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The Relationship Between Economic Development And Competition Policy

HISAMI KUROKOCHI, Commissioner of the Japan Fair Trade Commission
November 16, 1999
Presented at The 6th Asian and Oceanic Antimonopoly Conference
Old Parliament House, Canberra, Australia

I. INTRODUCTION

It is a great pleasure for me to participate in this conference and to make a presentation on how the economic development and competition policy interact each other. But before doing so, I would like to take this opportunity to express, on behalf of Japanese participants, our heartfelt appreciation to the Australian Competition and Consumer Commission for the warm hospitality and excellent arrangements made for this conference. I am convinced that this gathering gives all of us in this region which covers a wide range of economies a precious opportunity to exchange views and experiences with a view to further promoting competition.

It is well known to us all that the APEC dealt with the issue of "Strengthening the Market" as one of the main themes for discussion this year. The theme was raised by New Zealand,which currently holds the presidency of the APEC. The discussion took place on the basis of the recognition that the recent economic crisis demonstrated the need for improving the functioning of markets to achieve sound economic growth. The tangible result was the adoption of the "APEC Principles to Enhance Competition and Regulatory Reform" at the Economic Leaders' Meeting.

In this document, the Economic Leaders endorsed core principles on promoting competition policy and deregulation, namely, non-discrimination, comprehensiveness,transparency and accountability. To achieve this, Leaders also agreed on taking specific actions. Although the "Principles" are non-binding in nature, it is quite significant that Leaders come to share the common recognition that competition policy and deregulation play an important role for sustainable growth and that they agreed on the specific actions as set out in the document.

It also stated that the APEC economies recognized the need for flexibility in implementing the framework,taking into account their diverse circumstances. Depending on stages of development, each economy faces different problems in the field of competition policy.

Thus, our task now is to cooperate closely with each other in addressing the concern expressed by developing economies. In this sense, the topics chosen for today's discussion are quite pertinent and stimulative, for which I would like to express my respect to the ACCC. Here in this session, I would like to address some of the concerns expressed by developing economies at various fora and try to offer our thoughts on them, referring to Japan's experiences when appropriate. I sincerely hope that this will contribute to further discussion on the subject.

II. CONCERNS OF DEVELOPING ECONOMIES AND SOME THOUGHTS ON THEM

The relationship between competition policy and economic growth has been discussed not only in APEC but also in other international fora, including WTO and UNCTAD. Based on past discussions, I feel that the concern of developing economies may divide into the following four categories:

  1.  relationship between competition policy and competitiveness,
  2.  political and social impacts of competition policy,
  3.  priority between competition policy and industrial and other policy objectives, and
  4.  resource constraints of the competition authorities.

I will discuss each of these concerns briefly first and then try to offer our thinking on how to address them.

1. Relationship between competition policy and competitiveness

First, as to the relationship between competition policy and competitiveness, I have noted two types of concern. One is that competition policy may adversely affect state-owned enterprises or conglomerates. There has been an argument that state-owned enterprises and conglomerates can play a leading role in developing economies by providing the public with goods and services of the same quality at the same price. This is especially important in developing economies since they are more vulnerable to market failures than developed economies.

The second type of concern on the relationship between competition policy and competitiveness is that competition policy could hinder competitiveness of enterprises by imposing restrictions on their size. It would be useful to get economies of scale through mergers in order to cope with international competition, to develop domestic capital and to ensure increased synergy effects. Therefore, merger regulations could obstruct the growth of developing economies. Furthermore, it could be argued that monopoly or oligopoly is desirable in the market of developing economies. This is because there exists a minimum scale of efficiency for an enterprise, and the optimal number of enterprises in a market is relatively small in developing economies.

Responding to these concerns, I would like to raise three points.

First, it is important to ensure competition in the domestic market. In theory, competition expels inefficient enterprises from the market, helps remaining enterprises increase their efficiency and competitiveness, and, as a result, contributes to achieving economic growth. In practice, industries facing vigorous competition in domestic market are more successful than those protected by regulations. Some may still believe that Japan achieved a dramatic growth in the post-war period because the government and enterprises worked together as "Japan Inc." in promoting industrial policy. Contrary to the belief, however, there has been severe competition among domestic enterprises in the automobile, semiconductor and some other industries that were the driving force behind the economic growth. Conversely, inefficient enterprises have been protected by regulators and have lost their competitiveness during recession in areas such as financial and transportation services. The government did restrict competition in some industrial fields by introducing exemptions from competition law enforcement. Yet it did so in declining industrial fields that lost international competitiveness, such as textile, fertilizer and sugar.

Second, it has been noted that state monopoly, state-owned enterprises and conglomerates tend to become inefficient because of irresponsible management and the lack of competition. One might argue that domestic situations of each economy be taken into account in discussing whether they should be retained. It has been widely recognized, in particular, that state-owned enterprises are vital to build infrastructure such as transportation and communication network and public utility. Governments have traditionally played a leading role in building infrastructure because of its public nature and economic scale. Sometimes the duplication of investments in plants and equipment or other market failures have also prompted the government's role. However, due to the recent technological innovation and economic globalization, it has become feasible to introduce competition in this area as well.

In 1985, the Japanese Government privatized Nippon Telegraph and Telephone Public Corporation, which is presently known as NTT. Since 1987 active entry of enterprises have taken place in the telecommunications market. The increase in competitors together with technological development have reduced telecommunication charges and substantially raised productivity. If you permit me to quote rather archaic data, according to Japan's Economic White Paper of 1997, the telephone charge between Tokyo and Osaka, at a distance of approximately 500Km, decreased in 1996 to only 27.5 percent of that in 1985. The productivity increased 89 percent from 1986 to 1995, 41 percent of which was estimated to be brought by the reinforced competition.

Third, as to the relationship between the firm size and growth, there seems to be no significant analysis made to prove that the expansion of size improves managerial performance such as profitability, growth rates, productivity and return on equity. Mergers are believed to reduce expenses by synergy effects comprising knowledge sharing, complementarity of resources and integration of functions. Clearly, one needs to conduct a comprehensive and careful analysis case by case concerning those effects. In addition,productivity is determined in principle not by the size of an enterprise but by the production capacity of each plant. Even a small enterprise with a single plant can maintain competitiveness if its plant is efficient. Conversely, a big enterprise cannot be profitable if its individual plants are inefficient.

2. Political and social impacts of competition policy

Next, I would like to turn to the second category of concern, namely political and social impact of competition policy. It is claimed that competition policy could lead to increased unemployment and endanger incumbent industries and enterprises,including regional small and medium-sized ones and that political and social context generated by competition policy cannot be ignored.

Since competition policy expels inefficient enterprises from the market, bankruptcy and unemployment would most likely occur. Such costs of competition policy cannot be ignored in a political and social context. This is true not only in developing economies but also in developed economies. However, it should also be noted that anti-competitive practices, if overlooked, would raise prices, thereby impose excessive burdens on consumers and user industries and ultimately hamper the growth of national economic welfare.

Therefore, a desirable approach would be to increase national economic welfare by actively implementing competition policy on the one hand and to minimize its negative impact on the other, by creating new industries, promoting job mobility and providing relief measures for the unemployed as well as taking income reallocation policies to the extent permitted by social consensus. In doing so, the government should explain to the business circles and the general public to deepen their understanding on that competition policy would produce more economic advantage than disadvantage in the long run, and that the short-run cost of competition policy could be compensated by taking appropriate counter-measures without suspending competition policy.

Now, let me explain the recent Japanese experience. Japan is now making utmost efforts to overcome damages caused by the long recession. The Cabinet adopted a program which is called "Strategy for Revitalizing Industries" in January this year. This program aims at creating employment opportunities and new businesses as well as expanding investment for increasing productivity. In concrete terms, the Government provides incentives for start-ups and venture businesses. The Government also supports incumbent enterprises that have abundant managerial resources by setting conditions for them to improve efficiency in the existing business fields and to develop new business within themselves or do so by dividing themselves, drawing on such resources. Before adopting the program, the Japanese Government had chosen 15 new and growing fields including health and medicare,information and telecommunications services that merit more encouragement and support. These industrial fields were designated in the "Action Plan for the Economic Structure Reform" adopted by the Cabinet in May 1997. At the same time the Government is focusing efforts on greater mobility of human resources with a view to resolving mismatching of employment and improving individual vocational abilities (employability).

3. Priority between competition policy and industrial and other policy objectives

The third category of concern is the policy priorities. Some would say that competition policy should be implemented after achieving economic growth through industrial policy. Others who are more liberal would argue that competition policy should be introduced after trade liberalization, which would realize economic growth. The former view, "first development by industrial policy, then competition policy", attaches priority to the promotion of domestic capital rather than the introduction of foreign capital as a means to economic growth. Behind this view lie not only the desire to have domestic enterprises that they can boast of to the world, but also distrust against foreign enterprises. In other words, they believe that domestic enterprises commit themselves to the economic growth of the country, while multinational enterprises from developed economies could contribute to it to some extent but withdraw from the market once they regard it unfavorable.

The latter view of "first trade liberalization, then competition policy", it seems to me, is based on a thinking that trade liberalization would increase players in the domestic market and leave less room for anti-competitive practices,thereby playing an alternative role to competition policy.

In response to them, I would like to explain my views on the relationship between competition policy and industrial policy and that between competition policy and trade liberalization policy. Further, I will mention import restriction policy, export promotion policy and government regulations in light of their relevance to competition policy, respectively.

First, there is a fundamental question of how far the government support for domestic enterprises would help economic growth. Such a policy may contribute to the expansion of the scale of an enterprise and enhance the national prestige. However, the scale is not directly related to profitability or growth of the enterprise. They have little incentive for efficient management unless they are exposed to competition in the domestic market. Therefore,large enterprises are not necessarily competitive in the export market,either. Nor do they contribute to economic growth or inflow of foreign capital.

In Japan, the government provided various incentives to industries, including favorable taxation treatment,public loans and subsidies. However, it should be noted that the industrial policy was used to promote certain sectors of industries and not to support specific enterprises. In successful industries such as semiconductors, industrial policy was actually applied, but the competition in domestic market was not adversely affected. Software industries, such as TV game software industry have gained strong international competitiveness without any benefit of industrial policy. They have acquired it through vigorous competition in the domestic market. In my view, competition policy is compatible with industrial policy, and industrial policy is not always the requisite for growth.

Second, let me discuss the relationship between competition policy and trade liberalization. There is no doubt that an increasing number of players brought about by trade liberalization reduce the room for anti-competitive practices in the market. In this sense, trade liberalization complements competition policy. However, because successive trade liberalization has diminished tariffs and other border measures, anti-competitive activities across the national border are increasing, and activities in foreign economies sometimes affect one's own market. Furthermore, it should be noted that non-tradable goods or tradable goods with high transportation costs would face no real competition with imports. And even the competition of tradable goods could be affected by existing government measures such as regulations, standards and license requirements. For these reasons, I do not believe that trade liberalization can justify the moratorium on competition policy.

Third, I would like to mention the relationship between competition policy and import restriction policy. Restrictive measures, such as import quota, tariffs and regulations on foreign capital, should be removed from the viewpoint of promoting competition, because these measures limit the scope of the market and the number of players therein. However, developing economies presumably find it difficult to implement competition policy vigorously for fear that such a policy could hinder the efforts to develop domestic capital.

In regard to this problem, I would like to point out that the promotion of competition policy in domestic market should be considered separately from the diminishing of trade barriers. In other words, removal of anti-competitive practices and expansion of the coverage of competition laws are two separate issues. In fact,competition policy becomes more important for economic growth in closed markets that cannot have the benefit of trade liberalization. Therefore, it is necessary to make efforts to implement competition policy regardless of the degree of trade liberalization.

In automobile industry of Japan, for example, there already was vigorous competition among automakers in 1950s. The Ministry of International Trade and Industry was concerned about excessive competition and drew up a plan of a "national car" in 1955. This plan aimed at concentrating automakers into one entity that would produce small and low-priced cars exportable to foreign markets. However, this plan was not realized since one of the companies vigorously resisted it and chose the way to compete. While competition in domestic market was so severe, trade liberalization did not take place until 1964 in case of passenger cars. In the successful auto industry of Japan, the trade liberalization was preceded by competition in the domestic market.

The fourth is the relationship between competition policy and export promotion policy including export subsidies. Export promotion policy would help domestic export-oriented enterprises grow by expanding their market. At the same time, to improve the ability to negotiate with their trading partners on the sale of their goods, such enterprises may be tempted to realize concentration. If they are successful in increasing the volume of their exports, they might be obliged to take measures to restrict competition in export markets, by forming an export cartel or by imposing a voluntary export restraint in order to avoid friction with the importing economies. Furthermore, domestic enterprises could collude to keep the export price significantly lower than the domestic price in order to promote their exports. Such practices apparently run counter to competition law and policy.

Finally, it is desirable that government regulations be constantly reviewed because they limit the scope of the domestic market and the number of players, domestic or foreign. As was widely recognized in the WTO working group on trade and competition,advocacy of competition policy could play a major role in regulatory reform in developing economies.

4. Resource constraints of the competition authorities

Now, the fourth category of concern is resource constraints of the competition authorities in developing economies. It has been argued that institutional and capacity building of competition agencies is the priority for developing economies. In this sense, developing economies should grapple with the task,receiving technical assistance, while developing competition policy in a staged manner, starting from high priority areas. According to such a staged development policy, it has been suggested that in the first stage, restriction of horizontal cartels and competition advocacy should be focused. In the second stage, mergers and vertical restraints. In the third stage, regulatory reform from the viewpoint of competition policy.

I agree that competition policy should be implemented in a staged manner since competition agencies need to strengthen capacities and build the trust of the public. Specifically,primary focus should be placed on those practices that clearly hinder competition. They are, for example, unreasonable restraints of trade including cartels, concerted refusal to deal, resale price maintenance,dealing on exclusive terms and interference with a competitor's transactions. Then, come the practices that restrict competition in a less serious manner and those practices that require consideration of other policy objectives. In Japan, these practices correspond to most of unfair trade practices, mergers and acquisitions and restrictions imposed on subcontractors.

Regarding resource allocations among government bodies and agencies, it is important that more budget and personnel are gradually allocated to the competition agency through active competition advocacy which would help enlighten the public and the relevant authorities on the importance of competition policy.

In this sense, we must give careful consideration to the effective way of advocacy. Competition policy brings benefits extensively but thinly to all users and consumers,while it clearly causes short-run losses to vested interests. The political power of vested interests is normally much larger than that of consumers and makes competition agencies vulnerable to their pressure. Given this tendency, it is crucial to win support for competition policy through advocacy from users, particularly, consumers and the civil society. Academic circles should also be in the pro-competition group because they are often involved directly in working out competition policy. In holding seminars and conferences on competition policy, the competition agency should ensure the active participation of those academicians. Moreover, I would like to stress the importance of the principles of non-discrimination and transparency in enforcing competition law and policy because, if it is enforced in favor of specific incumbents, it could serve as barriers to entry into the market.

III. CONCLUSION

As I mentioned at the beginning of this statement, my intention was simply to present my views on various problems involving the relationship between competition policy and economic growth, with a hope that this may lead to frank exchange of views here. The point I wish to make is that it is necessary to reform existing systems to keep pace with the changes in the time and circumstances as competition policy is gaining its importance worldwide. Many of Asian economies including Japan experienced economic crises in the recent past. It seems to me that this is because their systems have long been protected by border measures and regulations and have more or less become out of date. We are required to promote competition policy in addition to pursuing structural reform and deregulation, so that we can respond to the need of globalizing economy and enhance the productivity. It is quite beneficial, therefore, to share experiences and knowledge among us in the field of competition law and policy.

The Fair Trade Commission of Japan is cooperating mainly with the economies in the Asia-Pacific region in promoting competition law and policy. Specifically, the Commission invites trainees of competition agencies and sends experts when requested. In the Partners for Progress (PFP) program of the APEC, the Commission and the Department of Internal Trade of Thailand have been jointly organizing seminars on competition policy. To implement such technical cooperation programs more effectively, we would like to learn from experiences of the economies represented here today and hear their frank views on the subject.



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