Promoting a competition law in favour of economic development
In my two previous articles for The Antitrust Review of the Americas, I explained how, after more than 10 years of applying and learning about competition law in El Salvador, the Competition Superintendence began to rethink the need to turn around the vision of the agency. The central point is whether competition law can generate a greater impact on the development and economic growth of the country.
In this context, in November 2017, the Competition Authority of El Salvador held the seminar ‘Competition Law and Economic Development: A Universal Solution?’. Representatives of 10 countries and competition agencies of the Central America region (including Panama) participated. The fundamental objective was to expose diverse perspectives that support the view that competition laws must fit the political, social and economic environment in which they are applied and question the logic of transplanting a law that originates in a different context and how this may generate unwanted results in developing countries.
The seminar took place in two stages: the first consisted of keynote speeches by renowned international researchers. According to the majority of the speakers, the traditional competition rules start from the assumption that the markets work well, that is, they present low barriers to entry, information is transparent and as a consequence, the price system provides the appropriate signals for an efficient allocation of resources. These assumptions do not seem to be valid for developing countries that, on the contrary, are characterised by high barriers to entry, inefficient infrastructure, economic vulnerability (mainly of the agricultural sector), concentrated markets, extreme inequality in the distribution of wealth and opportunities, limited state resources and corruption, among other elements. These differences, as pointed out, raise the need to create contextualised competition laws that work for the markets of developing countries.
The event was attended by Professor Liberty Mncube, chief economist of the South African Competition Agency, who spoke about how, in his country, public interest is incorporated as an objective of the competition law. South Africa can serve as an example of how equity, justice and efficiency can be integrated as objectives in the application of competition laws.
For the development of the second part of the seminar, workshops were organised based on four thematic axes:
• competition law and the informal sector;
• entry analysis applied to developing countries;
• merger control; and
• contextualisation of anticompetitive practices.
These were led by representatives of the competition agencies and research institutes participating in the event and were made up of competition experts from the Central American region. The purpose of these were to collect inputs for the definition and application of a competition law, adapted to the realities of developing countries and the specific characteristics of their markets and economies, to contribute more effectively to social and economic development.
It is important to note that the seminar was the first opportunity in which the countries of the region addressed the issue of competition and economic development from a non-traditional perspective. Thus, obtaining inputs from the members of working groups was not a simple task. Below are some reflections that the host team obtained from the event which describe challenges that the agencies that decide to make changes in the application of their competition laws would face.
The first point that was repeatedly addressed in the workshops is the scarce financial and human resources of agencies in developing countries versus developed countries. This situation makes it strictly necessary to prioritise activities. Therefore, agencies should focus on the sectors or types of conduct that could generate the greatest impacts on society. For example, focusing on sectors linked to the provision of basic goods (ie, in the agricultural sector) or in the sanction of the most harmful practices such as abuses of dominant position. To this end, highly concentrated markets could be identified, particularly those where the probability of having obtained a dominant position through undesirable channels is high, and then preliminary inquiries regarding market dynamics could be carried out.
At the workshops, the advisability of making the rule of analysis of anticompetitive agreements more flexible was discussed, ie, prohibiting those agreements that ultimately negatively affect the market per se (such as hardcore cartels) and analyse all other agreements under the rule of reason. This would make it possible to allow agreements that, given the characteristics of developing countries, could have a positive impact on economic development. Examples of potentially beneficial agreements are those that generate the most technical and technological progress in the markets or allow an increase in the scale of economic agents, for example, through the joint purchase of inputs. This can strengthen the ability of companies to compete and empower the most disadvantaged competitors, thereby facilitating access to the market and opportunities for growth.
However, more flexibility requires a greater amount of institutional resources and implies having specialised personnel to carry out the necessary quantitative analysis. At the same time, discretion is increased and predictability in the application of the law is reduced. A possible way to diminish these drawbacks could be the establishment of specific rules that define the agreements that will be considered an exception to the rule. A good starting point might be to analyse the cases of South Africa and Panama, given that both have established clear lists on what will be considered a beneficial agreement. At the same time, the competition authority should make sure that these exceptions do not imply the protection of entire sectors or the creation or strengthening of the market power of an economic agent. Another suggestion could be the creation of a mechanism of prior consultation, so that the agents can refer to the authority to determine, ex ante, if a specific agreement would be pro-competitive or not.
On the other hand, the reflections obtained from the working groups indicate that the competition authorities must assume a more active role in the pursuit of abuses of dominant position. Developed countries have minor concerns regarding abuses of dominant position. Namely, confidence in the proper functioning of markets results in the premise that the dominance of some companies has been achieved by their own merits and their individual decisions will tend to be pro-competitive. In developing countries, there are less reasons to support these hypotheses, on the contrary, dominant positions are usually the result of the presence of strong barriers to entry, corruption and economic groups with political influence, scarcity and concentration of opportunities, among other elements.
Regarding abuses of dominant position, it is important to assess whether the rules that are being used for their evaluation, which are generally the same as those applied in developed countries, are valid for developing countries. For example, the assessment of market shares and the definition of which kind of foreclosing strategies are classified as abuses of a dominant position. According to the traditional approach, it is necessary to verify an important participation in the relevant market to prove the existence of a dominant position. However, in developing countries where barriers to entry are high, it could be argued that some companies with relatively low shares might have an advantageous position that allows them to act independently and therefore have the capacity to abuse of their position. Going back to South Africa we find that companies with less than 35 per cent of the market are said to enjoy dominant position as long as they have market power.
The possible incorporation of the figure of abuse of economic dependence, currently used in some jurisdictions, was discussed in the workshops, as a more flexible alternative to the figure of dominant position. To determine the existence of economic dependence, it is required that the affected company (the dependent) has no other alternative to compete in the market other than through an economic agent (on whom it depends). Although it might be necessary to analyse this concept in greater detail, its application would allow competition authorities to examine situations that are quite common in developing countries, for example, the dependence of small producing companies, or suppliers of agricultural products on large supermarket chains.
It is also necessary to verify that at least one of the excluded companies is as efficient as the dominant firm (in the case of El Salvador, the legislation states that there must be a ‘significant’ limitation of competition) for the sanction of abuses of an exclusive nature (such as loyalty discounts and exclusivity agreements). In the case of developing countries, foreclosure strategies employed by a dominant firm are not likely to involve an equally efficient enterprise or a significant displacement of competition; nevertheless, the displacement of a company of less relevance might mean the elimination of a player capable of competing in the market in the long-term. Therefore, it is necessary to consider dynamic efficiencies to prevent harm to potential competitors in the market.
It is also important for developing countries to have an appropriate regime for merger analysis, since this allows to anticipate and remedy beforehand the possible harm to competition caused by these operations.
First, the suitability of the monetary thresholds should be assessed. To do this, an assessment should be carried out on whether they are low enough to include the majority of the most important markets, as well as transactions with the potential to have anticompetitive effects. At the same time, however, they should be high enough to ensure that the number of mergers to be evaluated does not surpass institutional capacity.
Another point that deserves special attention is whether the traditionally considered consumer welfare standard is an adequate parameter to assess the effects of a merger in developing countries.
The concept of consumer welfare is typically applied on a static model and therefore dynamic effects in the economy are not considered. For instance, under such approach, a merger would be considered beneficial if it implies lower prices for consumers in the short-term; however, the operations could have a negative effect on the growth potential of some competitors in the medium term. This might affect the competitive process and restrict access to goods in the long-term. Hence, it is important for developing countries to consider dynamic efficiencies instead of limiting themselves to static efficiencies.
Furthermore, consumer welfare does not usually consider the distinction between different types of consumers. This view might be considered limited in scope in countries where inequality is a relevant social issue. That is, any merger that improves consumer welfare would be considered desirable, even if it only benefits higher income consumers but worsens the condition of lower income consumer, provided that the gain of the wealthiest outweighs the loss of the poorest. Therefore, it might be desirable for developing countries to have the possibility of discriminating between different kinds of consumers, giving priority to the most disadvantaged segments of society. Thus, if the merger affected different types of consumers, the authority would prioritise in its assessment of the merger its impact on the most vulnerable groups of society (for example, the impact on lower income consumers in cases where staple goods are involved).
The traditional merger analysis considers some aspects that are clearly economical (economic efficiency, prices, quantities, etc), however, some jurisdictions have included elements that reach more dimensions of the social apparatus. South Africa has been a pioneer in extending the lens of merger analysis to include considerations of public interest.
Reflecting on the possibility of incorporating these elements, the seminar’s host team believes that the first step to turn this into reality would be to determine within a closed list what should be understood as a public interest to avoid arbitrariness in its application. For this, it would be convenient to develop a process of legitimising the items within the list. This process should involve the institutions and actors responsible for formulating and approving the regulations relevant to the social context. Consequently, for this task there should be interaction between the public and private sectors.
The second step will be to establish how these objectives defined as public interest will interact with economic efficiency. For this purpose, guidelines for the analysis will have to be developed and published. These guidelines should explain how the agency would assess mergers that imply gains (or losses) in efficiencies and at the same time generate damages (benefits) in terms of the public interest – in other words, the extent to which public interest concerns might affect conditions for approval. The classic example of this would be the effects the merger might have on employment (it is common for mergers to affect employment), therefore, if preserving employment were to be considered within the public interest, the merger might be subject to the condition of maintaining pre-merger employment levels.
Competition agencies could choose between two paths if they decide to move away from the traditional vision of application of competition law and towards a more pragmatic path focused on their own economic and social contexts. The first alternative would be to make changes through the interpretation and application of their jurisprudence. They could, for example, elaborate a theory of barriers to entry that fits their reality, by incorporating those aspects that delay timely, sufficient and probable entry. This would vary depending on the realities of each country but could, for example, include corruption, lack of qualified human capital and the informal sector, among others.
It was discussed within the seminar that this alternative of changing the way that their jurisprudence is interpreted could include applying a broader concept of economic efficiency in a way that incorporates elements of a social nature. The concept of efficiency could be reinterpreted, since for developing countries market efficiency also implies pursuing equity, access to basic services and inclusive development. These objectives are bounded to the concept of efficiency, which means that the decisions and criteria of the authority that promotes them should contribute to long term economic efficiency.
The other alternative would obviously be to make changes in the laws to explicitly incorporate some elements of a social nature, as in the case of South Africa. This alternative would have the advantage of generating less arbitrariness and an environment of greater transparency and legal certainty, both vis-à-vis the private sector and the judicial branch.
1 Translated from Spanish by Javier A Urrutia.
2 68 competition agencies were invited.
3 The following presentations were held: ‘General Characteristics of Developing Economies and their Implications for Competition Law’ by Michal S Gal; ‘Competition Policy for Regulated Industries in Developing Countries’ by Russel Pittman; ‘Impact of the informal economy on the dynamics of competition in developing countries’ by Mor Bakoum; ‘Barriers to entry and competition law in Latin America: Why is economic development important?’ by Francisco Beneke; ‘Adapting the Competition Law to the Brazilian context and its contribution to the BRICS discussions’ by João Paulo de Resende; ‘Beyond the economic objectives in the application of competition law: the experience of South Africa’ by Liberty Mncube and ‘Drafting legislation on competition in developing countries: what have we learned?’ by Eleanor Fox.
4 In the case of the South African law, an agreement is allowed if it is proven that the competitive restriction it causes is necessary to achieve a public interest objective. Public interest objectives may refer to one of the following topics: the maintenance or promotion of exports, the promotion of the capacity of small businesses or firms controlled by historically disadvantaged people, the change in productive capacity necessary to stop the decline of an industry and economic stability of an industry.
5 In Panama, the law does not apply to agreements that seek to improve production, distribution or promotion of technical or economic progress, being considered exceptions, provided that they consist of: the exchange of technical information; joint use of productive resources (infrastructure, equipment, distribution, storage or transport facilities); and that it is an export product.
6 For example, in the United States, laws tend to favour dominant companies as long as they act unilaterally, playing down the damage that unilateral behaviour may cause. For the most part, its jurisprudence maintains that competition should not be paused by imposing burdens on companies that have become dominant.
7 Belgium, France, Germany, Italy, all West Africa, among others.
8 In South Africa’s case, there are four considerations of public interest related to the effects on any of the following: a specific industry or sector of interest, employment, the ability of small businesses or firms controlled by historically disadvantaged people to compete and the ability of the national industry to compete internationally.
9 Although it could be thought that this task corresponds exclusively to the Legislative Body, considering that approving laws is one of its main jurisdictions, defining what is an object of public interest does not necessarily emanate from it. It is rather a synergic effort between different actors in society.
10 The complete results of the seminar will be published soon.