Distorted Competition - Αn Impediment to Growth

                             Distorted Competition - Αn Impediment to Growth


Competition is the economic foundation of market economies.
Competition is regulated by antitrust or competition law.

Ultimate goal of antitrust and competition law is to protect consumer welfare through protecting competition (and not the competitors).

This allows choices, low prices, increased output, high quality, and enhanced innovation for consumer welfare. Economic efficiencies supporting consumer welfare are favored.

U.S. “Free and fair competition” (FTC Act).

E.U. “A single market where competition is free and
undistorted” (Draft EU Constitution).

Principal Areas of Competition Distortion
- Conspiracies (i.e. plots) and agreements to restrain trade or competition, such as cartels (typically price-fixing and market allocation schemes) are prohibited.
- Abuses of dominant position or market power, such as bundling or tying products, are prohibited.
- Concentrations through mergers and acquisitions likely leading to dominance are regulated
- Position and Powers of monopolistic Natural Monopolies
- State Aids (Public Subsidies)


It is essential for any ambitious policy of economic growth to establish firm rules of free and unhindered competition in the workings of its markets. The full development of market forces and the realization of all possible benefits of an open economy rely to a substantial extent upon the application of free competition practices. It is beyond ideological inflexibility and preconceived socio-economic dogma to assert that the benefit of consumers and the fulfillment of a viable and stable socioeconomic order can most certainly achieved through the implementation of policies that encompass a really open and free competition regime.

The ultimate objective of all economic policies is the welfare of a country’s citizens. And this can be realized only by means of guaranteeing popular satisfaction with the condition of the economy, with the transparency of the state’s (and, consequently, the taxpayers’) finance, with hopeful prospects and expectations for a prosperous future.

Within the context of a modern economy, obliged to compete in an environment of an essentially globalized worldwide open market, there are several options to be followed for success to be ultimately attained. The economy has to be open. So that investment can flow in, new technologies attained, modern projects initiated and the market forces achieve a balanced level of activities. The private sector of the economy has to be enlarged thorough privatization and the reduction of state monopolies. This policy enhances the possibilities of more vigorous economic action, expands the state’s finances by means of extending the available tax basis and opens more possibilities for new initiatives, innovation and modern entrepreneurial practices which add dynamism and tremendous potentiality to the furthering of growth and economic development. Productivity levels finally have to be raised. So that the country should be able to compete efficiently on the international economic arena at almost every level of financial endeavor. High productivity is the measure on the basis of which countries achieve satisfactory levels of growth and attain rapid rhythms of development.

To attain however high productivity levels it is more than essential for an economic regime to establish free and open competition practices. Any disruption of competition rules and any violation of its root concepts and characteristics undermines the smooth working of the market and diminishes the prospects of high productivity results. It is therefore imperative that competition rules should be clear, all encompassing, universally – within the context of a national economy of course - applicable and with as few as possible exceptions tolerated. And by means of exceptions an overtly open and sincere competition concept should consider all state policies that undermine free marker procedures, offer protection to specific segments of the economy, allows for unwarranted state intrusions to the functions of the market and hinder unobstructed competition policies.

It is therefore 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, e.g., 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 in Japan 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.
It has also 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, even imperative, to introduce competition in this area as well.
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.
As for the political and social impacts of competition policy one can arrive to the following observations. 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.
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 lies 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 unfavourable.
The latter view of "first trade liberalization, then competition policy", it seems to be 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, one should explain the relationship between competition policy and industrial policy and that between competition policy and trade liberalization policy. Further, import restriction policy should be mentioned, 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.
The relationship also between competition policy and trade liberalization is important. 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, it is obviously not true the assertion that trade liberalization can justify the moratorium on competition policy.
The promotion of competition policy in domestic market should likewise 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.
The relationship between competition policy and export promotion policy including export subsidies is also very important. 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.