What a difference a year can make

Since the publication of the last edition of The Asia-Pacific Antitrust Review, the region has been drawn into a spreading global financial crisis, the speed and severity of which few authorities could have predicted.

While in 2008 the world was marvelling at average annual growth rates across the Asian region of 8 per cent and above, some of these economies 12 months later are facing the prospect of recession, collapse of leading banks and periods of protracted economic instability.

In March the World Bank predicted China's double-digit growth rate of recent years would slow significantly to 6.5 per cent. In Korea, the value of the won has halved since the emergence of the economic crisis and in Japan, Australia and other Asia Pacific economies rising unemployment is becoming an increasing concern.

Amid such uncertainty, competition policy reform can seem a distant priority for governments not wanting to impose any unnecessary additional pressure on already struggling businesses.

Yet history tells us that times of such calamity and economic dislocation can be precisely the moment where deep reforms in a nation's competition policy and enforcement regime can be most effective. It is also the time when competition authorities need to speak out the loudest to defend the hard-won competitive gains already made.

As chairman of the United Kingdom's Competition Commission Peter Freeman noted recently in response to the current crisis, scepticism of widely promoted competition policies tends to increase during difficult economic times. Some commentators are currently questioning whether competition policy has failed to deliver on its promises of greater productivity and prosperity.

Such sentiment is understandable, especially in countries that have recently taken hard decisions to introduce strong reforms, only to find they have done little to insulate their economies from the current financial fallout.

The success of many leading Asia-Pacific nations has been based on a policy of building national champions that can drive exports - in other words allowing businesses to grow unimpeded by domestic competition considerations so they can become large enough to compete on the international stage. It is a policy that has delivered a number of internationally recognised brands and industries, particularly in countries such as Singapore and Korea.

As a result some Asian countries have been reluctant to move away from the export-focused growth models that have served them well in the past and embrace the sometimes difficult competition reforms promoted by western nations. In other cases, such as Indonesia, competition policies have been imposed on countries as a condition of bailout support by the International Monetary Fund. In others, such as China and Vietnam, the prospect of membership of the World Trade Organization has proved a catalyst for their adoption.

Competition policy has in the past been perceived as a ploy by western countries to pry open the door to closed markets. These policies have been seen as a way of allowing multinationals a foot in the door or a way to break up national champion policies.

Several of those nations have in recent years softened their attitude to outside investment and have recognised that accepting foreign firms and trade can deliver strong economic benefits.

Yet as the Asian Development Bank has previously noted, opening emerging Asian markets to the world is, on its own, not enough for countries to enjoy the full benefits of competition.

Firms exposed to external markets will still find ways to act anticompetitively. Competition is known to widen consumer choice, lower prices and increase production efficiency - all of which contributes to the growth of a developing nation. Importantly, it is also a proven way of increasing the standard of living enjoyed by everyday citizens. Businesses, both large and small, are also more likely to invest in another country that provides regulatory certainty and clear competition rules that are well enforced.

However, in order for that growth to be able to occur, competitors need to be able to enter these markets confident they will be allowed to compete on fair terms against incumbent businesses that may have previously enjoyed monopoly or protected status.

Around the region, struggling businesses and institutions are calling for a return to protectionism and an easing of competition law enforcement on the grounds of their current hardships.

It is a compelling argument for governments that are yet to experience the full benefits of competition reforms. But allowing the hard-won gains of reforms of recent decades to be wound back in response to the relatively short-term impact of the current crisis risks further prolonging the current downturn.

Often such exemptions are presented as interim measures to be revoked once conditions improve. However, unwinding mergers and other anticompetitive arrangements at a later date can be like trying to unscramble an egg - difficult, if not impossible.

In the Asia-Pacific region, many of these lessons have already been learned the hard way.

The Asian financial crisis of the late 1990s slashed billions from the economies of affected countries. Japan, previously the shining beacon of Asian industrial success following the Second World War, was one of the hardest hit.

Like the current crisis, the Asian financial meltdown was driven partly by irresponsible lending that led to ballooning property prices. Japan provides a useful case study of how one economy reacted to the economic crisis.

It has been estimated that at the height of the property bubble, the Imperial Palace and its surrounding park in central Tokyo was more valuable than all the real estate assets in the US state of California. After injecting around 100 trillion yen of public money - around 20 per cent of GDP - into its economy and shoring up troubled banks, the government of Prime Minister Junichiro Koizumi turned its attention to competition reforms. The powers and staffing levels of the Japanese Fair Trade Commission were boosted, penalty provisions were increased and authorities began targeting long-standing price fixing practices that had dogged the economy, particularly in the construction industry. Those reforms were later complemented with the introduction of a leniency policy for cartel participants that encouraged them to expose their co-conspirators. The relentless pursuit of that reform by the Japanese Fair Trade Commission amid difficult circumstances is commendable.

It has also been argued that Japan prolonged the country's recession by shielding certain industries from additional competition. But the dedication to weeding out deeply entrenched cartels and more vigorous enforcement of the Antimonopoly Act has paid dividends, along with the financial sector reforms that were also introduced.

Despite struggling through a lost decade, Japan's recovery began to gain pace shortly after the turn of the century, with the country slowly recouping the massive investment it was forced to make to stabilise its economy. As the Japanese delegation told an OECD gathering in February this year, strengthening competition law was central to Japan's recovery.

The Japanese concluded that taking anticompetitive measures as a way of countering a financial and economic crisis, even for a short period, should be avoided at all costs due to the potentially negative impact in the medium- to long-term.

The 1997 crisis also proved the catalyst for Korea to reform long-standing inefficiencies in its economy. Like Japan, Korea has previously given priority to industrial policy over competition policy.

Much of Korea's success in the automotive, heavy manufacturing and electronic consumer goods was built on acceptance of the dominance of family-controlled conglomerates, known as chaebols. Yet it has been argued that the excessive borrowing by these conglomerates that was largely left unchecked led to much of Korea's troubles during the 1990s. Public concern over the behaviour of the chaebols was one element that prompted an overhaul of the country's competition policies.

As the country began to take a harder approach to cartel enforcement, the power of the chaebols was curbed, and the country has since seen a significant increase in fines against cartels - from 157 billion Korean won in 2006 to 410 billion in 2007. Importantly, the Korean Fair Trade Commission began taking action against major players in both the steel and software industries.

Both Korea and Japan are suffering just as much as other countries under the present downturn. But they have much to teach other countries following their experiences of the 1990s.

Among the most important is the need to maintain faith in the benefits of competition during times of crisis.

Setting aside the commonly accepted wisdom of competition enforcement on the grounds of economic hardship can in fact delay economic recovery, rather than assist it.

Instead, cutting waste in the economy and increasing efficiency by promoting competition have proved effective in enhancing productivity and strengthening growth, in turn helping struggling economies to pull themselves out of recession.

With governments under increasing pressure during such times, competition authorities have an increasingly important role to defend and promote the long-term benefits of competition reform. Many of the benefits of competition reform do not become evident until many years after their implementation, often leading business to question their effectiveness.

Therefore, the agencies tasked with promoting competition need to advocate steps that include quicker analysis and response to mergers that are likely to be anticompetitive in the longer term; strengthening enforcement of competition issues; and targeting enforcement to those industries that are likely to cause the most harm to the economy and its consumers.

Importantly, competition authorities need to ensure their responses are consistent with internationally recognised best practice, and that lessons of the past are not forgotten.

To this end, the International Competition Network and publications such as this one are important forums for the sharing of knowledge and experience. Finally, it is important to remember that competition reform is an ongoing process.

Challenges will continue for those countries moving towards stronger competition policies and enforcement. Much comment has been made about China's long-awaited Antimonopoly Law, following the rejection of Coca-Cola's recent US$2.4 billion take-over offer of juice company China Huiyuan.

After finally seeing the long-awaited law come into effect in 2008, some economists have expressed concern that by rejecting the offer, China's new law had failed its first big test, and that it may in fact be used as a barrier to prevent the entry of foreign competition.

China's economy is one that still contains many state-

controlled monopolies. The country also continues to grapple with important questions of foreign investment, as do a number of countries in the region, including Australia. Yet the significant reforms that have already taken place do need to be acknowledged. Moving towards competitive, open markets that comply with international policy and enforcement best practice is a gradual transition that needs to be encouraged.

As Professor of Law at the Chinese Academy of Social Sciences Xiaoye Wang recently told a competition forum in Melbourne, it is still early days for China's Antimonopoly Law. Despite the need for refinement and clarification of a number of critical issues, promulgation of the law should in itself be seen as an important milestone.

Of course competition reform is not a panacea to the world's current financial ills. Strengthening of competition policy is one part of the response governments need to make, but it has to be balanced against the range of other measures required to rescue struggling economies. Trillions of dollars of public money have so far been pumped into financial institutions around the world. Governments are also facing other pressures, such as calls to strengthen regulation, especially of the financial sector, and for tariffs to be reintroduced or increased to protect sectors of the economy and save jobs.

In these difficult times, it is important that we do not repeat the mistakes of the past. 2009 will not be an easy year, but the continued growth of strong competition policy and enforcement throughout the region in recent years provides hope.

Many countries are already well on their way to making competition a fundamental element at the heart of their economies. Others are just beginning that journey.

So long as those on the path to competition reform remain focused on the long-term benefits and do not allow themselves to be sidetracked, they stand every chance of emerging from this crisis in good shape.

My hope is that in a decade's time when we reflect on how countries responded to this crisis, we will be able to see it as a catalyst that led to an outbreak of competition policy reform throughout the Asia-Pacific region. Should that goal be realised, the benefits will be felt by billions of consumers for generations to come.