Bespoke competition policy for developing countries

Master Thesis for MS Economics with Specialization in Industrial

Organization, Regulation and Competition Policy

Bespoke Competition Policy for Developing Countries

Author: Dovile Venskutonyte Student Number: 10086102

Supervisor: Prof. dr. Maarten Pieter Schinkel

Abstract

This paper aims to contribute to the existing literature on competition policy in developing countries by proposing a new approach to studying the topic. This approach would potentially lead to better guidelines for bespoke competition policy for countries in different stages of development. A more nuance research method is needed in this field because current policy recommendations vary greatly, empirical literature is based on subjective data and it is not clear what kind of competition intensity is best for developing countries. Our approach, firstly, suggests separating developing countries into sub-groups on the basis of their developmental stage, in this case measured by economic complexity. Secondly, we propose to separate the causal effects that lead from competition policy to development and thirdly, we attempt at expanding the data available for studies on competition policy in developing countries by sending out a detailed questionnaire to developing country competition authorities. Even though he research does not result in empirical research initially intended, hopefully it serves as a useful next step in the way this topic is approached.

Acknowledgement

I would like to thank my thesis supervisor Prof. dr. Maarten Pieter Schinkel for his guidance and Ebru Gokce and Yves Kenfack of UNCTAD for coordinating the sending out of the questionnaire and allowing for this research to be presented at UNCTAD conferences.

Statement of Originality

This document is written by Student Dovile Venskutonyte who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

Table of Contents

1. Introduction

1

2. Literature Review

2

2.1.

Previous Proposals for Competition Policy

2

in Developing Countries

2.2.

Institutional Characteristics

7

2.3.

Empirical Studies of Competition Policy Effects

11

3. Competition Policy and the Developmental Process

19

3.1.

Competition and Development

19

3.2.

Structural Transformation

23

3.3.

Market Structure and Firm Dynamics

27

4. Different Approach to the Study of Competition

32

Policy Effects in Developing Countries

4.1.

Development Stages

32

4.2.

Separation of Causal Effects

35

4.3.

Extension of Available Data

38

4.4.

Outcomes and Challenges

48

5. Conclusion

49

6. References

51

Appendix 1

56

1. Introduction

More than 130 countries today have some type of competition law and most of them are developing countries that have enacted a law relatively recently (Aydin, 2016). However, many developing countries adopt legal transplants of competition policy from developing countries. Emerging markets are structurally different from high-income countries, which gives reason to believe that competition law of developed economies may not be appropriate for them. Furthermore, developing countries have much fewer human and financial resources needed to run a well-functioning competition regime. This raises the question of what type of competition policy is best suited to serve the needs of developing countries, given their economic and institutional constraints? There is a body of literature, which tries to answer this question, yet conclusions of different authors vary to a large degree. The guidelines for policy design are not well substantiated and based on theory and empirical results that apply mostly to developed countries.

Given the differences between developed and developing countries it is likely that optimal competition policy will also differ not only between the groups of developed and developing economies, but among members of the developing group themselves. However, it is not clear to what degree laws and enforcement powers should be different. Even though development can be thought of as a continuous variable, policy provisions are discrete. That implies that for countries that are sufficiently similar competition policy will also be essentially the same with the details tailored to each jurisdiction. In order to develop competition policy that is bespoke to each developing country strides have been made. However, at this point we should be aiming at more concrete guidelines for policy makers in different countries. Here it should be mentioned that through out this paper competition policy is referred to as competition law, that includes antitrust and concentration control, as well as its enforcement rather than a country’s broader policy on competition, which includes industrial policy.

In order to develop bespoke competition policy for developing countries, this paper asks the question of what type of approach to research should be taken and proposes a new method to empirical analysis. The first part of this paper reviews the existing thought on different proposals to competition policy in developing countries and how policy depends on institutional characteristics. Then we review existing empirical literature on the effects of competition policy on growth and other macro level indicators pointing out some

shortcomings, which are obstacles to this type of research reaching reliable conclusions that can inform policy makers. The second part looks at a country’s developmental process and tries to point out how different levels of development may influence an optimal degree of competition and hence competition policy. Lastly, we propose a new approach to studying competition policy in developing countries. Firstly, developing countries should not be treated as a monolith and instead divided into groups or stages of development based on characteristics relevant for competition policy. Secondly, the path that leads from competition policy to development should be broken down to its main steps and causal effects, which should be studied separately to determine points at which particular provisions can help or hamper a country’s development. Thirdly, this paper attempts to tackle one of the largest problems in this area of research, which is the lack of available data. In this research process a questionnaire has been sent out to developing country competition authorities through the United Nations Conference on Trade and Development (UNCTAD) in an attempt to collect data relevant for the proposed research approach.

Even though this paper does not conclude with concrete policy recommendations or an empirical analysis, due to the lack of data collected, it provides some insights into the potential differences in competition policy in developing countries and an outline of a new way of looking at this topic.

2. Literature Review

2.1 Previous Proposals for Competition Policy in Developing Countries

This section discusses the broad range of proposals for different approaches to competition policy in developing countries. There seems to be convergence on the point that developing countries should adopt some type of competition law, yet recommendations on what the goal and scope of that law should look vary widely, from a minimalistic approach to an extensive one, where points that are not even considered in developed country laws should be determining factors in the competition law of developing countries such as the effects an action or agreement between firms has on the poor. Despite much thought being given to this topic, there is yet a concrete and detailed proposal for what a competition policy should look like in a developing country or groups of developing countries.

Godek (1998) advocates for a minimal competition policy, especially in developing countries. He stresses that the potential benefits of regulating competition are not relevant, if they cannot be realized. The argument for a narrow competition law is even stronger in developing countries due to the difficulties in gathering data from firms and distortions of corruption in the law’s application. The article, which concentrates on transition economies in Eastern Europe in the 90’s, argues that adopting a large scope competition policy in these countries would be an error in prioritizing and a waste of resources due to the more pressing needs of developing countries. Lastly, he states that for small economies free international trade should act as a sufficient catalyst for domestic competition. Hoekman and Mavroidis (2003) affirm this point. When discussing the possibility of an international competition law regime, governed through the WTO, the authors state that such a policy would burden developing countries without significantly helping them remove anti-competitive practises. A more helpful approach would be for the WTO to oblige developed economies to fight against anti-competitive practices of multinationals in their own jurisdictions, while taking into account their effects on developing countries. Most importantly, the authors argue that the traditional liberalization of trade under WTO rules and removal of entry barriers would have a more significant effect on stimulating domestic competition that antitrust enforcement.

Sheth (1997) provides one the first attempts at describing a law more appropriate for developing countries, taking into account their different characteristics. Firstly, she argues that the US and EU laws are not appropriate for developing countries, because they require greater competition authority capacity, qualified judges and case law (in the case of the US) and because they are made for much larger economies that function differently. Instead, they should adopt: per se prohibition for horizontal collusion with stricter rules and penalties than those of the US and EU; very strict prohibitions against abuse of dominance, even pricing above own costs, but below a small competitors should be prohibited; mergers should be reviewed based on rule of reason in order to consider efficiencies, vertical agreements should not be illegal unless harm to competition can be proven, because they are prevalent in developing countries to the point where almost all businesses have agreements with their downstream or upstream partners.

Fox (2012) argues that developing countries should tailor their laws to best contribute to sustainable development and poverty alleviation. However, it is not clear whether such a

law would significantly differ from international standards of competition policy. The author gives six alternatives from which developing economies could draw inspiration in writing their own laws:

1. The US model: minimal scope of law with an emphasis on efficiency and free

enterprise principals, even when firms are dominant.

2. The US+ model: the core of US law, but adjusted to fit the market realities of

developing countries, such as prioritize potential entrants in monopolized markets instead of protect business freedom.

3. The EU model: a law that emphasizes market access and anticompetitive actions of the

state, especially in public procurement.

4. A combination of other developing country laws: a law that would bundle

competition policy features from different developing jurisdictions that have already built a comprehensive competition law. This model would especially draw influence from the South African law, which emphasizes poverty reduction and the benefit of previously marginalized groups.

5. The fairness model: this law would take into account how some companies have

benefited from colonization and imperialism, which now gives them an unfair advantage. It would also consider the far superior financial conditions of multinational firms.

6. The bespoke model: this law would be tailored to each countries needs, while taking

parts or inspiration from existing competition laws around the globe.

Even though the author stresses that developing countries should create their own laws, rather than copy from Western economies, she also sates that it is important not to presume that all countries should have significantly divergent laws, as there will be some basic principles that apply to all or most. These six options provide a starting point for tailoring competition law; however encompass a very broad variety of laws. A great deal of analysis needs to be done to narrow down the above list to more precise policy prescriptions.

Waked (2016) provides a different perspective altogether, stating that, regardless of what law would be best suited for an individual country, most of them have already legislated competition laws that are very similar to those of developed countries. In many cases due to international pressure and as a condition of trade agreements or accession to international organizations. Hence, these countries should concentrate on a strategy of

enforcing the law in a way that would best fit their needs and support development. Waked (2014) also discusses the different goals of competition policy that developing countries could adopt. At the moment most of them have “protection of competition” as the formal goal. The author states that developing countries should aim their laws at improving innovation and dynamic efficiency, which would spur their growth. However, it is not clear whether a more or less prohibitive policy would ensure this. In fact, no jurisdiction has a well-rounded competition policy that aims at dynamic efficiency, because it is quite difficult to determine ex ante what decisions by a competition authority would lead to more or less innovation. Even though any country would benefit from more dynamic efficiency and innovation, such a policy would be quite complex and hence, likely, unattainable for most developing countries.

Budzinski and Haji Ali Beigi (2013) give some more concrete policy recommendations for countries they define as “industrializing”. Even though there is not a precise definition, some characteristics of these countries are given, such as very concentrated and inefficient markets that are dominated by state-owned firms and have high entry barriers; a large informal sector; corruption and private sector capture; lack of human capital and social mobility as well as a lack of a culture of competition. The approach to competition policy proposed in the article is not very different from that of developed countries, but advises developing countries to have different priorities and err on the side of generating competition, with the assumption that more strict laws would do so. Firstly, the authors propose to take cartel agreements as a priority and establish clear laws against hard-core cartels, without exemptions, even with regard to R&D cooperation. Secondly, in concentration control, authorities should prevent mergers to monopoly or duopoly, but be more lenient in mergers to oligopoly. In the authors view, it is also better for developing countries to prevent mergers that would lead to efficiencies than to allow mergers that will lead to anti-competitive effects. Thirdly, in abuse of dominance cases, priority should be given to the protection of entrants and new firms, rather than incumbents. Lastly, the authors stress the need of creating a culture of competition, which means that all anti-competitive acts should be treated as per se illegal regardless of firm market share, rather than illegal on the basis of their effects.

Cook (2002) offers a more cautionary approach. In his review of the potential differences of appropriate competition policy between developed and developing countries, he states that competition and development may be harmed due to over-enforcement and the

prohibitions of agreements and actions that in some cases can be anticompetitive and harmful, but in others create efficiencies that developing countries desperately need. This is especially applicable for vertical agreements such as exclusive dealing. An example presented involves a producer that grants exclusive rights to a distributor in order for him to be able to invest and develop the market further, without loosing his profits to competitors. As for horizontal agreements, there are many examples of joint ventures that allow firms to invest in innovation and market development that would not otherwise be possible. There is also the danger that a competition authority would star breaking up dominant firms or monopolies that require scale to achieve efficiency ad be competitive on the international market. Furthermore, Cook stresses a problem repeated in previous and subsequent research that developing countries do not have the financial and human resources or a sufficiently low level of corruption to establish a well-functioning competition authority capable of enforcing laws with minimal error. Considering that the distinction between an efficient and harmful agreement, action or merger between firms is difficult to identify and often requires a lot of economic analysis and access to data, developing countries are likely to prevent beneficial actions of firms and hence hamper their development. Also corruption and state capture by private interest is a major concern in developing countries. There is the possibility hat competition policy would end up being another tool for rent seeking for government officials and private actors and would make the purpose of competition law redundant.

Singleton (1997) argues that because developing countries are not able of establishing competition authorities that could effectively carry out all of the duties and enforce all of the policies of developed economies, they should instead concentrate on entry and minimizing rent seeking. Entry is undoubtedly crucial for a competitive economy and developing countries are plagued with state caused infringements on entry and other barriers arising from the lack of development, such as the lack of capital and infrastructure. The author states that these countries’ authorities should first aim at identifying legal barriers and removing them as well as fighting against barrier building anti-competitive activities such as resource foreclosure by dominant firms.

The most popular opinion today seems to be that developing countries need a competition law that is not only enforceable, but also takes into account the different characteristics of developing economies. Although suggestions for these different types of laws have been made, there has not been a sufficient convergence between the fields of competition and

development economics to determine an appropriate law fit for developing countries (Lianos et al, 2012). Developed countries also have different competition regimes, however they have been converging in the past decades and are based on the same principles (Evans, 2005). It is not surprising that the laws are not identical, however the question of how different they should be and based on what factors, remains to be answered.

2.2 Institutional Characteristics

Even if the scope of competition law that is most appropriate for each country’s level of economic development were developed and substantiated by theory and empirical evidence, it would not serve a practical purpose if the country’s institutional characteristics prevented it from implementing and enforcing the written law. This is a major concern, discussed by scholars mentioned in the previous section and by policy makers. A study of 183 countries in an 18-year periods shows that the greatest political determinants of competition policy adoption are democracy and a government on the left side of the political spectrum. It also shows that countries with weaker rules of law are more likely to adopt competition policy (Parakkal, 2011). Considering that many developing jurisdictions adopt legal transplants of competition law from developed countries there is a risk that some of them will enforce law in an inefficient or even harmful way. Therefore, not only the economic characteristics of the country should be considered when writing competition policy, but also the policy should be adapted to the resource constraints of the agency and the institutional characteristics of the country.

Firstly the resource constraints of the country and hence the competition agency should be considered. The lack of both, economic and human, resources is one of the main reasons, why legal transplants from developed countries can fail. This can potentially mean that the written law should be simpler and involve less complicated analysis. For example, merger review is very time and resource intensive process, if ex ante notification is required. Many developing countries do not have the capability to conduct merger review in a timely manner with few errors. Furthermore this process would detract focus from other important areas of competition policy. A potential solution would be to set a high enough threshold of market share, below which mergers would be approved without review, and a threshold above which all mergers would be prohibited (Gal, Fox, 2014).

Some competition law provisions such as efficiency and public interest defences require a large scope of economic analysis. Properly considering and weighing the harmful and beneficial effects of various actions is difficult for well-funded developed country competition agencies, not to mention their resource strapped counterparts. It may be more reasonable for developing countries to avoid such complex tasks and instead set clear objective rules for enforcement. However, this would require the agency to settle on which side to err on. Should the agency presume that in most cases the anticompetitive effects of a large merger, agreement or other action by firms would outweigh the potential benefits or the other way around? Out of 75 developing and developed countries studied, 88% had some form of public interest defence. Also, it was found that having such a defence does not depend on the countries level of development (Reader, 2016). Considering that some authors discussed in the previous section recommend a pro-poor competition policy with a strong public interest and that innovation arising from dynamic efficiency, as discussed in subsequent sections, are very important for development, we are left with a difficult dilemma of policy design for resource strapped countries.

Another important institutional characteristic is the level of corruption. Developing countries on average have much greater levels of corruption than developed ones and the level of corruption is highly correlated with income per capita albeit a few exceptions. Furthermore there are no clear and effective guidelines on how to fight corruption and reduce it relatively quickly (Svensson, 2005). Corruption affects the effectiveness of competition policy and the scale of anti-competitive practices in a country. Senior officials in the competition authority may be influenced by various interest groups and hence make biased decisions potentially causing more harm to competition (Gal, Fox, 2014). It is important that the competition policy and authority design would minimize the distortions of corruption to law enforcement and prevent harm as much as possible. In some cases it may be beneficial to remove otherwise beneficial provisions due to their particular susceptibility to corruption. One such possible example is cartel leniency.

Leniency programs in anti-cartel policy have been one of the most successful policy tools to uncover and prosecute cartels. However, leniency can only be effective under certain conditions. Firstly, there has to be sufficient risk of detection, meaning that the competition authority has to have enough resources and a successful history of uncovering cartel agreements. Secondly, fines for participating in a cartel have to be sufficiently large. If these conditions are not met, the decrease in prices after a cartel is dispersed will be too

large to cover the potential gain from leniency and will be unwilling to report their collusive activity to the competition authority. Because of these conditions the very nature of leniency programs may build a foundation for corruption to foster, if legal institutions are not developed and transparent (Harrington, 2015).

Leniency in anti-cartel policy provides two types of perverse incentives for the competition authority. Firstly, corrupt officials may engage in rent seeking through extortion of cartel members. If the fines are high, as needed for a successful leniency program, authority officials could potentially request bribes once a cartel is uncovered in exchange for leniency. This has happened in 2006 in Greece. The director of the Hellenic Competition Commission has been found guilty of demanding a bribe of 2.5 million euros from a large dairy company MEVGAL, which had been participating in a price fixing cartel. In exchange the company would be granted leniency against paying a 25 million euro fine. The company reported the director. However, this case shows how leniency can be abused. The higher the potential fines are, the more likely it is that a cartel member would pay the bribe, but if the fines were not high enough leniency would not work. Furthermore, if the potential rents from extortion are large, it is more profitable for government officials to engage in this type of corrupt activity, therefore having a leniency policy may tempt more authority employees to take part and further deteriorate transparency and of the institution.

It is also necessary to note that the case happened in a developed, high-income country with a relatively good development of legal institutions. It is even more likely that such behaviour could take place in a developing country, where transparency in government bodies is much lower. In the case of Greece, the dairy cartel indeed took place, however it is not necessary for a cartel to exist in order for competition authority officials to abuse leniency programs. Furthermore the availability of leniency in combination with corruption can lead to over reporting of cartels to extort bribes or simply to create the impression that the agency is very active and effective (Stephan, 2008).

Kovacic and Lopez-Galdos (2016) study the life cycles of different competition authorities in developing countries. They find three distinct patterns of an agencies performance over time. Some agencies such as those of Venezuela, Argentina, Peru and Ukraine demonstrate high levels of activity and performance in the years just after establishment, which then fall rapidly. There are several reasons for their decline. Firstly, in some cases the authority is first lead by a very competent head, yet the institutional foundations and

processes are not well cemented, hence the agency declines once the head is replaced. In the cases of the other three example countries political problems and unrest were the causes of the agencies decline. Ukraine is a special example, since its decline was caused by military conflict, however Argentina’s competition agencies decrease in performance was caused by the emergence of scepticism towards market-oriented reforms.

The second patter, such as exhibited by the Dominican Republic, Paraguay and Thailand, is one of a flat line, where the agency never experiences an increase in activity. In most cases this is caused by a lack of resources allocated to the agency and a lack of political support. In the previous three examples the governments inability to fully and consistently establish the agency and appoint leadership caused the lack of outcomes.

The third patter is that of a steady increase in activity and accomplishments, which in some countries occurs faster and slower in others. Authorities in countries such as Brazil, South Africa, Mexico and Kenya show such a pattern. Although the path has successes and failures the overall trend in these countries is upward slopping due to political support and sufficient resources. Unfortunately, the authors stress that the first group of fast growing and then declining authorities have been shown as examples of competition authority success in their earlier years, while the steady growers were not. This is concerning, because it can give the wrong impression and hence misguided policy recommendations for competition policy and the readiness of institutions in developing countries to adopt it.

The authors also summarize the factors necessary for successful competition policy implementation in developing countries. These include economic and human resources political support, well enough developed institutions and lack of corruption, self assessment and learning of the authority, international cooperation and a good alignment of programs and capabilities. The necessity of the first characteristics is relatively straightforward, yet is important to stress the last one. If a competition agency adopts laws that it cannot enforce it may loose credibility and hence public support. Furthermore, if it makes many errors or is inconsistent the agency can create a climate of legal uncertainty and even damage the already fragile economy. Therefore, Kovacic and Lopesz-Galdos recommend that newly established authorities would focus on building their capabilities, training staff and strengthening the institutional background, while leaving actual enforcement as a second priority. This safe approach is reasonable, yet not without

criticism. Burke et al (2017) state that capacity building and enforcement should be equally important priorities and that by no means can enforcement be neglected. They argue that in order to retain and increase public and political support and hence more resources the authority needs to show results and build enforcement credibility. In order for competition policy to work the risk of detection and prosecution must be sufficiently high, which can only be demonstrated through a sequence of successful cases.

It has been noted in the research in the previous section that instructional characteristics are important for competition policy enforcement. However, the recommendations to improve institutional quality and reduce corruption or to funnel more resources into the competition authority are not very instructive. There is no clear path to achieving desired institutional characteristics and it cannot be done in a short period of time. Institutions develop with the country and improve together with other descriptors of a countries development. Therefore, when deigning competition policy institutional characteristics should be take as a given, unless they can be easily changed. It should also be considered if at a given level of institutional quality certain aspects of competition policy, such as leniency, might be harmful and therefore best avoided.

2.3 Empirical Studies of Competition Policy Effects

This section reviews empirical studies that have used some type of competition law indicator to estimate its effects on economic growth concentrating on developing countries.

Firstly, it is necessary to point out that many studies use survey data, gathered by the World Economic Forum (WEF) in its annual Competitiveness Report. The data that relates to competition and competition policy refers to the following questions (Schwab, Sala-i-Martin, 2018):

1. Intensity of local competition: 
In your country, how intense is competition in the local markets? [1 = not intense at all; 7 = extremely intense]


2. Extent of market dominance: 
In your country, how do you characterize corporate activity? [1 = dominated by a few business groups; 7 = spread among many firms]

3. Effectiveness of monopoly policy:
In your country, how effective are anti-monopoly policies at ensuring fair competition? [1 = not effective at all; 7 = extremely effective]

These together with 13 other questions asked of business executives in a global survey form the 6th _{(Goods Market Efficiency) pillar of 12, which are used to determine the global} competitiveness index that is supposed to represent an economy’s’ competitiveness relative to other countries. The methodology of this report has been criticized of being biased and vague, therefore should be take with a grain of salt (Lall, 2001). However, scholars use this data to proxy the intensity of competition, mainly because there are not many better options available to study market competition on a macroeconomic level.

Probably the most extensive study of the effects of competition policy was done by Buccirossi et al. (2011), where indexes of both scope and enforcement abilities are regressed on TFP growth, using a large variety of control variables. The effects found are significant and positive, which strengthens the argument in favour of competition policy enforcement. However, the study is performed on 12 developed high-income countries, therefore does not address the impact on developing countries.

One of the first studies on the effects of competition policy was performed by Dutz and Vaglaisindi (2000) for a sample of transition economies in the late 90’s. The authors study the effects of competition policy enforcement on firm mobility, measured by how often the firms expanded their labour force in a three-year period, taken as a share of all firms, weighted by the corresponding share of firms that saw and increase in labour productivity. The indicators for policy enforcement capture advocacy, effectiveness of institutions and the extent to which the law is enforced and are measured by largely objective data. The findings show that simply having a competition authority and law does not affect firm mobility, but that the extent of law enforcement has a significant and positive effect. This supports the expected result that competition law without adequate enforcement is not useful.

Nicholson (2008) developed a simple index to measure the scope of antitrust law. The index covers all of the most important provisions of competition law, including the merger review process, remedies, private enforcement, prohibitions against vertical and horizontal constraints and abuse of a dominant position. The existence of a particular prohibition scores the country 1 point, with a maximum possible score of 32. Other researchers have used this index to study the effects of competition law on a few output measures, but Nicholson uses it to se what determines the scope of the law itself. The first interesting

finding is that even though US is judged to have the broadest scope, developing countries have as high and sometimes even higher law indexes than other developed countries, such as in Western Europe. Also, the strength of the rule of law has a negative impact on the scope of the index, as does the effectiveness of antitrust policy, as measure by WEF survey data. The author mentions that the econometric method used in the study is not very robust, therefore it is difficult to draw firm conclusions.

Dalkir (2007) investigates three relationships with regard to competition policy in both developed and developing countries. Firstly, he uses the before mentioned antitrust law index (Nicholson, 2008) to test its effect on the WEF measurement of antitrust effectiveness and finds no significant effect. He also finds that the budget and staff of the competition agency are insignificant effectiveness predictors when controlling, whether the country is developed and a EU member or candidate. Years of competition laws being in place also have a positive influence on effectiveness, which suggests learning by the competition agencies. Lastly the study regresses the effectiveness of antitrust on FDI inflows and finds that a unit increase in the WEF rank increases FDI inflows by 66%. Since the effectiveness index is not influenced by the scope of laws on the books, but heavily influenced by the countries development may suggest that it is the rule of law more generally that causes the WEF rank to be effective.

Hylton and Deng (2006) expand the scope index (Nicholson, 2008) to 102 countries and include a few more provisions of antitrust law. They then try to estimate its impact on the perceived competition intensity, once again measured by the WEF indicator. The scope index has a significant yet very small effect on competition intensity. An improvement on Nicholson study is that Hylton and Deng also separate the various components of competition policy and measure their effects separately. The largest positive effect is that of the provisions for private enforcement, followed by concerted practices; merger regulations have no significant effect and abuse of dominance surprisingly has a weak negative effect on competition intensity. The authors also regress the scope index on a potentially objective measurement of competition intensity which s Purchasing Power Parity (PPP), yet find no significant effect. This study also addresses a major problem in any regression of a competition law index on the intensity of competition, which is the possibility of reverse causality. Meaning that a country with more intense competition may be more likely to implement the rules to protect and govern in. This study attempts at a IV regression with legal origin of the countries legal systems as the instrument, yet find that it

has no significant effect on the likelihood of adopting competition policy. In the authors own view the study is more of an introduction into the empirical research of antitrust law, rather than a source of concrete evidence.

Romano (2015) looks at whether the perceived effectiveness of competition policy has an effect on growth, by regressing the WEF survey indicator on GDP growth using the traditional controls of the Solow-Swan model: population growth, mean years of schooling, initial GDP per capita, gross capital formation and trade openness. A fixed effects regression for 138 countries over a 5-year period shows a significant positive effect on growth.

Clarke (2011) tries to estimate the impact of competition policy and trade policy on competition intensity and innovation in 27 Eastern and Central European economies. Firstly he regresses a competition policy index, average tariff rates, representing trade policy, and some country and firm level controls on the perceived intensity of competition. Like in most other studies of this kind, competition intensity is measured by enterprise survey data, in this case conducted by the Business Environment and Enterprise Performance Survey II in 2002. Three questions in the survey are used to estimate competition. The first one is the managers perception of demand elasticity, more precisely, his belief of the impact on sales caused by a unilateral 10% increase in price. The index ranges from 0 (no loss of sales) to 4 (a vey large decrease in sales). The second and third indexes represent pressure to innovate from foreign and domestic rivals respectively. These indexes range from 1 (pressure is not important) to 4 (pressure is very important). The measurement for competition policy only represents merger notification laws. The variable takes on the value of 0, if there is no requirement for merger notification, 1 if notification is voluntary, 2 for post-merger and a value of 3 for pre-merger notification. It is unclear, why the author did not include other areas of competition policy. As expected, competition policy index has a significant positive effect on competition. On average 18% of firms in jurisdictions with no merger notification stated that they would suffer a large loss in customers if it raised prices as opposed to 27% in countries that require pre-merger notification. The pressure to innovate from foreign companies is small but positive and significant, however domestic competitor pressure is insignificant. However, it is not clear, if the extent of merger laws is representative of the extent of all competition laws nor is there any measurement to account for the enforcement of laws on the books.

The second part of the study addresses the effect of a combined index of competition on innovation, measured with two dummy variables that show whether the firm had introduced a new product or a new process of production in a three-year period. As expected the pressure to innovate from foreign and domestic firms increases the likelihood of innovation, however perceived price competition intensity has a significant negative impact on innovation. Overall the findings showed that firms under the pre-merger notification requirement were 0.5 % more likely to develop new products, but 0.9% less likely to implement new technologies in their production process. Hence, the overall effect of competition policy on innovation is ambiguous.

Clark (2003) estimates the effects of competition law and enforcement on FDI inflows on a sample of developed and developing countries for the period from 1985 to 1999. The study measure the impact of a dummy variable that shows whether the country has any competition law in a particular year as well as the impact of competition policy enforcement measured by the WEF survey data. Contrary to expectations, neither one of the competition policy indicators has any significant effect on the inflow of FDI.

Voigt (2009) uses 4 indicators of competition policy and its enforcement to study their effects on TFP and corruption for a sample of both developed and developing countries. The first indicator describes the basis for competition law and includes its existence, years of enforcement, goals other than competition included in the laws objectives (the number of additional objectives decreases the index) as well as the number of prohibited practices. The second indicator represents the extent of an economics in competition law and includes the extent to which economic concepts are used, whether a rule of reason approach is used as opposed to per se rules and the extent to which remedies and efficiencies are considered. The third and fourth indicators describe de cure and de facto independence of the competition agency respectively. In the regression analysis most of these indicators are found to be insignificant or extremely weak except the de facto independence of the authority, which the author interprets as the importance of greater quality of institutions as opposed to scope of laws on the productivity of firms. Another interesting finding is that when the sample is reduced to only developing countries a significant predictor of TFP is a subcomponent of the first indicator - the number of goals other than competition. It appears to be better for developing countries to have only competition as a goal, however the regression suffers from omitted variable bias and therefore no firm conclusions should be drawn.

Gutman and Voigt (2014) then extend the previous study of competition policy in developing countries with a difference-in-difference approach. In this study they tests the effects of an enactment of competition policy on a variety of dependent variables, including GDP per capita growth, TFP growth, corruption, trust in government, effectiveness of competition law (as determined by expert evaluations), FDI inflows and some subjective variables, measured by survey data. A number of time windows are tested, ranging from 6 to 12 years both before and after the enactment of competition law. The results show a moderately (footnote mostly at 10% level, 7 years 5%) significant positive effect on GDP per capital growth and a very large significant effect of the investment share of GDP. Corruption is also significantly affected by competition law, but none of the other objective indicators are. Interestingly, when the measurement of competition law is divided into its subcomponents: remedies, merger control, restrictive practices and abuse of dominant position no additional effect is found, which suggests that the mere presents of a law is what drives the positive effect on growth rather than the actual scope. This is an odd finding which raises the question of whether the law enactment indicator does not capture the reforms that were put in place, accession to WTO, IMF loans or WB assistance, which, as discussed often went had-in-hand with competition law enforcement. The author does control for periods of democratisation and liberalisation, however it is not described how these indicators are actually composed and whether they include the mentioned factors.

Ma (2011) conducted one of the few studies that groups countries on the basis of their development. The study test the effects of the scope of competition law, measured by an indicator developed by Hylton and Deng (2006), and an enforcement efficiency proxy measured by an indicator that describes the wider quality of institutions and government efficiency, on TFP growth. The greatest contribution of this study is that a threshold analysis is used to divide countries into a rich and poor group. However, the countries are subdivided not based on GDP or income, but an indicator that represents trust in institutions and the wider society. A significant threshold is found and the regression estimates for the two groups are very different. Furthermore, it is found that the scope of the law has no significant effect on TFP growth by itself and that the efficiency of government institutions is necessary for its effectiveness, where the higher the effectiveness of institutions the more an increase in the scope of law improves growth. The results also show reason for caution when implementing competition law in developing

countries, because the finding show that in some cases countries with inefficient institutions can experience a negative effect of competition law scope on growth.

Key and Hoekman (2007) test the effects of the presence of competition law on objective measures of competition, namely industry mark-ups and the number of firms. They use a sample of 28 industries across 42 developed and developing countries over an 18-year period. The results show no significant effect of competition policy on price mark-ups, which suggests no direct effect of competition policy on pricing, however the effect on the number of firms is significant. The show that over a 4 year period competition law increases the number of firms by 37% and 29% in a 25 year period. The study suggests that competition law may improve competition indirectly, through stimulating entry.

Krakowski (2005) estimates the determinants of competition policy effectiveness and then its effects of competition policy intensity. He finds that competition policy effectiveness is significantly influenced by the general effectiveness of institutions and the years since competition law has passed. The intensity of competition is also significantly influenced by the effectiveness of competition policy. There is however a problem with the approach. Both the effectiveness of competition policy and the intensity of competition are measured by the same WEF survey, only two different questions. Enforcement effectiveness is measured by asking business managers whether they think that their anti-monopoly policy is effective at promoting competition and intensity is measured by asking whether competition in the market is low or high. It is unsurprising that a person, who would indicate effective policy enforcement, would also indicate higher competition. Considering that there are very few controls used in the regression, it is unlikely that these results accurately represent reality.

Pardolesi and Sama (2016) also use the WEF survey data to estimate the effects of competition law and competition authority characteristics on growth. The find that the law itself does not have a significant effect on growth, but that the independence of he authority does have significant positive effect on growth in developing countries, especially in low-income countries. The authors state that this could be due to the very poor quality of institutions in the former countries, which means than an independent authority would suffer less from government interference.

Preston (2003) in a review states that there seems to be consensus among policy makers that competition policy is beneficial for developing countries, yet that there are very few empirical studies carried out to affirm this agreement. Reasons for the lack of research, at the time, were the difficulty of separating the effects of competition policy and other policies enacted simultaneously, such as during the liberalisation period of Eastern Europe; the fact that most developing country authorities and laws are very young and may not show effects yet; the unavailability of data on market structures and the difficulty of finding an indicator that would approximate the intensity of competition in the whole economy. These factors remain to be the main reasons for the lack of empirical evidence to illustrate the effects of competition policy in developing countries.

The lack of objective data seems to be the biggest obstacle to research. Firstly, because an accurate measurement for competition is difficult to construct on a market level and even more so on a macro level. Furthermore data on market characteristics in developing countries is difficult to obtain. A cross-country analysis would require a dataset that is simply unattainable at this point. Also data on competition law and its enforcement is scarce and not available for a range of years. Some of the above-mentioned studies have sent out their own questionnaires, yet they only represent the written laws, whereas there is no data set, to my knowledge, of the actual enforcement and other activities in developing countries. Since the lack of enforcement or erroneous enforcement is a potential issue, it is crucial to empirically study the direct effects of competition policy rather than use written laws and authority powers as proxies.

For example Thailand passed a competition law in 1999 and received many complaints, however failed to make any prosecutions to date (Lai, 2017). The reasons for poor enforcement are the lack of government capabilities and transparency due to which the public suffered from anti-competitive practices. In one analysis the author states that it may have been better to postpone the 1999 legislation until the country reached a more mature political state (Nikomborirak, 2005). If we were to include Thailand in an empirical analysis as having a competition law without further detail and regressed such an indicator on growth, the country would contribute to a result of a positive effect of competition law on growth, since it grew dramatically from a low-income to an upper-middle income country in the time it had a law. However, it can be argued that such a result is misleading, since the government did not enforce the law in that period.

Even though the empirical work discussed in this section provides valuable insights into the relationship between competition policy and economic performance it is far from making reliable conclusions that could be used as guidelines to design policy. The results among these studies are mixed and the data used is not objective. Furthermore, results studies that focus on one subset of developing countries, for example Easter Europe in the 90s, cannot be generalized to other countries, such as Sub-Saharan Africa, since they are too different. If it can be claimed that the groups of developed and developing countries are sufficiently different to demand substantially different competition policies, it is also true that developing countries higher on the development ladder should be distinguished from ones lower in their developmental process.

3. Competition Policy and the Developmental Process

3.1 Competition and Development

There is a number of ways in which anticompetitive practices harm developing countries. Firstly, anticompetitive agreements such are damaging to the consumer. Ivaldi et al (2016) estimate the damages of 200 hard-core cartels in 20 developing countries across an 18-year period and find substantive harm on an aggregate level. In the worst example of South Africa in 2002 6.38% of sales relative to GDP were affected by cartels, whereas in South Africa in the same year and in Korea in 2004 cartel excess profits reached 1% of GDP. Especially the poor are affected by increased prices and less access to basic goods. Poverty is the most immediate problem in developing countries and has an enormous human cost. Cartels have been found in staple goods sectors such as bread, meat, sugar and other basic foods. Lack of access to staple products is not only devastating at the moment, but also prevents the poorest parts of the population to spend their income on education and save, which further regresses their progress.

Secondly, anticompetitive practices in sectors, which are fundamental to the development of infrastructure such as cement and construction, have been found in developing countries. Large prices in these sectors can prevent resource strapped governments from pursuing infrastructure development that is fundamental to fostering entrepreneurship and economic growth. Thirdly, in developing countries dominated by the agricultural sector small farmers have been found to be exploited by larger buyer firms, which not only

impoverished them, but also hampers the development of the agricultural sector (Jenny, 2006).

It is clear that there are competition infringements that should be removed and prevented to foster development. However the broader relationship between competition and development in developing countries is less clear. Even though research described in the literature review has given many examples of anticompetitive practices and stated that many developing countries show lower levels of competition others such as Glen et al (2003) show that corporate profitability is more persistent in developed than developing countries, which indicates that competition is more intense in emerging markets. However, we cannot make firm conclusions on the level of competition in developing countries. Furthermore, it s not clear whether competition is always better. Singh and Dhumale (2001) argues that the notion that a maximum degree of competition is best for developing countries should be scraped and that researchers should search for an optimal degree of competition instead, taking into account dynamic efficiencies.

When discussing economic development, examples often cited are those of Japan and South Korea, which over a short period of time managed to achieve enormous strides in growth and now find themselves among the richest countries in the world. They are also interesting, because of the government policies chosen to spur this development. Both countries did not stimulate competition for much of their development. Especially Japan, which imposed restrictions on competition and stimulated the formation of large conglomerates that competed amongst themselves for government investments. In spite of the government’s policy to foster competition among oligopolies, market concentration gradually fell. This indicates that the relationship between competition and growth is reversed. Meaning that it is not competition that leads to growth, but growth fosters more competitive markets. Dynamic competition that leads to technological progress rather than static competition was the goal of Japan and South Korea (Amsden, Singh, 1994). Whether or not such policies are feasible and would be effective in developing countries today is not clear.

Evenett (2005) in a literature review states that there are arguments for and against competition in developing countries relating to its effect on innovation. Against competition the first point is the Schumpeterian argument that monopoly profits incentivize firms to invest in innovation and that large firms have more funds to do so. This is especially true in

developing countries, where due to market failures and lack of capital, firms more often have to generate investment capita internally from retained profits, since it is unavailable in banks and equity markets. In addition to Schumpeter’s view, Evenett adds that in order for domestic firms to be able to compete with counterparts from developed economies, they have to achieve scale in the national market, which cannot be done with intense rivalry. In favour of more intense competition is the theory that in order to stay in the market firms will have to reduce costs by innovating; that competition law is necessary to support the process of market liberalisation and privatisation and that such a law would improve transparency, which is important in attracting foreign investors.

Most of theoretical work, on which competition policy of developed countries is based on, focuses on allocative or static efficiency. This type of efficiency presupposes the firm and consumer preferences, factor endowments, available technology and products, which do not change with competition. However, recently more and more attention is given to dynamic efficiency, which does not have a universal definition, as does static efficiency, but represents the new products and production technologies that arise through the competitive process. It is undoubted that innovation is the leading contributor to growth, however, it is not clear what kind of competition will lead to most innovation and competition law does not reflect the importance of dynamic efficiency (Kerber, 2007). It is even les clear, how such a process would look like in developing countries, which are plagued with market failures and what kind of competition authority intervention would be best suited to generate dynamic efficiency. If the goal of competition policy in developing countries should be economic growth and the poverty alleviation that comes with it, dynamic efficiency should certainly be considered.

At the centre of the debate on whether competition induces or hampers innovation are the Arrow and Schumpeter views. Arrow argued that competition is the force that leads to most innovation, because monopolists are not interested in investing new technologies that could be appropriated by other firms and erode his monopoly profits. On the other hand, in a competitive market firms must innovate to escape competition, otherwise they will be out of business by more advanced competitors. Schumpeter, on the other hand, believed that large firms in oligopolistic settings innovate the most. There is simply not enough incentive for a firm to spend large sums on research and development of new technologies, if the prospect of gaining market power, even monopoly, is not present. Also,

large firms have the resources to invest in new technology, which under intense competition would be eroded (Shapiro, 2011).

Aghion et al. (2005) combine the two views in their theory of an inverted-U shape relationship between competition and productivity, where the optimal degree of competition is not too many and not too few firms in a market. Whether an increase in the intensity of competition would improve innovation or hamper it depends on the initial number of firms. Starting from a market with very few firms, innovation is low, and Arrow’s reasoning dominates, but as the number of firms reaches a certain number, competition becomes too intense and a decrease in its intensity would incentivize firms to innovate as per Schumpeter’s theory.

There is empirical work on the effects of competition on innovation in developed countries, which give arguments both in favour and against competition. For example, Blundell et al. (1995) in an empirical study of 375 firms listed on the London Stock Exchange have found that it is likelier for firms in less concentrated industries to innovate, however given the number of firms, larger ones innovate more and spend more resources on RnD. However, similar studies in developing economies are scarce.

Some of the few studies in developing countries have mixed results. Aghion et al (2008) in their study of the effects of competition on growth of productivity find that an increase in competition, measured in size of mark-ups, would have a significant effect of 2-2.5% on productivity growth. This is in light of the fact that South Africa has much larger degrees of market concentration than other countries in the same industries. Further results show that the relationship between productivity and competition exhibit he same inverted U-shape relationship as in their study of UK manufacturing firms. However, it is not clear whether this is due to a large degree of anticompetitive behaviour or other factors that characterize the South African economy. Considering that South Africa has a competition law with a very high scope and an active competition authority, these results may imply that competition policy does not have a role in de-concentrating markets in this case. Carlin et al (2004) in a study of survey data of 4000 firms in 24 transition economies found that the existence of competitors as a significant positive impact innovation. However, there is some evidence to suggest that a firm with only a few competitors will innovate more than a firm with more competitors. This result supports the inverted- U hypothesis of the relationship between competition and innovation, but is not conclusive. However, Alvarez

and Campusano (2014) study on the effects of competition intensity of innovation show results that support the opposite relationship between competition and innovation. Their study is an improvement on previous studies in that they use an objective measure of competition – the Boone indicator and the number of innovations in an industry rather than aggregate TFP. They research a sample of 70 exclusively developing countries and find opposite results as studies of developed countries. Competition has a negative and robust effect on both product and process innovation across different sectors and the effect does not exhibit an inverted U-shape relationship. The authors attribute this result to the lack of firms’ ability to appropriate innovation in developing countries.

Implications for Competition Policy

Both theoretical and empirical insights into the relationship between competition and development are mixed. It seems to be that in order for new firms to appear, invest and grow in developing countries some rents should be possible, which implies a relaxed competition policy. On the other hand, profits gained through anti-competitive means without being reinvested reduce growth and development. In an ideal case the government would be able to distinguish between growth enhancing and reducing rents and intervene accordingly (Khan, 2004). The question on whether developing countries have such capabilities remains to be answered but is unlikely to have a positive conclusion. Researches, who study competition policy in developing countries often mention that the governments do not have sufficient human and financial resources to properly enforce competition law and therefore it should be simplified. If this is the case it is very unlikely that the competition authority would be able to carry out such sophisticated analysis on whether or not a particular competition infringement has the potential to result in long-term growth on a case-by-case basis. Hence developing country governments should decide on which side to err on.

3.2 Structural Transformation

In order to even begin to analyse and design competition policy in developing countries, we should think about how they are different from developed ones and from each other. Therefore, we should consider how the developmental process looks like. A countries development is most accurately described by its structural transformation or the transition from a predominantly agricultural to a manufacturing to a service economy. Most countries

follow a broad pattern where the value added share and employment in the agricultural sector decreases as GDP grows whereas the manufacturing sector increases and so does the service sector. Whereas agriculture shows an always-declining trend and services show an always-increasing trend, manufacturing increases in the middle stages of development and then starts to decrease as the service sector accelerates in growth (Herrendorf et al, 2013). That is the low-resolution picture of structural transformation, however zooming in closer reveals a more complicated picture.

It was once believed that the main determinant for economic growth was factor accumulation. In the context of structural transformation this would mean that a country accumulates production factors in the agricultural sector, which gives sufficient resources to start a manufacturing sector, which in turn gives rise to the services sector. However, what spurs development the most is economic diversification. Meaning that economies that grow the most do not only transition from the agricultural to the manufacturing sector, but transition into many different sub-sectors of manufacturing. Counter to the argument that countries should specialise in producing goods, where they have a comparative advantage, empirical evidence shows that economies that make efforts to expand into sectors where they did not have a comparative advantage grow the most. Hence the process of growth and structural transformation is described not only by the overall change in the predominant sector in the economy, but also in the change of quantity of sub-sectors (Rodrik, 2007).

The process of product diversification and its relationship with growth is described and modelled by Hidaldo and Hausmann (2009). Different types of products and their industries can be placed on a tree or the product space. Each product is related to the other on the basis of inputs used in production, the more similar the inputs the more related two products are. Of course, in the end all products require capital and labour, however certain types of capital and labour are not easily interchangeable between the productions of different products. The more related a product is to an existing product, the easier it is for firms to start producing it. The types of new firms that are created are strongly dependent on the types of existing industries. It does not mean that firms would only enter existing markets, but that they are much more likely to appear if inputs used in related industries could be repurposed for their production. This includes both factors of production, technology, human capital and institutional inputs, such as the existence of regulations and safety standards. The lack of such inputs means that it is up to the firm to