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Mitchell, Arthur "Toward an Asian Regional Competition Framework" [2006] ADBLPRes 3 (16 May 2006)

Toward an Asian Regional Competition Framework

Remarks
of
Arthur M. Mitchell*
General Counsel
Asian Development Bank

Competition Law and Policy Roundtable

New Delhi, India
16 May 2006

Ladies and gentlemen, and distinguished guests.

It is a pleasure to welcome you to this Competition Law and Policy Roundtable sponsored by the Asian Development Bank (ADB). As early as 1995, ADB recognized, in its Governance Policy, the importance that competition played in ensuring sustainable economic growth in its developing member countries.¹

Since then, ADB has actively supported reforms that assist its developing member countries develop competition laws and policies. In the People’s Republic of China, ADB is presently assisting the Government establish the legal and regulatory framework for formulating and implementing competition policy. Among its outputs will be the new Anti-Monopoly Law and amendments to the Law against Unfair Competition. In Central Asia, ADB is helping the Governments of Azerbaijan and Uzbekistan create well-designed competition policy frameworks and strengthen the institutional capacity of their respective competition regulators.

ADB has pursued competition reforms in the context of regulatory reforms and within certain industries. In Indonesia, ADB completed in 2004 a technical assistance that evaluated several regulations that had been identified as being harmful to competition or competitiveness, and recommended policy reforms. In the Philippines, ADB is providing technical assistance for creating a competition policy in the electricity industry.

ADB recognizes that competition is necessary for developing countries to obtain the benefits promised by trade liberalization and privatization. For while trade liberalization and privatizing the public sector have increased business opportunities in the international market, they do not, by themselves, level the investment playing field or make an economy an attractive investment destination.

Privatization, regulation, competition

In the last decade, many developing countries have sought to privatize public sector monopolies. But experience in many countries such as the United Kingdom shows that without a corresponding increase in competition, privatizing the utilities sectors has not maximized sector efficiency or led to lower prices for the consumer. Competition thus emerges as the most significant factor in this regard.² Without the appropriate safeguards to ensure competition, privatizing the public sector may lead to a substitution of public sector monopolies with private monopolies, and thus decrease social welfare.

Historically, many of ADB’s developing member countries have responded to increased privatization by creating regulatory regimes or undertaking regulatory reforms to safeguard consumer welfare and ensure competition. In some regimes, competition laws and policies continue to be enforced primarily by sector regulators. Much can be learned from the specialized knowledge and experience of these sector regulators.

In recent years, competition agencies and commissions have been formed alongside existing sector regulators. It is important that appropriate regulatory and competition policy frameworks be put in place to ensure improved economic performance. What are the ingredients of the right relationship between the competition authority and sector regulators? How does one resolve jurisdictional overlaps between competition authorities and sector regulators? How does each contribute to enforcement of competition law and the development of competition policy? These are some of the issues we hope will be discussed during the Roundtable.

Competition, market liberalization, regional cooperation

Competition laws are now rapidly being adopted in many developing countries, in all continents and in all types of economies. There are now at least 100 systems of competition law worldwide, and more are being contemplated.³ Of course, enacting competition laws is not enough—we need to learn how to implement these new laws effectively.

Among the many challenges facing agencies tasked with enforcing competition laws is how to enable developing countries to use their competition laws to protect them from cross-border anti-competitive behavior. A large and growing part of foreign direct investment (FDI) in emerging economies has come from cross-border takeovers.⁴ Such takeovers sometimes allow large multinationals to increase their market power, and increase the risk of abuse of market power. Abuse of a dominant position has an adverse impact not only on domestic economies but on international trade. Other anti-competitive practices such as running hard-core cartels engaged in price-fixing or bid-rigging likewise pose threats to domestic and global economies. The cross-border implications of these anticompetitive practices will likely be the subject of greater regional attention as the volume of international trade rises.⁵

Conventionally, the Asian response to the threats posed by large multinationals has been to employ a screening process and impose pre-entry requirements on all foreign investors. They have imposed limitations on foreign equity and ownership and divestment requirements and other protectionist regulations, which prevent foreign investors and firms from becoming dominant forces in the economy.⁶However, such regulations also restrict the flow of foreign investments into the region. And since such restrictive investment laws and regulations focus on protecting national industries from foreign investors, they do not prevent local firms from establishing oligopolies in specific sectors by merging with or acquiring other local or foreign firms. Such arrangements are incompatible with fair competition. They distort prices and restrict the scope of consumers’ choices.

Implementing competition law and policy in the region may be a better way of dealing with the risks brought about by liberalizing one’s economy. Competition laws normally apply to all firms operating in the national and regional territory, whether in the areas of domestic sales, imports, or foreign direct investments. Countries will find that adherence to a widely understood and regionally accepted competition framework will enable them to use widely accepted standards in assessing the competitive impact of foreign firms at the time of entry and thereafter. Such adherence will help a country, in tandem with its neighbors, to monitor the competitive behavior of global firms in host countries to ensure that these do not engage in anti-competitive practices. In this way, converging competition law and cooperation in the enforcement of competition law in Asian countries can help regulate and control cross-border mergers and acquisitions that may give rise to an abuse of dominant market positions in the region.

Toward a regional competition framework

Today, we have the opportunity to build consensus regarding a regional competition framework. Discussions currently taking place domestically with regard to the formation of competition agencies and establishing or amending competition law also need to be conducted on a regional scale. Regional integration in Asia has increased, and continues to increase, demonstrating how inextricably linked Asian economies already are.

A regional competition framework may help in the process of building stronger economic integration in the region. Despite their differences, the region’s many markets do share common issues and concerns. A coordinated response to those concerns will enable the countries in the region to liberalize their economies and expand their markets—while at the same time mitigating some of the risks inherent in globalization. Moreover, discussions regarding a regional competition framework may help coordinate and harmonize laws that are concerned with the proper regulation of foreign direct investment in the region.

But can such a framework be developed in Asia? Some have contended that the harmonization of competition laws may prove to be a challenge in the region, given the diversity of competition laws and enforcement practices—all of which are said to follow the variances in the markets that they regulate.

However, it should be noted that significant variances in competition law exist not only within Asia, but around the world. A 2002 World Bank survey of competition laws in 50 countries has identified differences in three important areas:

1. definition of dominance;
2. treatment of cartels; and
3. enforcement.⁷

Despite differences in domestic legal and institutional structures, there is growing international consensus regarding the fundamentals of competition law and policy. This consensus relates to core competition principles such as transparency and accountability; non-discrimination; due process and procedural fairness. Without insisting on outright harmonization, countries may consider negotiating the acceptance of these binding core principles as part of domestic competition laws.

Converging competition regimes provide investors with less uncertainty in sifting through conflicting definitions of key concepts in competition laws. As a result, investors will have greater predictability in determining the scope of acceptable competitive behavior—and this should make the region a more attractive investment destination.

Conclusion

Competition is a public good that can potentially spur economic efficiency and growth, not only within a country but within the Asian region. But the right legal infrastructure to support competitive practices both domestically and regionally must be constructed. While appropriate laws are necessary, equally important is how the legal infrastructure is implemented.

Further developments in competition law regime and capacity building within countries and in the region--these are what lie ahead. None of these will develop effective and efficient market economies overnight, but all are key to lasting development. Surely the magnitude of what lies ahead will not discourage you, who are at the forefront of competition law and policy reforms in your respective jurisdictions. We look forward to learning lessons from all of you—lessons that are so urgently needed by the developing world.

Thank you.