Second, emerging economies have relied on their developmental variances and domestic policies resonating with those variances to justify conduct or arrangements that would be deemed serious violations in developed economies, such as cartels. For example, competition law in Tunisia broadly exempts from antitrust liability of cartels that (1) promote technical or economic progress and (2) allow consumers a fair share of the resulting benefits. (10) Similarly, the Kenya Competition Act allows prohibited cartels to be exempted if "exceptional and compelling reasons of public policy" could be shown. (11) In making exemption decisions, the Kenya Competition Authority considers whether a cartel would (1) maintain or promote export; (2) improve or prevent decline in the production or distribution of goods or the provision of services; (3) promote technical or economic progress or stability in any industry; and (4) provide benefits for the public that outweigh or would outweigh the decrease in competition that would result from the operations of the cartel. (12) This "positive" application of developmental variance could challenge the goal of pursuing a more coherent global application of competition law.

   Finally, if complicated analytical techniques, such as market definition or the measurement of efficiency, can be flawlessly operated, it is irrelevant whether competition rules are based on an overly optimistic view of the self-correcting function that potential market entrants could provide. Economic and noneconomic features would be evaluated with substantial precision through the preference-revealing function inherent in the "substitutability" test for market delineation. Viewing this observation in context, equating the lack of capacity or resources to implement sophisticated techniques employed by the developed economies with the advantages of divergent competition policy and rules for emerging economies may be premature. Convergence in the form of regional technical assistance to improve the accessibility of analytical techniques and to enhance the ability of emerging economies to implement those techniques may still be preferable. This is particularly evident when the costs from business uncertainty occasioned by an increasingly fragmented international enforcement structure are accounted for.

2. UNIQUE FEATURES UNDERLYING EMERGING ECONOMIES

   Certain scholars have asserted that emerging economies, because of their unique economic and institutional features, are more vulnerable to anticompetitive activities than developed countries. (13) Default antitrust standards or rules developed by advanced economies are frequently based on an overly optimistic view of the degree to which the market can self-correct the competitive problems caused by the economic interactions taking place inside it. Consequently, such unique features of emerging economies might render those standards and rules ineffective in emerging economies. This paper classifies those features into the following two groups: economic and noneconomic features. (14)

   1. Economic Features (15)

      First, in comparison with developed countries, emerging economies typically have higher minimum efficient scale ("MES") requirements. (16) Because individual firm sizes on average tend to be smaller than those in advanced economies, the sales required for efficient operations are also greater. (17) This further leads to higher market concentration ratios in emerging economies. (18) Second, industries in emerging economies are also characterized by higher entry barriers, which result from increased regulations and market-control measures implemented by the governments in those countries. (19) It is still popular for governments of emerging economies to establish tariffs that are three to four times as high as those adopted in developed economies. (20) In small emerging economies, constraints on the supplies of resources and skilled labor can increase the cost of market entry. Lower population and demands make the higher MES requirements more likely to become obstacles for potential entrants. (21) Additionally, a higher concentration ratio in one market could force competing entrants in a vertically related market to enter two markets simultaneously to engage in competition. (22) Capital markets in emerging economies typically being far less vibrant than in developed economies indicates the increased costs for entry into emerging markets. (23) Namely, entry barriers could be leveraged by existing firms to hinder competition in other markets. From a macroeconomic perspective, emerging economies tend to be low-income economies; therefore, the adverse effects on consumers and economic growth from price-fixing arrangements or unilateral misconduct in emerging economies are also larger.

   2. Noneconomic Features

      In addition to their unique economic features, emerging economies also vary with developed economies in social, political, and...