El Salvador: Superintendency of Competition

The degree of innovation in El Salvador is low and its economic growth has been slow in recent years. In 2016 the country ranked 104th among 128 nations surveyed in the Global Innovation Index (Cornell University, INSEAD, & WIPO, 2017). Moreover, since 2000 the Salvadorean GDP has registered growth at rates below 3 per cent with the sole exception of the 2005-2007 period.

In addition, 32.7 per cent of households live in poverty, of which 7.9 per cent live in extreme poverty and 24.8 per cent in relative poverty (MINEC-DIGESTYC, 2016). Under the Multidimensional Poverty Measurement,1 34 per cent of Salvadorean households are categorised as poor. This means that more than one-third of the population has severe deficiencies in multiple areas of their lives, such as low educational attainment in adults (97.7 per cent), limited access to social security (90.8 per cent), underemployment and job instability (84.4 per cent), lack of access to sanitation facilities (83.7 per cent) and household overcrowding (79.6 per cent) (STPP, MINEC & DIGESTYC, 2015).

These variables highlight the need to rethink the role of economic policy tools in El Salvador, among them its competition policy, so that they become an instrument to promote socioeconomic development.

The first step in such a process is to account for the relationship between competition and economic development. Classic economic theory establishes that competitive markets efficiently allocate the resources of a country, resulting in the best outcome of products and services. Much theoretical work and empirical research has been done to highlight the importance of efficiency gains obtained from competition. In principle, competition incentivises firms to implement and develop more efficient production processes and propels the adoption of better technologies and innovation. In doing so, competition creates a scenario that favours economic development and reduces poverty. Based on these premises, the appropriate and timely application of competition policies should help developing countries to achieve objectives such as poverty reduction and improve income distribution (Godfrey, 2008).

Nonetheless, recent empirical assessment indicates that the benefits produced by the application of competition policies are substantially lower in developing countries.2 One of the main reasons discussed in the literature is the lack of adaptation of competition policies to the local context. In this regard, several authors have stated that competition law and its application in developing countries must be adapted to their markets' characteristics.3 For instance, Bakhoum (2011) marks that ‘an adequate competition law for developing countries must account for their local context'.4 Furthermore, Ezrachi (2017) points out about competition law: ‘Its true scope and nature are not a ‘pure' nor a given' of a consistent objective reality, but rather a complex and, at times, inconsistent expression of many values'. According to these authors, the implementation of competition law without considering the local context and national economy characteristics should be unconceivable for developing countries.

Even though there seems to be a consensus about the importance of a contextualisation process, there are multiple perspectives on the best way to implement it. The main questions that arise are: Should the law be differentiated to the stage of development of the country? Is it possible for a unique legal framework to be interpreted in a different manner for developing countries? Are the competition agency priorities different in less developed nations?

This article will focus on three main issues, though it does not intend to carry a thorough discussion of its subject matter but to initiate a discussion of some relevant topics for El Salvador. The first issue relates to the transversal application of the competition law; second, the usage of the per se rule in the prosecution of cartels (article 25, LC); and third, the objective of the Salvadorean competition law.

Regarding the first point, the current law exempts from its application those activities that the Constitution and other laws have designated to be carried out exclusively by the government and city halls (article 2, Competition Law (LC)). Also, regarding mergers, transactions below pre-established monetary thresholds are excluded from scrutiny (article 33, LC).5 These rules define who is subject to the law, thus generating legal clarity and predictability in its application, which is truly valuable when a new competition agency is involved.6

Conversely, there are other instances where exemptions might be desirable, for example, when conflict arises between the objectives of competition law and other goals of public interest because the competition law applies to every sector of the economy, including those regulated by other government institutions.7 This is particularly relevant in the ex ante merger analysis in which case, competition agency decisions are binding for the regulatory body (article 34, LC). For example, a merger in the financial sector could lead to anticompetitive effects and bring financial stability at the same time. Then, the dilemma will be how to weigh both objectives,8 ie, how financial stability is as an argument to authorise a merger and which of the two institutions - the competition agency or regulatory body - would be appropriate to carry it out.9 However, this issue is less problematic in other actions of the competition agency such as advocacy letters.

The absence of exemptions in such cases limits the institution's ability to assess, in terms of efficiency in the allocation of resources and effectiveness, which action should be carried out when the resolving a filed complaint.

Another consideration could be the possibility to exclude - or differentiate within the law - vulnerable or underdeveloped economic activities such as those within the agricultural sector,10 or SMEs11 with the purpose of developing them. As pointed out by Swaguer (2015), agricultural activity has an important role in developing economies; however, farmers are threatened by the existence of a double bottleneck as both input suppliers and buyers - supermarkets, wholesalers, among others - sustain high bargaining power whereas agriculture tends to be an extremely fragmented sector.12

Empirical research recognises that the relevance of the agricultural sector in developing countries justifies a special application of competition law. Nonetheless, there is no consensus on how to take this differentiation into practice. For El Salvador, the main question is whether it is convenient to permit cooperation among competitors in those cases where this sort of agreement would, for instance, reduce asymmetries between small (ie, farmers and SMEs) and bigger competitors or promote scale economies in the purchase of inputs. Current law is not compatible with these propositions, as they conflict with the per se rule applied to cartels (article 25, LC). In this regard, some authors highlight: ‘A competition law for developing countries should not promote competition as a good thing per se, rather it should be used as a tool to foster economic development' (Bakhoum, 2011), implying that competition may not always be the best path for developing countries, including El Salvador.

As for the last point, article 1, LC establishes the promotion of competition as a means to reach economic efficiency, measured by the standard of consumers' welfare. Moreover, merger analysis considers efficiency gains if they are large enough to mitigate the potential damage to the competition process and result in direct benefits to the consumers. The same principle applies to vertical agreements analysis, which also mandates to consider not only the effects on the competitive dynamics but those on consumer welfare too. With regard to abuses of dominant position, they have been addressed as those actions that limit the dynamics of competition, without there being any need to assess damage to consumers.

Economic efficiency measured with welfare standards (total or just consumers) are two accepted goals in any competition law regime regardless of the stage of development in a country; however, there is a current discussion as to whether developing countries should complement these objectives with social (or non-economic as they are sometimes called) purposes. In El Salvador, this would seem to be justified.

When one bears in mind the attainment of economic efficiency, it must be assimilated that sometimes it implies increasing the size of big players and eliminating the weaker ones. Furthermore, the pursuit of economic efficiency assumes that markets are contestable and that there is a credible threat of entry of new competitors that disciplines the behaviour of the incumbents, which would impel them to innovate, to improve productivity and to operate with competitive profit margins.

The question is whether this assumption can be held in developing economies, such as El Salvador, where market concentration is high - generally characterised by monopolistic and oligopolistic structures - and distortions prevail in many industries. For instance, big firms tend to enjoy advantageous positions with high market power and special industry structures that favour them (this article will not elaborate on barriers to entry).

Preliminary estimations find that most of the markets in El Salvador are highly concentrated; the average HHI estimated in 2014 for the whole economy was 3,567. Moreover, some markets are far above this value, such as electricity whose index was over 6,000 units (SC (2012a). Market Study of Competition Conditions in Electrical Sector. Superintendency of Competition, San Salvador, El Salvador).

In addition, multiple analyses carried out by the Competition Superintendency have identified oligopolistic structures and economic agents holding a dominant position. Some examples are electric power generation, sugar distribution, beans industry, fixed-line calls, internet, public-access television, rice industry, supermarkets and retail, beer production and distribution, and insurance markets, among others. For El Salvador, a distorted market seems to be the rule rather the exception. Moreover, the composition of markets and industries is completely asymmetric since 96.2 per cent of the formal sector is engaged in activities with annual revenue below US$100,000 (MINEC-DIGESTYC, 2012).

Hence, the main question is to what extent a scenario with a standard competition law will prevail and succeed in the promotion of economic efficiency in a country with characteristics such as those of El Salvador. How likely is it that the lack of adaption to the local environment would result in an exacerbation of the aforementioned conditions: deeper poverty, income inequality and welfare?

These questions pose the need to complement the actual goals of economic efficiency and consumers' welfare with others belonging to social spheres. The Competition Superintendency has made small steps towards this vision. For example, the recent decision in the Anheuser-Busch InBev SA/NV/SABMiller plc merger analysis conditioned the transaction to comply with several obligations, which included maintaining labour guarantees for the workers of the local company acquired (property of SABMiller), since it is one of the biggest employers in the country and its restructuring could endanger the income of thousands of households nationwide.

In summary, the characteristics of the Salvadorean economy discussed in this article (which is not and does not set out to present the full picture), supports the necessity of pursuing a new vision with regard to the definition and application of competition law in El Salvador. This is not an easy path; nonetheless, it has started.

Notes

1 In 2015, El Salvador measured poverty from a multidimensional perspective for the first time. This new approach includes in its definition other dimensions, besides income, such as education, standard of living, employment, social security, environmental conditions, health and nutrition.

2 Grecco et al (2006) find a negative relationship between the application of competition policies and GDP per capita growth rates in Latin America. Levy (2016) points out that the mechanisms to promote competition implemented in Mexico have not been as effective as expected. Acemoglu (2004) reveals that developing countries benefit less from strengthening their markets through conventional policies (market liberalisation, diminishing barriers to entry) with respect to their developed peers.

3 Bakoum (2011); Ezrachi (2016); Fox (2000, 2003, 2006); Gal (2009); Gal, et al (2015).

4 Bakoum Mor: ‘A Dual Language in Modern Competition Law? Efficiency Approach versus Development Approach and Implications for Developing Countries.' World Competition 34, No. 3 (2011) :495-520.

5 Salvadorean legislation defines two different thresholds based on income and assets, and it is required that a transaction value exceeds at least one of them to be subject to merger control. Both thresholds are defined as a multiple of minimum salaries. Currently, they are estimated at US$180 million for assets and US$216 million for income.

6 Bakoum (2011) argues that inexperience of new competition agencies can be offset by following the example of more experienced jurisdictions.

7 Energy, telecommunications, transport services, financial services, among others.

8 The current law requires the competition agency to analyse anticompetitive effects that could be generated because of a merger. If any effects are found, the merger parties must account for efficiency gains significant enough to counteract the potential loss of welfare due to the operation (articles 28, 29 and 34, LC).

9 An international example is the merger case of E.ON/Ruhrgas, in which the Ministry of Economic Affairs reversed the decision of the Federal Competition Agency (Bundeskartellamt) based on the argument that the transaction was necessary to guarantee the stability of gas provision nationwide.

10 The participation of the agricultural sector on GDP in 2015, reported by the World Bank, was 11.4 per cent in El Salvador while in the total OECD countries it represented 1.6 per cent of their output.

11 In El Salvador, the smallest enterprise category is defined as the micro sector. It includes those businesses whose annual income is below US$100,000. In 2015, 96.2 per cent of enterprises were classified within this sector (MINEC-DIGESTYC, 2012).

12 In El Salvador, imports are the main source of supply for agricultural inputs. These are concentrated by two large regional companies. Meanwhile, the last census surveyed by the Ministry of Agriculture and Livestock listed a total of 395,588 farms, which suggests a strong fragmentation of this value chain link. In the case of sugar, beans and rice wholesale distribution, the markets are structured as oligopolies that are not subject to high competition pressures. (SC (2009) (Analysis of the Sugar Industry and its Competition Conditions in El Salvador. Superintendency of Competition, San Salvador. El Salvador); SC 2012a; SC 2012b (Market Study Update: Analysis of Rice Industry and its Competition Conditions in El Salvador. Superintendency of Competition, San Salvador. El Salvador), SC 2017 (Market Study of Beans Industry and its Competition Conditions in El Salvador. Superintendency of Competition, San Salvador, El Salvador)).

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