Challenges in South Asia Mark Dutz and R. Shyam Khemani THE WORLD BANK CompetitionLawand Policy: Challenges inSouthAsia Mark Dutzand R. Shyam Khemani The World Bank Financeand PrivateSector Development Unit South Asia Region The World Bank Washington, D.C. March 2007 Copyright OThe World Bank 2007 Disclaimer AlH rights reserved.The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of thleWorld Bank or the governments they represent. Copying and/or transmitting portions or all of this work without prior permission may be violation of applicable law. The World Bank encou!ragesdissemination of its work and will normally grant permissionpromptly. Any queries in this regard should be addressed to the Office of the Publisher,World Bank, 1818 H Street NW, washington, DC 20433, USA, fax 202-522-2422,email: pubrights@worldbank.org Cover Photo Courtesy:Corbis Images Designed& Printed by: Macro Graphics Pvt. Ltd., www.macrographics.com Foreword Acknowledgments 1. Introduction 2. Benefitsand Challenges of PromotingCompetition A Pro-growth and Pro-poorBenefitsof Competition B Competition Matters Even More in Less Mature Markets C Deterrents of Competition andTheTyranny of PredatoryVested Interests 3. Barriersto Competition in Local Markets 4. Designand lmplementation Issues A Adopting Competition Law and Policy B FosteringCompetition Advocacy C Institutional Sequencingand Design Issues D Interfacewith Other Government Bodies and Jurisdiction E International Dimensions of Competition Law and Policy 5. Overview of Competition Law and Policy lmplementation A Bangladesh B India C Nepal D Pakistan E Sri Lanka 6. Conclusion and Recommendations Bibliography IForeword ~ ompetition-the processof rivalry betweenbusinessenterprisesfor customers- C is a fundamental characteristic of a flexible and dynamic market economy. By responding to demand for goods and services with lower prices and higher quality, competing businesses are pressured to reduce costs, increase productivity, and invest and innovate in processes and products. They do so by adapting existing knowledge to local contexts and by creating and commercializing new knowledge. Successful enterprises become stronger and more competitive - in both domestic and international markets. They also contribute to sustainable economic growth, development, and poverty alleviation. Competition is not automatic. While it reflects the business conduct of enterprises, it depends on the business environment or investment climate in which they operate, including the legal and regulatory framework, barriersto entry and exit, and prevailing conditions in markets for labor, land, finance, infrastructure services, and other productive inputs. Moreover, even if most of the problems that enterprises in developing countriesoften confront in these areaswere mitigated, competition is not necessarily assured. Competition needs to be maintained, protected, and promoted. Herein liesthe roleand importance of effectivecompetition law and policy,the subject of this engaging report. As the authors point out, a well-designed and effectively implemented competition law and policy aims to reduce or eliminate impediments to competition that unnecessarily arise from public policy interventions by the government and restrictive business practices by the private sector. In addition to helping realizethe benefitsof competition, competition lawand policyfosters broader and shared economic development, increases transparency in government-business relations,and limits opportunities for rent seeking and corruption. More than 100countries have enacted or significantly revised and strengthened their competition legislation. But in South Asia, only three of the region's eight countries- India, Pakistan, and Sri Lanka-have formally enacted competition laws. In addition, India and Pakistan are significantly updating their legislation and institutions. Active discussions are also under way in neighboring countries, notably Bangladesh, Nepal, and Sri Lanka.Drawingon lessonsfrom internationalbest practice,this report isatimely contribution to informed discussionsand improved policymaking. Shantayanan Devarajan Chief Economist, South Asia Region,The World Bank 1Acknowledgments T his report seeks to respond to the increased interest and demand from South Asian countries to improve their competition law and policy frameworks. In particular, the Government of Pakistan had asked the World Bank Group to help it prepare a competition policy report highlighting the need and importance of establishing a modern, updated competition law as part of its second generation reforms. Parts of this report reflect materials prepared specifically for this purpose. In addition, the Government of lndia has requested technical assistance in conducting sector-specificpolicyreviewsand marketstudiesto buildstaffand institutionalcapacity in the context of ongoing implementation support for competition law and policy. The Government of lndia has also requested information on international experience with broader competition policy implementation beyond law enforcement, including examples of more and less formal articulation of competition policy principles and their institutionalization. Bangladeshindicated its intent to pass a competition law in its recent Poverty Reduction Strategy Paper, and has also requested assistance from the World Bank Group in this regard. This report examines the main drivers of and impedimentsto effectiveimplementation of competition law and policy in South Asia more generally, and proposeselements of a road mapfor moving forward. The authors are grateful for the extremely helpful suggestions provided by formal reviewersofthisreport,inparticularHarryBroadman,PauloCorrea,andloannisKessides, aswell as SimonBell, ShantayananDevarajan, EjazGhani, BarbaraKafka, Eric Manes,and other participantsin initial and final review processes. Initialfindings of the report were shared at a PrivateSector Development learning event on competition policy held in Washington, D.C. in March2006. The report was edited by Paul Holtz. Introduction T here is growing recognition that a flexible, dynamic, competitive private sector is essential to fostering sustained and shared economic development. Just as sound macroeconomic management and good public governance are important prerequisites for economic stability and efficient government services, it is crucial to develop a competitive business environment for private firms. Promoting effective competition spurs firms to focus on efficiency and improves consumer welfare by offering greater choice of higher-quality products and services at lower prices. It also promotesgreateraccountabilityandtransparencyingovernment-businessrelationsand decisionmaking, and helps reduce corruption, lobbying, and rent seeking. Inaddition, it provides opportunities for broadly based participation in the economy and for sharing in the benefits of economic growth. Without effective competition, firms are more likely to possessconsiderablemarket power-enabling them to earn excess profits and wield political influenceto tilt public policy in their favor. Without effective competition, there are also likely to be distorted price and profit signals and increased risk of misguided investment and output decisions, which can haveeconomy-wide repercussions. This report focuses on the five South Asian economies that have shown the strongest interest in adopting or modifying their policies on competition: Bangladesh, India, Nepal, Pakistan, and Sri Lanka. It argues that encouraging and strengthening competitionis criticalfor sustainable,privatesector-led growth and poverty reduction. Competition policies are government measures that directly affect the extent of rivalry between enterprises and the structure of industry. Competition policies typically include both broader measuresto enhance competition in local and national markets (such as liberalized trade policy, relaxed foreign investment and ownership requirements, and economic deregulation) and competition law (also referred to as antitrust or antimonopoly law)designed to prevent anticompetitive businesspractices by firms and unnecessary government intervention in the marketplace.' It is in the interest of every South Asian country to adopt and effectiyely enforce an appropriate Khemani and Dutz (1996). More than 100 countries have competition legislation. More than half of these have adopted or strengthened such policies sincethe early 1990s, but effective implementation varies due to factors such as inadequate resources, administrative capacity, and political will and support. I competitionLaw and Policy:Challengesin SouthAsia competition law. In addition, South Asian economies need to take credible steps to implement a more explicit, broader competition policy to attract more investment (domestic and foreign) and develop their national competitiveness. The report is organized as follows. Section 2 discusses the benefits and challenges of promoting competition. It reviewsevidence on the benefitsof competition, arguesthat competition matters even more in less mature markets, and exploreswhy competition often remains insufficient despite its obvious benefits. Competition deterrence is linked to the vested interests of people with political and economic market power- incumbent businesses, corrupt bureaucrats and politicians, protected workers in formal employment-who oppose the development of competition that would force uncomfortable economic changes. Section 3 focuses on some of the key barriers to competition in the five South Asian economies being studied, including insufficient openness to the world economy, regulations that constrain enterprise entry and exit, and other elements of the investment climate related to competition. Section 4 examines what these countries should do, based on international best practice in designing and implementing competition law and policy. Section 5 contrasts this road map with what the countries have done to date, presenting overviews of their competition law and policy implementation. Section 6 concludes the discussion and offerssome recommendations. The main conclusions and recommendations center on challenges of unfulfilled potential-namely, the contrast between the size of the potential benefits to South Asian economiesfrom increasedcompetition and the slow paceof competition reforms to date. All South Asian governments should seek to create business environments where business success is linked to underlying enterprise competitiveness. Doing so would ensure the sustainable entry and growth of enterprises based on productivity rather than political connections, enhancingjob creation and growth of better-paying jobs. South Asia has been relatively slow in adopting effective competition policies, and remains more closed than most regions to global competition, regional competition, and intenserivalryamongdomesticfirms.MostSouthAsian economieshavea legacyof public restraintsand bureaucratichurdlesthat impede starting and closingbusinesses, employing workers, getting credit, trading, and enforcing contracts. Corruption, and the attendant lack of a level playing field, is a top obstacle in most countries in the region. Powerful vested interests shared by favored firms and certain government bureaucracies,andtheir reluctanceto removepublicrestraintsandbureaucraticbarriers to competition, are the main impediment to enhanced competition. Introducing effective competition laws and policies would ease this obstacle-but that can happenonly with sufficient political will and support for changefrom pro-competition rn Introduction stakeholders.That will requiresignificantly enhancedefforts at strengthening"natural" alliesof competition, includingdynamic entrepreneursand exportersthat havegained from competition, as well as consumer associations and other representativesof civil society, buttressed by enlightened champions within government. Three policythrusts deservespecialattention inall SouthAsian economies.First,as part of competition promotion, each country's government should: Enacta nationalcompetition lawanddevotesufficient resourcesto adequately enforce it. Undertakestrenuouscompetition advocacyeffortswithin government,focusing on facilitating understandingof the impact and reducing the most important competition-related barriersto doing business. Second, as part of competition advocacy by business,the privatesector should: Mobilize natural allies of competition (firms that have benefited from competition and havean interest in maintaining an open, level playingfield) to provide political support for competition policies. Pressure governments to improve transparency and accountability in public procurement,aided by greater useof electronicprocurementtechnologies. Finally, as part of advocacy efforts at the regional level, governments and businesses should: Create opportunities to integrate markets through competition policy at the SouthAsia regionallevel,allowing a broader rangeof stakeholdersto participate and so makingit harderfor a singlegroup to block such initiatives. Establish a working group to develop an action plan to increase regional competition, including agreeing on principles of mutual interest for regional cooperationon cross-bordercompetition,trade, and investment. . .. Benefitsand Challenges of PromotingCompetition ** A Pro-Growthand Pro-Poor Benefits of Competition Economieswith competitivedomestic markets tend to have higher levels and growth ratesinpercapita income(Figure1).Theseeconomiesalso havelower poverty ratesand 15ource:World Bank(2002).Dataare fromtheWorld EconomicForumandWorld BankSlMA Indicators Note: "Competition"is the average response by surveyed internationalbusiness leaders in each country to the question,"lnmost industries, ratecompetitioninthe localmarketon ascalefrom 1(limited,with rarepricecutting) to 7(intense,with changesinmarketleadershipover time."'Entry"is theaverageresponsetothequestion,"Rate the entryof newcompetitorsinthe localmarketonascalefrom 1(almostneveroccurs)to 7 (iscommon)." rn Competition Law and Policy:Challengesin SouthAsia attract more domestic and foreign investment.*These conclusions are consistent with the broad empirical finding that barriers to competition impede innovation, growth, and pr~sperity.~ Based on a detailed study of industries and companies across a broad range of countries, undistorted competition in product markets is the most important long-run determinant of productivity-and hence prosperity. Low education levels and limited capital do not appear to be binding constraints on productivity. Direct investment by top-class companies (domestic and foreign) can readily overcome such obstacles and allow workers to reach world-class productivity levels-if allowed to do so through open markets and a level playing field where efficiency and innovation are appropriately re~arded.~India's emergence as a major global center for automotive design and car and component manufacturing in less than a decade was the result of explicit policies to promote competition in this sector, showing the potential productivity benefits of competition (Box 1). Increased competition and investment have also led to higher employment and wages in India's automotive sector. Similar productivity and employment benefits have occurred in other sectors that India has liberalized, such as telecommunications, consumer durables, domestic airlines, and information technology (IT)and software. Although competitive markets can be fostered without enacting a competition law or instituting an explicit competition policy, effective competition law and policy can playan important role in protecting and encouraging competition. By helping to lower public policy and private barriers to entry and restraints to trade, competition law and policy can help create opportunities for broadly based participation in the economy. In addition, the lower pricesthat resultfrom increased competitive pressures makegoods and services more affordable. Indeed, various studies suggest that poor people often pay higher prices and receive lower-quality goods and services than do more affluent segments of ~ociety.~ Intermsofempirical evidenceon the effectivenessandimpactofcompetition law,the most-studiedexperience isthat of U.S. antitrustenforcement. Basedonanexhaustive review of examples of socially beneficial antitrust challenges by U.S.federal antitrust agencies to price fixing and other forms of collusion, mergers that appeared likely World Bank (2002),chapters 2 and 3. Baumol(2002) and Easterly(2001), chapter 9. Lewis (2004). For example, World Bank (2004a). See also Public Affairs Center (2005), which reports that there was improved quality and delivery of food grains at lower prices when competitive market-oriented measures were introduced in the state-dominated food distribution system in Karnataka, India. Benefits and Challengesof PromotingCompetition 0 Box 1The Benefitsof IncreasedCompetition:India's Automobile Industry Despite the partial nature of India's 1991 economic reforms and subsequent sector liberalization, they fostered increased growth, competitiveness, and domestic and foreign investment. Nowhere is this more evident than in the automobile industry, which in 2002 permitted foreign direct investment (FDI) up to 100 percent for the manufacturing of automobiles and their components, with no minimum capital investment required for new entrants. Once describedby TheEconomistas producing outdated 1940smodels referredto as"fossils on wheels,"todayls automobile industry 'accounts for: 4.0 percentofGDPin2004-05, upfrom 2.8 percentin 1992-93. Morethan $13.5billion ininvestmentsduringthe pastdecade Morethan 1.12 millionautomobiles producedin2005-06, comparedwith 264,000 in 1994-95. Over $21.6billioninannualturnoverofautomobilesales. - Direct employment of 0.5 millionworkers and indirectly 10 million, compared with I fewerthan 100,000 before1991. - While two decades ago Indian customers waited for five years or more to get a car, today they havea plethoraof modelsto choosefrom in all price ranges,from economyto luxury. Abroad, MarutiAlto's hatchback,manufacturedincollaborationwith Suzuki, accountsfor 19 percentofthesmallcarssoldintheNetherlandsIndiahasalsobecomeasignificant exporter of automotiveparts. The benefits of intense competition and increased investment have also stimulated innovation. Mahindra & Mahindra spent just $120 million to develop its fast-selling Scorpio model-one-fifth of what it would cost in Detroit (the Michigan city home to most major U.S. car makers). Similarly, Tata Motors developed its lndica modelfor $340 million, compared with a global development benchmark cost of $1 billion. As a result Indiahasemergedas majorglobalcenter for automotivedesignaswell asmanufacturing of cars and components. Source: Evalueserve2006;OxfordAnalytica,4 September2006. to harm competition, and monopolists that used exclusionary practicesto obtain or maintain their market power-as well as a survey of empirical evidence on the value of antitrust enforcement derived from informal experiments on the behavior of U.S. firms during periods without such enforcement and the behavior of firms under different national competition law regimes-the conclusion was that: "Overall, the benefits of antitrust enforcement to consumers and social welfare-particularly in deterring the harms from anticompetitive conduct across the economy-seem I CompetitionLaw and Policy:Challengesin SouthAsia likely to be far larger than what the government spends on antitrust enforcement and firms spend directly or indirectly on antitrust c~mpliance".~ At theinternationallevelthere iscompellingevidencethatenforcingcompetition law,by prosecutinginternationalcartels, hasyieldedsignificantgainsto developingeconomies. One of the starkest examples is the estimated overchargefrom an internationalcartel of vitamin producers between 1990 and 1999. The total value of overcharges from the cartel for imports into 90 economies was $2.7 billion-including overcharges to Pakistanof $36.8 million, Indiaof $25.7 million, Bangladeshof $6.4million,and Nepalof $1.2 million.There is robust evidence that cartel members imposed greater price rises and larger overcharges to customers from countries with little or no competition law containing tough penalties for cartels? Overcharges for vitamins and other essential goods and services consumed by poor peopleare disproportionatelyfelt bythem. An examination of the potentialand actual experience of competition law and policy in affecting pro-poor outcomes-and in particular, Millennium Development Goal (MDG) targets-highlights linksbetweencompetitionandthreeMDGtargets:thoseonalleviating poverty, reducing hunger, and making available the benefits of new technologies. Such links are weaker between competition and the high-profile MDG targets on education, health care, safe drinking water, and medicines to control HIVIAIDS, malaria, and other major diseases.This is likely because competition policies affect these MDG outcomes only indirectly through their effects on markets, while policy observers and developmentpractitionerstend to emphasizeactions that result in direct improvements inMDGoutc~mes.~Thishighlightsthe needfor competitionauthoritiesand policymakers seekingto buildsupportfor strongcompetitionpoliciesto betteranalyze,document,and disseminatethe pro-poorbenefitsof competition,to help raise understandingamongall stakeholders-particularly those interested in achieving the MDGs. Doing so is perhaps the most important initialtask of competitionadvocacy (seesection40). Baker (2003). U.S. examples cited include a prosecuted international cartel of vitamin producers that resulted in overcharging to purchasers in the United States alone of at least $1.2 billion, and a prosecuted lysine (an additive to animal feed) cartel that resulted in overcharge to customers exceeding $75 million in the United States and $200millionworldwide. A study of soft drink bottling mergers found that acquisitions between horizontal rivals led prices to rise an average of nearly 13 in large mergers. And a settlement by the U.S. FederalTrade Commission with Xerox (which had been charged with monopolization) that required patent licensing in return for a small royalty opened the market to competition and innovation and led to substantial improvements in product quality and large reductions in price. Evenett (2003). Evenett (2006).This conclusion is basedon 1,092statements from MDG-relatedreports of UNagencies (rather than writings of experts sympathetic to promoting competition) that relate competition or its absence to various development outcomes. Benefitsand ChallengesofPromotingCompetition B CompetitionMatters EvenMorein LessMature Markets How important is promoting competition in less mature markets, such as South Asian economies, relative to more advanced industrial economies?And what are the most appropriate policies for promoting competition?To answer these questions, focus is placed on inadequate essential business infrastructure, both physical and institutional, as a key characteristicdefining less mature markets. To enter and expand ventures, enterprises require flexible access to basic business services. Largely local physical infrastructure that stimulates entrepreneurship includes traditional network industry infrastructure services and many others. Entrepreneurial activity generally requires that infrastructure services such as telecommunications and transportation facilities (such as roads) be available, flexible, and cost-effective. Increased availability and affordability of data and information services like the Internet, call centers, high-speed data networks, and collaborative tools facilitate efficient downstream entry. Many other inputs essential for entrepreneurial activities are local in nature, including production sites and related industrial real estate markets, financial services, transportation operations (such as trucking), distribution warehouses and other logistics-related facilities, semi-finished materials and parts, professional business services (legal, accounting, auditing, engineering, consulting, architectural, and other market-making services), and skilled workers. In addition, elements of institutional infrastructure-such as government rules on enterprise entry and exit, financial regulation, and customs enforcement-are affected by governance issues, including bureaucratic norms and corruption. Barriers to productive entrepreneurship are often likely to reside in less traditional but easier to address areas of the environment for doing business, such as the need to strengthen registries and introduce liens on movable assets (such as motor vehicles), to facilitate access to finance. Among the traditional transmission channels between competition and enterprise growth is how enhanced rivalry can spur innovation among profit-maximizing firms and how competition can act as a disciplining device, inducing managers to adhere more closely to maximizing profits? In less mature markets inadequacies in essential business infrastructure services can impede entrepreneurship, making genuine competition even more important. Addressing such inadequacies is critical because it simultaneously fosters competition. While many firms may be able to overcome some of the problems of inadequate business infrastructure by internalizing certain costs Rey (1997). rn Competition Law andPolicy:Challengesin SouthAsia and functions, other firms (especiallysmaller ones) may find this difficult-stunting the development of entrepreneurial, innovativefirms.1° Marketsforbasicbusinessservicesareoftenthinner inlessmaturemarkets; imperfections in capital markets are the best-knownexample. Due to more pronouncedinformation asymmetries in credit and product markets, more significant contract enforcement problems,and weaker institutions,internalagencycosts are likelyto be much higherfor firms. Insuch contexts, increasingcompetition may havea particularlyfavorable impact on growth. In particular, when agency problems become especially severe-as when the need for outside finance becomes so high that investors are reluctant to lend- more competition can increase investmentand other credible forms of commitment." In addition, product market competition can substitute for debt-related financial pressure and external shareholder control. Such competition is even more important where external shareholder control is weak.12 Another problem that is more acute when business infrastructure is inadequate is the vulnerability of essential local inputs to monopolization. Opportunities for foreclosure are often greater in emerging markets given the legacy of strong government intervention and weak governance, with captured or otherwise dysfunctional public institutions restricting the scope of market interactions. Elites might control local markets and have financial incentives to block would- be entrepreneurs from accessing needed inputs. Such foreclosure could be more profitablefor local input monopoliststhan selling inputs at suitably higher pricesfor a variety of reasons, such as facilitating price discrimination or denying economies of scope with other marketswhere monopoly power can be effectively entrenched. Facilitating access to essential business inputs should be a prominent aspect of competition policy, in terms of both law enforcement and a more wide-ranging competition advocacy mandate.I3 C Deterrentsof CompetitionandtheTyrannyof PredatoryVested Interests Despitethe benefitsofcompetition andits increasedimportanceinlessmaturemarkets, insufficient competition persists in many contexts. Most developing economies, l o Dutz (2005) provides evidence on how competition and innovations in upstream business services provide significant downstream benefits in terms of new entry, entrepreneurship, and innovation. ' Aghion and others (1999). l2 Nickel and others (1997). l3 For a more detailed discussionof these ideas, see Dutz, Ordover, andWillig (2000). Benefitsand Challengesof PromotingCompetition rn includingthoseinSouthAsia, sharea numberofstructural,institutiona1,andgovernance characteristics,such as: Highdomesticproduct marketconcentrationand barrierstoentry andtradeland limited rivalry amongfirms.Although marketsfor goods and services are being liberalized,these changestend to be slow due to past government policiesand interventions (such as industrial policy, tariff protection, licensing, preferential procurement,and the like) as well as structural features of the economy (such , as small domestic marketsand underdevelopedcapital markets).This is further documented in Section 3 for the South Asian economies. Lack of an effectivemarketfor corporate control-that is,the process by which inefficient firm management is displaced through changes in ownership and mergersandacquisitions.Thisinpartlyduetorestrictionsonforeignownership,14 lists of"reserved"economicsectorsand high ownershipconcentration. High ownership concentration and weak corporate governance. In many developing economies major corporations are owned by families or controlled by small groups of influential investors. For example, most of the 50 largest industrial groups in India are family owned and controlled.15As a result few public sharesare issuedand traded. These factors tend to reinforce one another and give rise to inflexible, inefficient industrial and financial market structures. They also have adverse implications not only for fostering effective competition and competitiveness, but also for governance at both the state and corporate levels-and for the persistence of an anti-competitive nexusof mutuallysupporting vested interests between incumbent firms and government, with some of the earned rents used to entrench market power by buying government favoritism. Since firms tend to be large in size and few in number, they have organizational and financial advantages in influencing legislation and regulation. In more advanced countries with a depth of informed opinions, competing interests, and independent media, powerful commercial interests may not always prevail. But in most developing countries, including some South Asian ones, competing opinions are more limited. In such contexts interest groups are more likely to succeed in furthering their agendas. '' l 4 Dutz (2006). On India, see Piramal (2003).A survey of nearly 3,000 firms in nine East Asian economies found that more than half are controlled by a single shareholder.Also Prowse (1998)and Claessens, Djankov, and Lang (1998). In OECD countries, by contrast, most publicly trade companies are widely held (except in Belgium, Greece, Portugal,and Sweden). rn Competition Law and Policy:Challengesin SouthAsia The close connection between economic power and political influence is widely recognized. The successful resistance of public enterprises to privatization programs, for example, has been encountered over a wide spectrum of cultural and economic environments-from Ghana to lndia and Thailand. Another example is the successful opposition of domestic bankers in many countries to competition from foreign banks. Even during East Asia's 1997-98 economic crisis, major conglomerates in the region were able to water down unfavorable reforms and delaytheir implementation. The ability of corporate elites to resist policy reforms is cause for concern. As noted, inadequate competition limits access to capital by new or small businesses. Lenders and investors understandably prefer more established firms with significant business advantages. Over time, industrial structure may become skewed, with a few large conglomeratesdominating the economyand a large number of small firms struggling, with few prospects for growth. Another concern is that when distorted prices guide businessdecisions, the pursuitof profits may bedetrimentalto socialwelfare. Profitable operations based on domestic prices may actually produce a loss when inputs and outputs arevaluedat world prices-as with manycommodity monopoliesinAfrica and politically connected conglomeratesin East Asia. In lndia major concerns have emerged about the strong influence that private conglomerates wield "behind the scenes" to undermine liberal economic reforms. In the past these conglomerates operated comfortably under a system of market cartels in concert with large public enterprises. But uncompetitive sales of privatized public enterprisesand policies favoring incumbents pose "the danger that the Indian economy's pre-liberalization system of public sector dominance will give way to dominance by private monopoliesor to a system in which the leading conglomerates carve out separate territorial jurisdictions."16 Vested interestsexist notjust in the privatesector but also among various political and othergroupswitheconomicinterest.Thepoliticaleconomyof reformsanddevelopment in lndia has been strongly influenced by three "proprietary classesN-industrial capitalists, rich landlordsand farmers, and the civil and military bureaucracy-that form an"elaboratenetworkof patronage." Intheinterestsofninter-groupequity,"some Indian policies are essentially anti-market, reflect a deep suspicion of competition, and work against market and allocational efficiency." A similar political economy is reported in Pakistan,with "military capital"playingaprominent role.'* As Rajanand Zingales(2003) state: ''The corrupt version of capitalism-when powerful corporations deliberately l 6 OxfordAnalytica, 15 August 2006. l 7 Bardhan (1998, pp. 134-36). l8 Nadviand Sayeed (2004). BenefitsandChallengesofPromotingCompetition wH try to eliminate healthy competition to preserve their privileg~dposition-generates economic inefficiencies and social injustice, thereby undermining political support for thefree-market basedsystem."lgTheauthors alsoobservethat "while everyonebenefits from competitive markets, no one in particular makes huge profits from keeping the system competitive and the playingfield level...Without astrong political constituency supporting them and under the continuous pressure of vested interests, markets are alwaystoo restricted, nevertoo free."*O Competition law and policy can mitigate some of the adverse effects of the structural and other characteristics prevalent in developing economies. Economies with more effective competition law and policy have lower levels of market dominance by large firms. The least developed countries tend to have the highest levels of market dominance and the least effective competition law and policy; they also rank low on the World Economic Forum's business competitiveness index. Moreover, the more effective is competition law and policy, the greater is local market c~mpetition.~'In addition, countries with competition (antitrust) laws score better than those that do not on the Heritage Foundation's index of freedom of economic lifelaction.They also score better on the Freedom Foundation's index of political freedom.22 l9 Rajanand Zingales (2003a). 20 Rajanand Zingales (2003b, p. 311). The authors argue that competitive financial markets are perhaps the most critical factor for sustainable economic development. Vibrant financial markets threaten sclerotic corporate establishments and increase corporate mobility and opportunities-which translate into personalfreedom and economic development for more people. Elites restrict access to capital and severely limit not only overall economic development but also that of individuals. In the end such vested interests backfire, as the excusefor suppressing competition to reduce risk results in lack of innovation and increasedexposure to market downturns. 21 Khemani (2007),who draws on data from theWorld Economic Forum's GlobalComperitivenessReport 2006-2007. Measures of effectiveness of competition (antitrust) law and policy, intensity of local market competition, and the business competitiveness index are based on a survey of business leaders, policymakers, academics, and others in the respective countries, conducted by the World Economic Forum. 22 Carlton (2003). Barriersto Competition in LocalMarkets. A* T here is considerable diversity among the five South Asian countries that are the focus of this study, compounded by significant diversity within each country. This section focuses on barriers to competition in these economies-particularly the insufficient openness of most of them to the world economy, regulations that constrain enterprise entry and exit, and other elements of the investment climate related to competition, based on enterprise surveys. What is perhaps most striking is that, despite the diversity, there is considerable commonality across these economies relative to selected international benchmarks for a number of the barriers-such as relatively lowforeign direct investment(FDI),protectionfrom dismissalfor formal sector workers at the expense of large pools of equally qualified underemployed workers, regulatory complexity affecting cross-border trade, inefficient contract enforcement, and insufficient access to electricity.The commonalities in some of these barriersare at least partly related to the predatoryvested interestsdiscussed in Section 2. South Asia is more closed to international and domestic competition than most other regions. As shown in figures 2-4, South Asia has high tariff protection, low openness to international trade, and low FDI and information flows.23Figure 2 provides average tariffs for all productsand for agriculture for the South Asian focus countries in 2002-05, benchmarked against China.24Despitethe tariff liberalization that began largely in the 1990s, by world standards the South Asian countries are still among the most highly protected-except for Sri Lanka (though its agriculture tariffs are exceptionally high), they are all among the top 20 percent of 139 developing countries. Figure3 highlights how South Asia also lags in openness to foreign competition, based on importsandexports of goods andservicesas ashareofGDP in 2004.The region's low openness to foreign trade (again, except for Sri Lanka) relative to East Asian and Pacific countries is driven partly bytariff and nontariff barriers,butalso by other regulatoryand infrastructure barrierstotrade-including, asdiscussed below, procedural requirements for trading and bottlenecks in port and road infrastructure. 23 Although these data improved significantly for some countries during 2004-06, comparable data for East Asia and Pacificcountries also improved during this period. 24 Seetable3.4 inWorld Bank (2004b,Vol ll, p. 35). Infigure 2 the China data are for 2002, with China used as a benchmark for tariff comparisons rather than East Asia and the Pacific for lack of regional data. rn CompetitionLawand Policy:Challengesin SouthAsia Figure4 presents a similar closed picture in terms of openness to foreign investment and accessto informationflows, basedon FDIas a percentageof GDPand onfixed and mobile phonesubscribersper 100peoplein 2004. SouthAsian countries receive lessthan halfthe average share of FDI to East Asian and Pacific countries. India's meager FDI of 0.8 percent of GDP is just over one-quarter of China's share, which is above the East Asia and Pacific average.Nepalhasextremely low FDIas ashareof GDP.Finally, SouthAsia lagsenormously in terms of access to information flows (as proxied by fixed and mobile teledensity). Bangladesh,Nepal,and Pakistanhavethe lowestteledensity,and India'steledensityof 8.5 isone-sixthofChina's (whichagainisabovethe EastAsia and Pacificaverage). Figure2 Tariff Protection, 2002-05 (AverageTariffs) I All Products AgriculturaIProducts Bangladesh 1265 Bangladesh India Nepal 18.0 Pakistan 18.11 Pakiitan ri Lanka 13.4 St1Lanka China 12.3 China 0 5 10 15 20 25 30 I r ~ i ~ u3r Opennessto InternationalTrade, 2004 e I ImportPressu-- "mportslGDP) ExportRivalry(ExporU/GDP) Bangladesh 20.8 Bangladesh 5.5 India "1.0 India 19.0 Nepal 30.6 17.6 Pabstan Pakist 6.0 Sri Lanka 5.5 Sri Lanka 3 36.4 j 1,39.5 EastAsia Pacific EastAsiaPa6h p 0 10 20 30 40 5C 0 10 20 30 40 ! Figure4 OpennesstoForeignInvestmentandInformationFlows,2004 FDIIntensity(FDIIGDP) Teled--ity (FixedandMobile L r iper100People) -Iaderh Bangladesh lndia India 1.5 Nepal Pakistan Pakistan 6 . 3 Sri Lanka 1 tEastAsia Pacific EastAsia Pacific 0 0.5 1 1.5 2 2.5 0 10 20 30 40 50 Source:World Bank 2006a Barriers to Competition in LocalMarkets Figures 5-1 0 provide compelling evidence on the region's legacy of public restraints and bureaucratic barriers to competition by comparing the severity of those regulations that most constrain enterprise entry and exit in South Asia with regional benchmarks from East Asian and Pacific and OECD countries, in six areas: starting a business,employing workers, getting credit, closinga business,trading across borders, and enforcing contracts.Theseareas are critical to ensuring effective supply responses and curbing the market power of incumbent firms. That competition barriers need to be addressed at the local level is highlighted by the range of variation in severity of regulations constraining enterprise entry and exit across cities within the same country. In lndia the average ranking across 10 regulatory indicators varies by 26 places in global rankings (from best-ranked Bangalore and Hyderabad, tied for 108th place, to Kolkata, at 134Ih),in Pakistan by 34 places (from Karachiat 74thto Quetta also tied at 108th),and in Bangladeshby 14 places (from Dhaka at 88thto Bogra at 102nd).25 Wherever there is scope for local variation, the focus on competition problems must be at the local levelsince problemstypically occur where opportunities for pressure by vested interests are greatest. Starting a business identifies the legal and bureaucratic hurdles that entrepreneursmust overcometo enter-in particular,the number of procedures required to register a firm and the number of days spent completing entry requirements (Figure 5). Business registration is typically a critical prerequisite for access to a range of complementary market infrastructure, including finance, physical infrastructure (such as electricity and water), and contract enforcement.Thehigher isthe numberof procedures,the greateristhe scopefor enforcing them unevenly across enterprises. As a region, South Asia performs comparatively well in regulations on starting a new business. But lndia and Pakistan,with 11 procedures each, and Sri Lanka, requiring 50 days on average to complete entry procedures, still compare unfavorably with the East Asian average of 8.2 procedures,the OECDaverage of 6.2, and especiallyAustralia and Canada,which require only 2 proceduresand no morethan 3 days.There is also considerable variation across cities within some countries.While the reported numberof daysto start abusinessin India is 35 inMumbailit is51 days in Kolkata and 52 days in New Delhi and Bhubaneshwar(in the state of Orissa).Although India hasliberalizedenterprise entry significantly sincethe early 1990s,thereare still some key servicesubsectors subject to FDIceilings,and some businessand retail service subsectors with FDI restrictions. Furthermore,industrial licensing restrictions and controls remain in the sugar, petroleum refining, fertilizer, and 25 For local data on variance in restraints across 12 cities in India, 6 in Pakistan, and 4 in Bangladesh, see World Bank (2007).Averages across restraints by city mask more significant variations across cities for individual restraints. 3 -- CompetitionLawand Policy:Challengesin SouthAsia -- - Figure5 Startinga Business {k?<-/-- ... .-*.i . , - NumberofProcedures Numberof Days - Bangladesh 8.0 Bangladesh India 11.0 - lndii 0 Nepal Nepal 11.O Pakistan 11.0 Pakistan 1 Sri Lanka Sri Lanka 5c EAP 8.2 EAP 46.3 OECD 6.2 OECD 16.6 I I I I I I 1 0 2 4 6 8 1 0 1 2 0 10 20 30 40 50 60 Figure6 EmployingWorkers Difficultyof Hiring(Indexof0-100) Costof Firing(WeeksofSalary) Bangladesh 11.0 Bangladesh 1.O India India Nepal Nepal - 90.0 Pakistan Pakistan 90.0 SriLanka - 177.; EAP I *I., OECD 31.3 $ I I I I 1 I I 0 10 20 30 40 50 60 70 80 90 0 50 100 150 200 Figure7 GettingCredit PublicCreditRegistryCoverage(%of Adults) PrivateCreditBureauCoverage(%ofAdults) - Bangladesh 0.0 ' Bangla:; India 16.1 Nepal Nepal 0.1 Pakistan SriLanka 0.0 EAP . 3.2 OECD 8.4 1 0 1 2 3 4 5 6 7 8 9 0 10 20 30 40 50 60 70 Figure8 Closinga Business - Time(Years) RecoveryRate(CentsOnThe Dollar) Bangladesl Bangladesh 4.9 lndi 1 10.0 India Nepal 4.5 Pakistan Pakistan =.9 sriLa;;;b7 OECD I , , , ,%o 0 2 4 6 8 1 0 1 2 0 10 20 30 40 50 60 70 80 BarrierstoCompetitioninLocalMarkets wm Figure9 TradingAcrossBorders 9 TimetoExport(Days) Timeto Import(Days) Figurc 1 EnforcingContracts Numberof Prbceduws Numberof Days Bangladab Pakistan - EAP 5ource:World Bank 2006b drug industries, and 326 industrial items in various sectors remain exclusively reservedfor production by small-scale enterprise^.^^ Employing workers measures the flexibility of labor regulations-in particular, the difficulty of hiring new workers (usinga 0-100 index, where a higher value indicates more rigid regulation, such as limits on the use of term contracts) and the cost in weeks of wages for firing redundant workers (or for replacing less productiveformallyemployedworkerswithbetter-qualifiedworkers)(Figure6).0f 175countries,Sri Lankaranks98th,lndia 112Ih,Pakistan126th,andNepal 150thinthe ease of hiring and firing workers.South Asia ranks particularlypoorly in terms of redundancydismissalregulations,with firing costing90weeks of wages in Nepal and Pakistan,and 178 in Sri Lanka-compared with the East Asian average of 42 and the OECDaverageof 31. Sri Lanka is the mostexpensiveplaceinthe world to dismissworkers,after Zimbabwe,Sierra Leoneland Egypt.ln NewZealandandthe United States, in contrast,the cost of dismissing redundantworkers is zero. lndia has 47 central laws and 157 state regulations that directly affect labor markets, 26 PlanningCommission (2006, p.34), 1 Competition Law and Policy:Challengesin SouthAsia often inconsistent and at times overlapping. Restrictive labor regulations are costly in terms of lost enterprise entry, expansion and adjustment opportunities, and formal sectorjobs, with workers pushedinto the informalsector.27 a Getting credit here covers credit information registries-both public credit registry and private credit bureau coverage as a percentage of the adult population (Figure7).Enterprisesconsistentlyratelimitedaccessto creditasone of the main barriersto operationsand growth,with uneven access constraining competition from rewardingthe most productive firms. Better information on potential borrowers'creditworthiness helps improve such access.28South Asia fallsfar behind inthe availabilityof credit information,havingthe world's lowest coverage for both public and private registries:only 0.1 percent of the South Asian population is covered by public registries and 1.3 percent by private bureaus,compared with 3.2 percentand 10.1 percentin EastAsia andthe Pacific and 10.1 percent and 60.8 percent in OECDcountries. Closing a business tracks legal, procedural, and administrative bottlenecks in the bankruptcyprocess-in particular,the time requiredto completeabankruptcyand how manycents on the dollar claimants(creditors,tax authorities,and employees) recover from an insolvent firm (Figure8).Enterprise exit is particularly onerous in lndia intermsoftime (10years,the longest intheworldland instark contrastto the OECDaverage of 1.4 years) and in terms of recovery rate (13 cents on the dollar,in contrastto the OECDaverageof 74cents).CentraIauthoritiesneedto recognizethe variance acrosscities intheir countries:inlndiatime and recoveryratesare 7.3 years and 19.5 cents on the dollar in Bangalore,but 19.6years and 5.5 cents in Kolkata. a Trading across borders examines procedural requirements for exporting and importing a standardized cargo of goods, and serves as a proxy for restraints impeding indirect local pro-competitionspilloversfrom export rivalry and direct entry from foreign enterprises through import competition, as summarized by the number of days needed to comply with procedures required to export and import goods (Figure9).Tradingacrossborders is slow and complex inSouthAsia, with Bangladesh ranked 134th,Nepal 136Ih,and lndia 139Ihworldwide in terms of these trade costs impedingcompetition.Every container is opened in Nepal and Sri Lanka, in contrast to 5 percent of imports undergoing inspection in OECD 27 Based on a study of differences in labor regulationsacross states, World Bank estimates suggest that Indiafailedto createabout2.8 millionformalmanufacturingjobs duetojust two clausesofitsIndustrial Disputes Act-about 45 percent of all formal manufacturingjobs currently existing. SeeWorld Bank (2006d, p. 25). 28 For evidence that improving credit information and laws to create and enforce collateral not only strengthensthe rights of creditors but also benefits deserving borrowers by increasing their chances of getting credit, see Djankov,McLeish, and Shleifer(forthcoming). Barriers toCompetitionin LocalMarkets rn countries.Bangladeshand lndia rankespecially poorly interms of time neededto complywith import procedures,at57and41daysrespectively(requiring 16and 15 separatedocumentsfor import)-in contrastto anaverageof 26daysin EastAsian and Pacificcountriesand 12daysinOECDcountries.Thevariation intime to import is particularlystark in Bangladeshand Pakistan,from 24 days in Chittagong to 57 days in Dhaka,andfrom 19days in Karachito 42 days in Peshawarand Quetta. Enforcing contracts explores the efficiency of enforcing a simple commercial contract in terms of number of proceduresand days from when a lawsuit is filed incourt untilenforcementof thejudgment (payment;Figure 10).Inefficientcourts create an uneven playing field and especially inhibit new entrants-including foreign investors and small businesses, among others-by constraining access to favorable financial terms on loans and slowing adoption of new techno~ogies.~~ Ofthe 10areasofeveryday businessmeasuredbytheWorld Bank's Doing Business 2007, this is the onewhere SouthAsia performsworst, with Pakistanranking 163rd, lndia 173rd,and Bangladesh 174thworldwide. Bangladesh and lndia are among the four countries in the world with the longest court delays, at 1,442 and 1,420 days to enforce a contract respectively.In Pakistan it is far more costly to enforce contracts in businesscenters such as Karachiand Lahorethan in other cities, with a difference of more than 100days between Karachi(880days) and Lahore (875) relativeto Sialkot (735)and Peshawar(730).Reporteddifferencesare even bigger in Bangladesh (1,790 days in Bogra compared with 1,373 in Khulna) and lndia (1,420days inMumbaicomparedwith 610 inBhubaneshwar,Orissa).During 2005- 06 no reformsin proceduresfor contractenforcementoccurred in SouthAsia. Inaddition to these objective measuresof regulation-based constraintsto competition, it is useful to take into account what enterprise managers say about other elements of the investment climate related to c~mpetition.~~Toenter and expand, enterprises require access to essential business services-both physical and institutional infrastructure. Figures 11-1 3 provide subjective evidence based on enterprise surveys on the inadequacy of business infrastructure in the five South Asian countries of focus *' Figure 10.1 in World Bank (2006b) shows the negative correlation between FDI and time to enforce a contract. Qian and Strahan (2006)find that small businessesget better financial terms on loans when contracts can be enforced quickly and cheaply. Cooley, Marimon, and Quadrini (2004)find that new technologies are adopted faster when courts are efficient, since new businesses-as the predominant innovators-do not have the clout that larger firms do to resolve disputes outside courts. 30 Thesedata are basedon investmentclimatesurveysof privatemanufacturing enterpriseswith varying degrees of representative sampling conducted in Bangladesh in 2002, lndia in 2003, Nepal in 2000, Pakistan in 2002, and Sri Lanka in 2004. Given that enterprise managers in a given country and year may have been more or less vocal in responding to constraints than managers in other countries, depending on their own requirements andexpectations, comparisonsof rankings of constraints across countries are more problematic than relative rankings within a given country. competitionLawandPolicy:ChallengesinSouthAsia relative to the average in OECD countries for three areas: access to electricity, access to communications and transport services, and access toUlevelplaying fieldnenforcement by government (measuredby the extent of bureaucracyand corruption). Access toelectricity is amajor problemfor entry andexpansion(Figure1 Inall five South Asian countries except Pakistan, electricity is among the top three obstaclesto operations and growth,as reflected bythe percentageof enterprise managers ranking it as a major or very severe obstacle. For Bangladesh, lndia and Sri Lanka it is the top 0bstacle;for Nepal it is the second,and for Pakistan it is the sixth (behindcustoms and trade regulations for Nepal and behind access to finance, tax administration, tax rates, corruption and policy uncertainty for Pakistan). In all these countries, getting access to an electrical connection is also much more problematic than in the average OECD country. And once connected, enterprises typically have to endure poor-quality supply, including frequent outages and fluctuating voltages-preventing entry into many lines of business that require constant power supply without the added (and less efficient) expenseof investing in their own generator capacity. Access to transport andcommunications servicesalso are major problemsfor many enterprises (Figure 12).To compete with their rivals, entrepreneurs need rapid, low-costways to get their goodsto markets.Complaintsabout the access,quaIity, and cost of transport services focus on roads and ports.In Sri Lanka,for instance, 20 percent of urban manufacturing firms and 40 percent of ruralfirms indicated that transport was a majoror severe constraint,with ruralfirms emphasizing road quality andaccess.Such constraintsfacilitate local monopolization.InBangladesh the main complaint involves the port of Chittagong, where congestion, poor management, labor problems, and lack of equipment lead to ship turnaround times of five to six days,comparedwith one day in more efficient ports.32Interms of communications,despite the rapid spread of mobile telephones in much of South Asia,access to afixed line remainsan arduous processin some countries.ln Bangladeshenterprisesthat obtained aconnection within the previoustwo years reported an averagewait of 126 days, and Sri Lankan enterprises reported a wait of morethan 48 days,with all countriesabovethe OECD benchmarkof 8 days. Bureaucracy and corruption can stifle competition by facilitating an uneven playing field (Figure 13).Corruption-also known as the"bribe taxu-is ranked as a key obstacle to enterprise operation and growth in Bangladesh, lndia and 31 Electricity is the most striking area where most South Asia countriesappear to be doing significantly worsethancomparatorcountries;seeWorld Bank(2006c).Themainexceptionis Bhutan,where sizable hydroelectric assets areamong its most important competitive advantages. 32 World Bank(2006c, pp. 14-15). Barriers toCompetitionin LocalMarkets Pakistan.InPakistanand lndiathe perceptionof an uneveninstitutional playing field is reinforced by the high response rate of managers on thentimetax,"with an average of almost 9 and 7 percent, respectively, of senior managers'time taken away from managing the productive aspects of their firms, and rather spent dealing with government regulations and tax inspectors. '- Figure 11 Accessto Electri EtactridtyisMajorCon! (%ofFirms) - Bangkdesh Pakistan Srili Sri Lanka 01 OECD 0 10 20 30 .40 50 60 70 80 --- ... A ----, to CommunicationsandTransport Servic ~nstraint of Firms) (96 FbccdLineAccessIWIYS d r Connection) ndia 13 BureaucracyandCorruption isMajorConstraint(%of Firms) PercentageofTimeDealingwith Regulathns Bangladesh D HLi 0 10 20 30 1 46 50 60 70 Source: Enterprise surveys-Bangladesh (2002), lndia (2006), Nepal (2000), Pakistan (2002), Sri Lanka (2004), and OECD (2005). Note: The Nepal survey did not including questions on electricity access, fixed line access, and time dealing with regulations. 1 * Designand Implementation 4 1 lssues aving discussed the benefitsand challenges of promoting competition, and reviewed some of the key barriersto competition in South Asian economies, this section focuses on what the region's countries should do to promote it. International good practice in the design and implementation of competition law includes adopting an appropriate law, preventing private restrictive business practices through effective law enforcement, actively promoting competition advocacy to open markets, fostering compliance with the law and reducing regulatory burdens, and addressing a range of institutional sequencing and design issues. An explicit legal framework helps safeguard and encourage competition. Across the world, numerous examples exist of tendencies by firms to thwart competition and monopolize markets-tendencies that cannot be effectively prevented without an effective competition law that injured parties can rely on to obtain relief. When countries enact an explicit competition law, they should keep the legal framework as simple as possible and avoid excessive precision, to allow the economic analyses and judicial processesthat interpret the law to evolve flexibly in response to changing economic conditions. In addition, the recommended policy approach should place more emphasis on anticompetitive business conduct by incumbent firms rather than on large size in terms of market shares or assets. Developments in the economics of industrial organization over the past three decades have led to a reassessment of the structural approach in the design and application of competition law and policies. In the absence of significant barriers to entry, high or increasing levels of market concentration are unlikely to result in anticompetitive business practices. In such situations, markets are likely to be contestable-that is, new firms will quickly enter the market if incumbent firms charge high prices and earn excessive profits. Moreover, largefirm size could be due to economic efficiency and superior competitive perf~rmance.~~ 33 See Baumol,Panzer,and Willig (1982),and Goldschmidt, Mann, and Weston (1974). rn CompetitionLawandPolicy:ChallengesinSouthAsia A Adopting Competition Lawand Policy Competition lawisasetofrulesand regulations,supported byaninstitutionalstructurefor enforcement, that preserveand promote competitive rivalry in markets.The foundation of competition law is increasinglybased on analysis of the market power of enterprises in a relevant product and geographic market. In so doing, competition law seeks to constrain the ability of enterprises-acting unilaterally or collectively-from engaging in illegal business practices that profitably raise prices above the competitive level for a sufficiently long period to adversely affect the well-being of consumers. Although there is no definitive list of business practices and strategiesthat must be included in a competition law, three areastypically fall within the purview of most competition laws: Cartelcontrol: measuresrelatedto agreementsbetween enterprisesinthe same market that restraincompetition. Abuse of dominance: measures related to attempts by large, incumbent enterprisesto independently exercise or enhancetheir market power. Mergers and combinations control: measures related to consolidations of assets and businessoperations oftwo or moreenterprisesthat maysignificantly lessen competition. In many jurisdictions competition law empowers competition authorities to address the anticompetitive effects of government measures-or, more broadly, to promote competition through means not involving law enforcement. 'This is often referred to as competition advocacy, and as illustrated in Figure 14 and discussed in more detail CompetitionLaw Competition Enforcement Advocacy Awareness Raising Designand Implementat~onIssues below, it entails providing opinions and pro-competition arguments to policymakers and regulatorsbyengaging the competition agency with multiplestakeholders. Indeed, competition advocacy was the first function that India's new Competition Commission (createdin 2002) was empowered to perform. Competition policies cover a much broader set of instruments than competition law, and typically include all policies aimed at increasing the intensity of competition or rivalry in local and national markets by lowering entry barriers and opportunities for harmful coordination, to ensure that markets work effectively and serve the interests of all citizens. Competition law is only a subset of a nation's competition policies. Competition policies typically include pro-competition approaches to trade, investment, sector regulation, and consumer protection. As illustrations, barriers to international or interregional trade, restrictions on FDI and technology transfers, restrictions on entry in regulated network utility industries, regulations affecting the registration of new enterprises and the taxation and corporate governance of existing enterprises, and rules on marketing practices all influence the extent of competitive pressures in markets and so are appropriate concernsof competition policies. In many countries competition agencies have become the focal point for consultations and putting forward pro-competition viewpoints across a broad range of policy areas. Countries have taken a wide variety of approaches to competition policy.These range from no explicit articulation of competition policy beyond that articulated in the competition law to very formal articulations of competition policy principles and their additional institutionalization-with competition policy implementation (as opposed. to competition law enforcement) often placed under a politically strong institution in the executive branch. Australia may have the world's most explicit competition policies. The Hilmer Committee report (1995) recommended adopting a detailed quantitative assessment of the costs and benefits of enforcing competition through simplified regulations (for instance, liberalizing trade at the international, inter-, and intra-state levels by reducing tariffs and taxes). Incentives for reform implementation were designed, such as providing additional federal resources to states that achieved tax reduction targets, while compensation of short-term losers was also put in place. The Hilmer report led, among other measures, to a formal-institutionalized process in 1995 known as the National Competition Policy. The core idea of that policy was that regulation-a significant portion of government action-should be subject to coordinated, systematic, and ongoing (annual) review. By focusing on anticompetitive regulations,the annual,coordinated regulatory reform processhas increasedAustralia's GDP by at least 2.5 percent.34 34 See National Competition Council (2005). CompetitionLowand Policy:Challengesin SouthAsia B FosteringCompetitionAdvocacy y As noted, competition advocacy concerns itself with promoting competition beyond the enforcement of legislative controls on specific anticompetitive conduct and combinations by enterprises.In this sense, advocacy is about fostering competition in ways unrelatedto lawenforcement.Itseeksprimarilyto reducepolicy-basedrestrictions on competition and, more generally, focuses on the broader questions on the role of competition in the overall economy. It also seeks to encourage compliance with the law through information dissemination and cooperative initiatives with business- especiallyindustry,trade, and professionalassociations. Competitionauthoritiesshould not haveamonopolyon advocacy.Tothe contrary, such authoritiesshould helpensurethat other entitieswithin government and morebroadly within civil society assist in these tasks. Similarly, competition advocacy should not create an additional regulatory oversight or super-regulatoryentity; advocacy is most effective when it helps limit inappropriateoversight of industry by other entities. The appropriateshort-term priority for South Asian countriesshould likely beon regulatory reforms stressing simplificationof regulations and deregulation to facilitateenterprise entry, expansion,andexit-helping buildsupportfor and reducingthetypes of barriers highlightedin Section3. Competition advocacy playsan important role in creating and strengthening effective markets. Ideally, a competition authority should be a country's strongest public voice on promoting competition and articulating the competition perspective. Advocacy complements law enforcement by increasing competition throughout an economy. Furthermore, because both public and private constraints can be used to the same effect-namely, to give monopoly rents to selected enterprises-reducing private constraints will lead enterprises to rely more on public constraints. Thus effective competition policy must be able to move on bothfronts. This argument is even stronger in economieswith a strong legacyof state intervention that have recently introduced competition policy-especially where laws limit the extent of enforcement.In such environments, effective competition advocacycan help create an environment where, over time, enforcement strengthens the role of markets by reducing government interventions and concomitant regulatory burdens. Thus advocacy may not just be a complement to enforcement, but an essential first step in expediting full, effectivecompetition. Given that competition authoritiestypically lack sufficient politidcapital and reputation intheir earlyyears, and that policy-generated obstacles to competition are often maintained by support from powerful vested interests, initial advocacy efforts should focus on public restraints whose removal is subject to less debate, or that directly benefit entrepreneurs, exporters, and other stakeholdersd o can be counted on to provide strong backing and support. Special Design and Implementation Issues attentionshouldbepaidto initiativesthat directlyor indirectlybenefitas broada baseas possible.Finally,even ifacountry is not readyto implementacompetition law, an entity should bevestedwith theauthorityto undertakecompetitionadvocacy-typically under apolitically stronginstitution inthe executive branch, as that branchwould usuallyalso be entrustedwith the broader oversight of the country's competition policies. Competition advocacy should focus on increasing understanding among all stakeholders of the obstaclesand benefitsof increasedcompetition by: Conducting studies in markets where competition does not appear to work effectively (because of public or private restrictions),either in response to a government request or based on the authority's volition. Influencing government policymaking and implementation, by providing advice in instanceswhere competition is absent or restricted,toministers,government departments and agencies, regulators, and representativebodies.Such advice typically includes identifying and commenting on existing and proposed legislation,regulations,and policiesof public bodiesthat constrain competition in the markets they affect. These areas can include trade and investment policies(such as on tariffs,antidumping duties, FDI restrictions, and intellectual property rules),sector regulations (such as telecommunications,transport, and oil and gas), reviewsof proposed privatization, and operations of other central, provincial,and local governmententities. Raising public awareness of the benefits of competition and the role of competition policy to deliver better economic outcomes, by championing competition more broadly to develop al'competition cultureUinsociety. Fostering compliance with competition law to avoid unnecessary and costly litigation. Essentialto consistent messages on the role of competition is the ability to undertake rigorous economic and legal analyses of laws and regulations-analytical, reasoned, balanced,and well-argued.Thisabilityhelpscreatestatusandcredibilityforan authority, and so helps counterbalance vested interests opposed to change. Decisions on conducting such studies should be basedon factors such as the economic importance of the market, indicators of possible competition problems, existence of private or public barriers to entry, degree of public interest,and the costs of conducting them. Countries have adopted different approaches on how best to influence government policymaking and implementation, ranging from implied or informal understandings based on a general advocacy statement in the law to more explicit statutory underpinnings.CountriessuchasCanada, Italy,the Republicof Korea,and Russiaassign their competition authorities legal mandates to submit their views on certain issues rn CompetitionLaw and Policy:Challengesin SouthAsia to the appropriate ministry or regulatory agency. Such mandates range from making public opinions and recommendations to having veto power on policies that may limit competition (as in Russia, in terms of how proposed privatization transactionsare structured) or providing no-objection screeningto existing regulations (asin Italy and Korea).Many authorities have mandatory consultation on new legislation, regulations, or other government actions that affect competition. Such statutory powers can be made more explicit by supporting regulations that ensure, for instance, that the competition authority hasa seatonthe privatizationcommissionor hasthe opportunity to review all privatizations-so that public monopolies are not transferred to private monopolies without appropriate restructuring, asset divestiture, or pro-competition change to the market structure in the relevant industry. An additional dimension to consider is empowering the competition authority to challenge public restrictions in the courts or other appropriate public forums. In Brazil, the European Union, and Mexico as well as in some transition economies in Central and Eastern Europe, the competition authorities are empowered to review and question local, regional and national legislation that unnecessarily impedes competition, and call for alternative approachesto be considered. The precise processes through which these powers would be enabled may be best included in regulations subsequent to the publication of competition law. It will be critical to develop processes to ensure that implementation is workable, and allows the competition authority to have access to required information and focus on cases most harmful to economy-wide competition-without overwhelming its capacity. Requiringat a minimum that the authority's comments on competition issuesare made public imposes desirable quality control, and ensures that the language of advocacy remains accessible-becauseitshould beframed inaway understandabletothe general public. A transparent publication requirement of all advocacy opinions also opens the process to third-party advocates of competition, and forces the arguments of vested interestsintothe open, imposing the sameself-disciplineonthem. Inselectinginstances where to dedicate its limited resources for policy-related advocacy, the competition authority should start by picking cases where restrictions on competition are most obviously excessive and disproportionate. Some form of "proportionality test" can provide a consistent approachto pro-competitionadvice.The idea is that unnecessary restrictions on competition should be avoided-but where they are needed for other policy objectives, they should be the most effective instruments available and only involve restrictionsthat are unavoidableto achieve clearly stated goals. Especially in the early years of a new competition authority and until a broad understandingofthe benefitsof competitiondevelopsinany country,the authority has a critical role to play in creating and strengthening its natural allies.Such allies can help rn Design and lmplementat~onIssues the authority champion the benefits of competition and facilitate its understanding of the greatest obstacles to competition. These allies, in turn, can help ensure that the competition authority is effective in its other tasks and not capturedbyvested interests. Education and constituency-building efforts should be directed, among others, at pro-competition interest groups-especially exporters, grassroots entrepreneurs (newentrants and rural or small firms without market power),and consumers, who all stand to gain the most from competition policy. Being able to take credit for having successfully championed the removal of a regulatory obstacle that impeded entry or access to an essential business service should help strengthen political support for pro-competition policies. Efforts to raise public awareness typically include training for judges, lawyers, government officials, and businesses,and outreach to universities, think tanks, consumer groups, and broader civil society through sponsorship of and participation in conferences and seminars, publication of guidelines, information notes and studies, and user-friendly,up-to-dateWebsites. Opinions differ among practitioners on the priority that should be accorded to competition advocacy relativeto the other functions of a nascentcompetition agency. One school of thought is that unless the competition law is vigorously enforced and guilty parties are penalized, the law and the competition agency will not be credible. According to this view, the competition advocacy arguments will not carry any weight in governmentor business decisions until the agency has achieved credibility based on effective enforcement.A somewhatcomplementaryviewpoint isthat newcompetition agenciesshould not initially betoo activeineitheradvocacy or enforcement.According to David Lewis, Chairman of South Africa's CompetitionTribunal, enforcement priority should be given primarilyto evaluating mergersand acquisitions: [A] strategy aimed at building a new competition authority should not rest on advocacy or enforcement, because both draw heavily on experience and technical competence and they require the reserves of political capital that enable even the most powerful antitrust regime to absorb the inevitable setbacks that are associated with these activities. New antitrust authorities are possessed of neither experience, nor wide-ranging technical competence, nor bountiful reserves of political capital...Merging firms have incentives to conclude their transactions as expeditiously as possible and the parties voluntarily cooperate with and provide relevant information to the competition authorities. Firms opposing a specific merger transaction alsodo the same,so there is less burden and useof formal powers to gather evidence by the authorities. Moreover, merger transactions provide an opportunity to the staff to learn about how industries and markets function, which can assist them in analyzing rn Competition Law and Policy:Challengesin SouthAsia more complex anticompetitive situations in the future. In addition, since the bulk of economic studies indicatethat little value is created for shareholders of acquiring firms, the commercial and economic consequences of erroneously prohibiting a merger may not be very large. (Speech at FordhamCorporate Law Institute, 2004) But South Africa's economy is not typical of most developing economies. It has reasonably well-developed physical and business infrastructure, as well as sophisticated companies and management, business press, civil service, and related institutions. The authors of this report disagree with Lewis's arguments as being generally applicable, and believe that new competition agencies need to be cautious about vigorously enforcing the law-including merger provisions- until appropriate institutional capacity, staff skills, and knowledge are developed. Too vigorous initial enforcement of competition law could prevent the efficient economic restructuring and adjustment processthat usuallyoccursas governments deregulate and liberalize markets.An appropriate balance has to be struck, but the starting point should be to win support_f~r~.competition law and policy among various stakeholders in government, bu$i,nes;s,.andcivil society. . .: -, . - C InstitutionalSequencingand DesignIssues When should competition law and policy be introduced as part of a government's economic and regulatoryframework?Thereseems to be consensusamong competition policyexpertsthat theappropriateinstitutionalsequencingisto introduceacompetition lawand policiesas earlyas possible,becauseotherwisethe broadlybasedpublicbenefits that usuallyaccruefrompro-marketreformsmaybecomedistortedandreapedbyprivate interestgroups.Withoutaneffectivecompetitionlawandpoliciesinplace,consumersand businesses that are victims of anticompetitive practices will have no explicit measures available to seek relief.Thispropositionwould also apply in post-co-nflicteconomies such as Afghanistan, where various laws and institutions have yet to be formalized. In such casesthe needfor a fully fledged competition law may not be initiallyfeasible. Still, it may be important to at least start with strict provisionsaimed at prohibiting and penalizing collusion and bid rigging in government procurement. Governments are among the biggest buyers and consumers of goods and services, and taxpayers are oftenthevictimsofanticompetitive businesspractices,corruption,bribery,andconflicts of interest. Moreover, most competition cases, even in jurisdictions with longstanding competition laws, tend to be basedon complaints byfirms forced to pay high pricesfor inputs because of illegal price fixing and bid rigging, or denied access to vital markets and distribution channels by other businesses. Designand implementation Issues Several institutional design features should be considered to support effective implementation of competition law. In Canada, the United States, and the United Kingdom a mix of criminal proceduresand civil and administrative procedures has been used to administer and enforce competition law-while other jurisdictions (primar~ly Europe, India, Latin America, and Pakistan) rely solely on administrative procedures. In both legal approaches, horizontal price fixing and collusive bidding agreements are strictly prohibited and subject to severe penalties.The treatment of other types of horizontal restraints,such as geographic market allocation, parallel pricing, and output restrictions,varies across countries. Structuraland other provisions,which are enforced under theUruleof reason"approach, are more suitably handled using both civil and administrative legal procedures. But courts and administrative tribunals in South Asia are unlikely to have the needed expertiseon competition-relatedmatters.So, to enforce competition law, consideration should be given to creating specialized administrative bodies or tribunals comprised of judicial and nonjudicial members with backgroundsin law, economics,finance, and various fields of industry and business. This is, in essence, the approach taken under India's 2002 Competition Act. Regardlessof the institutional model adopted, certain principles needto be reflected in the design of an effective agencyfor competition law: Theagencyshouldbeindependentand insulatedfrom politicalinterferenceand influence.lt should beaccountableto an impartial body,such as an independent committee or elected parliament. Investigation and prosecution function should be separatedfrom adjudication functions when enforcing competition law.That was not the case in India's new Competition Act (2002),giving riseto the constitutional challenge described in Section 5B. Checks and balancesshould be in place, with appropriate rights to appeal and reviews of decisions and facts based on legal and economic interpretations. This approachalso safeguardsagainst the possibility of competition authorities being captured by special interest groups. Cases and related matters must be resolvedexpeditiously to avoid unnecessary transaction and other business costs. But proceedings also need to be transparent-while protecting sensitive business information of a competitive nature. Reporting of cases and transparent proceedings help guide businesses and reduce uncertainty. Measures are needed to collect relevant information and evidence on markets and firms. rn CompetitionLaw and Policy:Challengesin SouthAsia Proceedings should be accessible to all affected parties, with provisions for introducing expert testimony and evidence. Provisions are needed for imposing significant penalties, fines, and other remedial measures as deemed necessary to deter and correct infractions of the law. Even if most of these principles are followed, additional and more subtle institutional design issues-appropriate to the national context-can make the difference between success and failure. A comparison of the Netherlands and Panama is instructi~e.~~The two countries'competition agencies started at about the same time during the1990s, and neither country had ideological, social, or cultural endowments favoring competition enforcement. Both introduced competition law in response to international obligations. After five years the Netherlands Competition Authority had successfully prosecuted about 15 hardcore cartels (including some rigging bids for public works) and several cases of anticompetitive behavior. Meanwhile, Panama's FreeTrade and Consumer Affairs Commission (CLICAC) had barely finished one cartel case. Although human capital may have played a role, salaries in Panama were high (a commissioner's salary could reach $90,000 a year, not including benefits). Moreover, the Dutch authority hasample sanction powers,while CLICACdoes not (seefinal bullet above). Other institutional aspects, such as organizational structure and specialized knowledge, may have played a role.The Netherlands Competition Authority created a specialized department for cartel investigations, while CLICAC did not, and personnel of the Dutch authority handle only antitrust cases-while CLICACstaff arealso involved with consumer protection and trade remedy cases. As noted, competition policy agencies should also be vested with a statutory role of participating, formulating, and commenting on government economic and regulatory policies affecting market competition. By advocating competition, such agencies can counter or at least minimize the rent seeking common in most countries-particularly in South Asia. Giventhe limited administrativecapacity and enforcement experiencein this area in South Asia, some commentators consider it the most important, if not the sole function, of a competition policy agency.36Competition advocacy can also reduce the possibility of misapplying provisions of competition law, which can induce further distortions into an economy. The burden of implementing competition law does not have to rest solely with government (Figure 15). Provisions for individual private and class action suits help 35 The authors are grateful to Paulo Correa for this insightful comparison, communicated in a earlier reviewof this paper. 36 See Kovacic (1995),and RodriguezandWilliams (1994). rn Design and Implementation Issues igure15 AdministrationandEnforcementof CompetitionLaw dfi Prosecution byGovernmen "U,UU.C'...".., Impositionof Departmentor Complaints Finesor Civil Aaencv or Damages Government (CourtlSpecial Initiative Tribunal) Private Actions strengthen application of the law and promote a competition-oriented culture. But appropriate safeguards are needed to prevent the potential abuse of such provisions, to avoid unnecessary litigation. Moreover, competition law does not necessarily have to be administered by a large bureaucratic office-especially if the law contains provisions for private actions. A specialized court or tribunal can consist of a few full-time members as well as draw on part-time officials for cases re- quiring sector-specificexpertise.Inaddition, implementationofthe lawcan proceed in stages, starting with competition advocacy and prohibitions on price fixing and other types of collusion among firms. In more complex areas of competition law, such as mergers and abuse of dominant market position, only the most blatant infractions can be pursued until the necessary experience has developed. Among the countries reviewed in this report, India has largely adopted this approach- though, as discussed below, effective implementation of its competition law has been mired by other, related issues. D Interfacewith Other Government BodiesandJurisdiction Competitionlawaffectsallsectorsandeconomicentitiesengagedincommercialactivity (unlessotherwise exempted).One of the challenges facing competition agencies is to ensure, as much as possible, that other government policies and regulations do not unnecessarilyimpede the competitive process. As the preceding discussion suggests, rn CompetitionLaw and Policy:Challengesin SouthAsia competition advocacy plays an important role in this regard. But there still arise situations-in South Asian and advanced industrial economies-where sector-specific and other regulatory bodies have jurisdiction over important economic activities, including adjudicating anticompetitive matters. These situations vary across countries but include areas such as the provisionof basic infrastructure services-namely, telecommunications, electricity, and water-as well as financial services and air and rail passenger travel. In most of these areas, specific regulatory institutions have been createdto set rules on entry, exit, pricing, output, and other business matters, including competition. Thus a question that usually arises is whether the competitionauthority should havesole, concurrent,or nojurisdiction over such matters-as well as the best approach to ensuring that competition policies are coherent and consistent. No clear-cutmodel of best practice can be recommended.For example, the Australian Competition and Consumer Council has jurisdiction over competition matters across a wide range of regulated industries, while sector-specific regulatorsand government departments deal with technical issues such as setting standards, engineering specifications, andthe like.Although the UnitedKingdomhassector-specific regulatory bodies, they work closely with the Office of Fair Trade to determine how to handle competition complaints. In other countries there are rivalries and jurisdictional turf battles between competition and sector-specific regulatory authorities, resulting in application of different principles or complete gaps in policies on anticompetitive business practicesand market structures. Most South Asian economiesfall into this category. For example, India has seen a competitive industry evolve for telecommunications (especiallymobile),yet the roles, responsibilities,andjurisdictions ofthe Department ofTelecommunications,Telecommunication RegulatoryAuthority, and Competition Commission have not been delineated when it comes to competition issues. A similar situation prevails in Pakistan between the Monopoly Control Authority and government departments and regulatory bodies dealing with electricity and telecommunications. Meanwhile, Bangladesh has not created sector-specific regulatory institutions, and state-owned entities are under the direct oversight of relevant government ministries. To foster investment and growth, business uncertainty stemming from concurrent or lack of effective competition and regulatory frameworks needs to be addressed in developing economies-especially in South Asia. In designing regulatory policies and institutions, safeguards need to be developed to prevent capture by regulated entities and vested interest groups in both the public and private sectors. Designand Implementation Issues E InternationalDimensionsof CompetitionLaw and Policy With increased globalization of markets and cross-border flows of goods, services, and investment, competition agencies in various countries have had to address the international dimensions of administering competition law and policy. These dimensions most often arise between major bilateral trading partners. For example, international cooperation arrangements-ranging from consultative agreements and memorandumsof understandingto formal treaties-exist betweenAustralia and New Zealand; Canada and the United States; the European Union, United States, and Japan; and member countries of the Andean Pact, Southern Common Market (MERCOSUR), and North American FreeTrade Agreement (NAFTA),among other trading blocs.These internationalcooperationarrangementscover matterssuch as: Extraterritorial effects of business transactions and practices and of administration of competition law and policy. Cooperation, information exchangesand mutual assistance. Industrialpolicyand subsidies. Member countries of the South Asian Association for Regional Cooperation (SAARC) should consider similar bilateral and multilateral agreements as they integrate further within the region. Extraterritorialeffects of competition can arise in avariety of ways. For example, one of thetrading partners'countriescould haveanexport cartel.Somecountriesexemptsuch cartelsfrom competition law under the reasoning that they do not reducecompetition in the domestic market. But an export cartel-even if legally sanctioned-could adverselyaffect an importing country's markets, creating friction in economic relations between the two trading partners. Moreover, illegal international cartels can have anticompetitive effects, as inthe casesof vitamins, lysine, and other productsdiscussed above. In some case mergersand acquisitions among firms doing business in different countries can also create concerns about competition. If a merger or acquisition is prevented by one country, it may hurt commercial interests in another. In addition, because governments compete for foreign investment-by offering subsidies and other incentives-such activities can impair competition for firms in countries that do not receive such investment. For these and similar situations, competition agencies have found it beneficial and in their mutual interests to enter into international cooperation agreements. Such agreements may contain provisions for one agency to ask another for assistance in investigating and gathering evidence on a specific anticompetitive business practice rn competition Law and Policy:Challengesin SouthAsia (referred to as positive comity). They may also take into account the effects on the national interests of th-e other country in its enforcement of competition law (referred to as traditional comity). In addition, such agreements may contain provisions for exchanges of non-confidential information, experiences, and staff. Increased cooperation between national competition agencies leads to greater convergence in enforcement policies, investigative techniques, information requirements, and time taken to review and resolve cases. Such convergence is being furthered by the International Competition Network, an organization in operation for since 2001. This convergence facilitates and reduces the transaction and other costs associated with doing business across borders. -7 * ' Overviewof CompetitionLaw A 5 ,and PolicyImplementation T he South Asia region has been relatively slow in moving from command and control policies to market reform and adjustment policies. Only 3 of the region's 8 countries-India, Pakistan, and Sri Lanka-have formally enacted competition laws (Table 1).TheMiddle East and North Africa region has also been quite slow, with 7 of 21 countries having enacted competition laws, as has the Sub-SaharanAfrica region, with such laws in 17 of 50 political entities (countriesand regional groups of countries). In the East Asia and Pacific region, 13 of 32 political entities have enacted such laws. The Latin America, Caribbean, and North America region has been more active, with competition laws in 19 of 37 political entities. Europe and Central Asia stands out in this regard, with such laws in 47 of 58 political entities. This progress has largely been driven by the desire of Central and Eastern European countries to join the European Union-which requires that its members not only enact but also effectively implement competition law. As highlighted in the following subsections, Bangladesh, India, Nepal, Pakistan, and Sri Lanka are at widely varying stages in implementing competition laws and policies. lndia has the longest, most active history of competition law implementation, and enacted a new law in 2002.Moreover,this law is being amended, and the newly formed Competition Commission of lndia is steppinq up its advocacy activities. Pakistan has EastAsia SouthAsia Europe IMiddleEasi I Saharan America, and and and Africa Caribbean, Pacific Central North and North Asia Africa I 1 1 1 1 1 1 Numberd countries/ 47N 3512 12 8 5711 21 groups 1 I I Number petitionlaw Competition Law and Policy:Challengesin SouthAsia also recognizedthe desirabilityof updating its competition law and policy,and recently finalized a draft law that was submitted to the prime minister's office as the first step toward ratification.Sri Lanka is at adifferent stage, having modified its competition law in the direction of a more traditional consumer protection law. Finally, Bangladeshand Nepal lack competition laws,though both are exploring their development-driven by a range of pro-competitionstakeholders. Bangladesh Context. Bangladesh does not have a competition law framework to deal with situations that significantly impede competition, such as cartels, bid rigging, monopolization, restrictive business practices, and mergers and acquisitions that result in market dominance. In addition, the government has no formal institutional mechanisms to systematically review existing or proposed policies and regulations that may adversely affect competition. Formally, the Monopolies and Restrictive Trade Practices Ordinance, enacted in 1970 by the Government of Pakistan when Bangladesh was still part of East Pakistan, remains on the books. But neither the government nor the private sector has ever tried to invoke this law, and no commission or other specific body has been set up to administer it. In any case, the law is dated. If at some point Bangladeshconsidersenacting a specific competition law, it would be advisable to start afresh.37 In addition to the competition-related problems (including corruption) identified in Section 3, a 2004 survey by the Bangladesh Enterprise Institute found that 65 percent of respondents considered price fixing a major anticompetitive practice in domestic markets, followed by monopolies and bid rigging (48 percent), discriminatory dealings (39 percent), and entry barriers (30 percent). Most respondents strongly favored introducing a competition law and an independent agency to administer it.38 Although there are few studies on competition and market structure in Bangladesh, in many sectors-such as sugar, beverages, jute, paper products, fertilizers, petroleum refining, and electrical machinery-state enterprises are prominent and often dominant. State enterprises are generally insulated from competitive market pressures, and it is alleged that they enjoy price preferences in government 37 In 2004 Bangladesh's Cabinet approved a consumer rights law containing some competition provisionson unfair and misleadingmarketingpractices.Butthe law's fate is unknown, as it hasyet to be submitted to Parliament.See Rahmanand Eusuf(2006). 38 BE1 and CUTS (2005). Overviewof CompetitionLaw and Policy Implementation rn procurement decisions of up to 15 percent. Infrastructure services, such as electricity and fixed-line telephones, are often provided by monopoly state enterprises operating under unclear regulations. Low investment and high operating costs undermine the competitive position of private firms in these sectors. In addition, the Bangladesh Enterprise Institute survey suggests that concentration is high in sectors where private firms primarily operate. Anticompetitive practices are alleged to be prevalent in markets for consumer toiletry, tobacco, pharmaceutical products, and health services. Such practices, emanating from both public policies and private restraints, have also been alleged in other sectors (Box 2). Issues moving forward. The Bangladesh economy has been liberalized considerably in the past decade, and steps have been taken to improve the competitive environment for business-for example,through aprivatization programand, morerecently,through the introduction of procurement guidelines. But problems in implementation remain, as evidenced by lack of progress on privatization and limited adoption of the new procurement policies. The importance of promoting competition and instituting a comprehensive framework for competition law and policy has been recognized and supported by Cartels are alleged to exist in the purchase, distribution, and sale of several staple products, includingrice,sugar, potatoes,and other foods.These cartels are reputedly partlydue to monopsonisticmarket powersof wholesalers,who also providefinance to farmers, control truck transportation, and provide refrigerated storage facilities. Cartels are also believedto exist in the supply of cement, fertilizer, corrugated steel, and intercitybusservices. Infreight forwarding,fees andcommissionsfor importsandexportsareallegedto be highbecauseof carteland marketsharingagreements. Until recently the government banned land-based imports of cotton yarn from India due to concerns about under invoicing, smuggling, and customs and excise inspection capacity. Although cotton yarn could be imported from lndia and - Competition Law and Policy:Challengesin SouthAsia Box2Examples c c petition ...(Contd.) The industry employs about 2 million workers-85 percent of them women. The competitionandpricedisciplineprovidedbyimportedyarn (evenat only5-1 0percent of total market supply)was evident, as the minister of finance threatenedto open up the land border points iflargedomestic suppliersdid not lowertheir prices. A single firm has apparently been granted the license for importing compressed naturalgas (CNG) auto-rickshawsfrom Indiaand China.Lackof competition inthis market has resulted insignificantly higher prices than those in more competitive markets (such as that in Kolkata, India).CNG auto-rickshaws are mostly operated by self-employed workers-often from the poorer segments of the population- who formerly operated bicycle rickshaws and are trying to raise their living standards. Import controlsextend to productssuch as sugar, salt, and newsprint,among others, with adverseeffects on domestic pricesandcompetition. Nontariff barriers related to customs inspection, truck transportation, container handling,and freight forwarding raisetransactionandother costs of imports. Governmentprocurementandprivatization Allegations include irregularitiesand lackof transparency and competitive bidding in procurementof passenger aircraft for domestic air services.The tendering process was delayedandcancelled, resultingin resubmissionof bidswith no pricechanges- and a used aircraft was apparently purchased at a high price outside the normal procurementsystem. Illegalpracticesandirregularitiesaresaidto haveoccurredinthe PowerDevelopment Board's evaluation of bids for power projects. Two Chinese companies, CMEC and Harbin, are currently engaged in litigation and have lodged complaints about the evaluation processandawardingof contractsunder public procurement regulations. Various governmentagenciesanddepartmentshaveinstituteddifferentprocurement policies,without adequatemeasurestoensureaccountability,transparency,coherency, and consistencyin biddingand contracting. Allegations have been made of lack of competition,undervaluation,and preferential sales of jute mills and other state assets. In some cases inadequate safeguards were takento ensure continued operationsof viable privatizedfirms. Regulatory framework forinfrastructure Oversight and regulation of infrastructure-such as electricity,telecommunications, water and sanitation, ports, and domestic passenger air-services-are generally considered insufficient to ensure efficient operations, reliable services, and competitive prices. OverviewofCompetitionLawandPolicyImplementation rn both public and private representatives, as well as by various nongovernmental organizations (NGOs).But concerns remain about the timing and sequencing of this framework and the staff, resources, and institutional capacity building needed for its effective implementation. There is also a need for greater public information dissemination and education. Widespread misconceptionsexist on what competition policy is, and on the merits of introducing it in Bangladesh. Many in general public view the topic as part of trade- related issues-such as World Trade Organization (WTO) requirements-and not about fostering competition, entry, efficiency, and consumer welfare in the domestic economy. Moreover, notwithstanding the various allegations of anticompetitive business practicesand market situations, and government policiesand regulations that impede competition, available information is primarily anecdotal in nature. More in-depth analysis and accurate information on the costs imposed by lack of competition, and identification of the critical sectors most affected, is neededfor informed policymaking and economic decisionmaking. B India Context. For most of its economic history since independence (in 1947), the Government of India heavilyintervened invarious spheresof the country's economic acti~ity.~~Throughelaborate systems of regulations, licensing, price controls, trade protection, rigid labor and land tenure laws, investment and ownership restrictions, state enterprises engaged in commercial business, five-year plans, and the like, the government determined the structure of industry and state of competition (if any) in the major sectorsof the economy. During the 1960sconcernsabout the slow pace ofUtrickle-down"benefits to poorer segments of society and high levelsof industrial concentration led to the establishment of several commissions and committees to examine the various issues.40In 1969these efforts culminated in the passage of the Monopolies and RestrictiveTrade Practices Act and creation of the Monopolies and RestrictiveTrade PracticesCommission. 39 The discussionin this section draws on Mehta (2005).and Chakravarthy(2005). 40 Committeeon DistributionofIncomeand LevelsofLiving(MahalanobisCommittee,1960);Monopolies lnquiryCommission(1964); HazariCommittee (1966); Industrial Licensing Policy lnquiryCommission (ILPIC 1967). rn CompetitionLaw and Policy:ChallengesinSouthAsia Instead of examining the distortions induced by public policies, the government seemed to blame the problems on the private sector!' Paradoxically, while the new act had all the hallmarks of a competition law, instead of maintaining and encouraging competition, it becamea bureaucraticinstruments for intervening and restricting entry and expansionof existing firms and competition in the Indian economy.The approach adopted toward largefirm size and combinations (mergersand acquisitions)increased enterprise diversification and conglomeration, to the detriment of economic efficiency and competitiveness. In addition, a plethora of new regulations segmented industries and firm size by instituting "reserve lists" of economic activities that could be engaged in only by small and medium-sizeenterprises. Such an approach toward "competition policy" provides ammunition to libertine critics that governments-especially in developing countries-should not be encouraged to adopt competition law, because they are more likely to result in further interventions and economic distortions. In 1991, as part of structural economic reforms, India's government annulled the most restrictive provisions of the Monopolies and RestrictiveTrade Practices Act-namely, those aimed at preventing concentration and growth of firms by imposing size and other controls on firm mergers and acquisition, investment, and expansion activities. The policy of extending application of the act to cover state enterprises engaged in commercial economic activities was reiterated to level the field between the public and privatesectors. Butwhile the preferential treatment accordedto public enterprises has been formally removed, private firms continue to complain that in practice this is not the case. In 1999 the government appointed the High Level Committee on Competition Policy and Competition Law, which in its 2000 report recommended the adoption of a new law in light of market liberalization and globalization. A subsequent "concept bill"was placed on the Website of the Department of Company Affairs and, along with various meetings across the country, input from different stakeholders and interest groups was solicited.The 2002 Competition Act was enacted with the proviso that, before it came into full effect, the newly created Competition Commission should give priority to building its staff and institutional capacity by conducting market studies and competition advocacy. 4 ' One change that one of the government's high powered (Sachar)committees (1977) recommended was removing exemptions from application of the Monopolies and RestrictiveTrade PracticesAct to public enterprises. Public enterprises were found to engage in monopolistic, restrictive, and unfair trade practices.Thisrecommendationwas notacted on until 14years later-though allegations ofsuch practices being prevalent and public enterprises being accorded preferential pricing in government tenders persist. However, the Sachar committee also recommended expanding the power and role of the Monopolies and RestrictiveTrade PracticesCommission. Overviewof Competition Law and Policy Implementation rn The Competition Act states its main goals as being: Preventing practicesadversely affecting competition. Promotingand sustainingcompetition in markets. Protectingthe interestsof consumers. a Ensuringfreedom of trade in markets in India. In implementing this act, India's economic development needs must be borne in mind. Although the act is a law of general application with few exemptions or excepti0ns,4~ the central government can exempt application of the act (or any of its provisions) if it concludes that doing so is in the interest of states or the general public. So, while the act's main goals are to maintain and encourage competition-thereby fostering economic efficiency and consumer welfare-in certain circumstances (left undefined) exceptions are possible in the context of broader public interests.43 India's Competition Act contains features of modern competition laws elsewhere, with provisions prohibiting anticompetitive horizontal agreements and a "rule of reason" approachto vertical agreements,abuseof dominant marketposition,andcombinations or mergers and acquisitions likely to substantially reduce competition. There are no mandatory notification requirementsfor mergers and acquisitions, and provisions are aimed mainly at large transactionsor high market shares. In addition,The Competition Commission is accorded independent status and, along with its law enforcement functions, can engage in competition advocacy by focusing on public policy as well as privatesector practicesthat unnecessarilyimpede competition. However, implementation of the Competition Act and staffing of the Competition Commissionhavebeen miredin bureaucraticinfightingandaconstitutional challenge. Highly vocal criticisms were levied by consumer and other civil society groups that the designated chairman of the commission was a senior civil servant with no legal training or background in competition economics. And since he was about to retire, this seemed likeanother exampleof bureaucratic rent seeking, in the form of sinecure for former civilservants-Thenomineewithdrew from seekingthe post,andto dateonly one full-time commission member has been appointed, with a small skeletalstaff.The constitutional challenge led to a reference to the Supreme Court, which opined that the act and the establishment of the commission did not provide sufficient separation of powers between investigation and adjudication of cases. The lndian government "' The act specifies two exceptions: the first relate to reasonable conditions regarding intellectual property rights, the second to export cartels. 43 Such exceptions are also provided for in advanced industrial economies such as Germany and the United Kingdom, among others. WH CompetitionLaw and Policy:Challengesin SouthAsia has recently tabled parliamentaryamendments to the Competition Act to address the points raised by the Supreme Court, among others. Issues movingforward.The immediatechallengefor the Indiangovernment is to getthe legislativeamendmentsthrough parliament so that the Competition Commission can befullyconstitutedandstaffed,andthefullforceofthecompetition Act canbebrought intoeffect. Sincethe 1991 economic reformsand removalof controlson combinations, merger and acquisition transactions have proceeded unfettered. Between 1991 and 2003 suchtransactions havequintupled, from 44to 214 a~ear.~'Theactual paceof such activity has likely been higher because most such transactions are unreported.While not all such transactions necessarily result in substantial lessening of competition, some do. A current transaction that would give raise competition concerns in other jurisdictions is the proposed acquisition of Sahara Airlines by Jet Airways for domestic passengerservicesalong some major routes.Various other mergersand acquisitions- in sectors such as cement, pharmaceuticals, and various consumer products-would be given prima facie review if the Competition Act was in effect.The consolidation in industry may give rise to market structures and competition problemsthat would be difficult to remedy. In addition, there have been widespread pressures for protection and increased regulationwherethe competition advocacyfunction ofthe Competition Commission would be particularly useful. For example, the Post and Telecommunications Department has reputedly drafted legislation for monopoly rights on all letters and packages up to 500 grams-a measure that, if instituted, would severely limit competition and effectively ensure the demise of the fast-growing and efficient private courier business, to the detriment of consumers. A more appropriate policy would be to ensure a monopoly on letters of 20-50 grams for the post office and, capitalizing on their extensive network, offer competing private courier services- as in countries such as Australia, Canada, the United Kingdom, and the United States. Demandsfor sector regulations and price controls have also emanated from the steel industry. In addition, delineation of the roles and responsibilities of the Competition Commission and sector-specific regulators and regulations in areas such as electricity, telecommunications, and energy (amongothers) remains largely undefined. In sum, the Indian government faces significant challenges in developing and implementing policy and in building staff and institutional capacity to foster competition. The pace at which these efforts have proceeded thus far is cause for concern and raises questions about whether various vested interests-including Overviewof CompetitionLawand Policy Implementation those in bureaucracy itself-are part of the problem. Yet the benefits of increased competition in fostering broadly based economic development, investment, growth, and overall competitiveness are clear in India's economy-as evidenced by the lower prices, increased consumer choice, and higher quality of products and servicessuch as automobiles, consumer electronics, and domestic passenger services. C Nepal Context. Nepal does not have a competition law. During accession negotiations for the WTO, Nepal agreed to enact a competition law by July 2004. Although a draft competition bill was prepared by the Ministry of Industries, Commerce, and Supplies, the draft has not been enacted. Reportedly, the Ministry of Law expressed concerns about the creation of an independent competition authority, and the draft was sent back to the Ministry of Industries, Commerce, and Supplies for recon~ideration.~~In March 2006 the secretary of the latter ministry said that the draft competition law is in its final stages and would soon be enacted by ~rdinance.~~ A few legislative documents have provisions related to competition in markets. The 1990 Nepal Constitution makes explicit reference to competition principles. Article 25(2)statesthatntherole of the stateshall beto transform the nationaleconomy into an independent and self reliant system, by preventing the available resources and means of the country from being concentrated within a limited section of society, by making arrangements for the equitable distribution of economic gains on the basis of social justice, and by making such provisions as will prevent economic exploitation of any class or individual." The 1992 Enterprises Act was the first law to mention competition related to industry. The act's preamble statesthatIufor the overall economic development ofthe country, it is expedient to makearrangements for fostering industrialenterprises inacompetitive manner, through the increment in productivity, by making the environment of industrial investment more congenial, straightforward and encouraging." And the concomitant 1992 Foreign Investment and Technology Transfer Act opened up most sectors to FDI-with the exception of cottage industries, real estate, and sectors affecting national security. 45 Dahal (2006). 46 Inaugural address to a workshop on "Competition Law for Economic Development:' held in Kathmanduon 16March2006,jointly organizedbyan NGO(SouthAsiaWatchonTrade, Economics, and Environment) and a business association (Federation of Nepalese Chambers of Commerce and Industry). R H Competition Law and Policy:Challengesin SouthAsia Nepal's 1998 Consumer Protection Act was adopted to protect the interests ot consumers, by addressing restrictive and unfair trade practices. But this act's effectiveness has reportedly beenvery weak.47 Issues moving forward. Just as Nepal's efforts to increase competition in telecommunications have been halted by poor enforcement institutions, weak checks, andvestedinterests,itappearsthat enactmentandeffectiveenforcementofcompetition lawfacethe same risks. Ifthe country's competition authority is madepart of an existing government department, such as the Department of Commerce of the Ministry of Industries, Commerce, and Supplies, its competition law is likely to be as ineffective as the ConsumerProtection Evenifthe authority is nominallyindependent,successful impact is not assured.49Overzealous enforcement could protect local incumbent enterprises from effective international competition-and even from competitive pressures by new domesticentrants-by inappropriatelyimputing abuse of dominance on the part of foreign enterprises or inappropriate practices by new entrants, when in realitythe conduct merely reflectsthe pro-competition practicesof healthyrivalry. Context.Pakistanhashadacompetition lawsince 1970:the Monopoliesand Restrictive Trade Practices (Control and Prevention) Ordinance. Enactment of this law appears to have been largely motivated by the realization that a few privileged elites had cornered the benefits of growth, as wealth became increasingly concentrated in the economyfollowing a period of high growth and businessfavoritism during the 1960s. Although timely information on industrial concentration is not available, older census data suggest that four or fewer firms account for more than three-quarters of output intwo-thirds of industries. The Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance prohibited undueconcentrationof economic power, unreasonablemonopolypower,and unreasonablerestrictivetrade practices.The law providedfor the creationof a Monopoly 47 "" Dahal (2006).p. 122. Dahal (2006),p. 124. In the above-mentioned workshop on "Competition Law for Economic Development,"the president of the Federation of Nepalese Chambers of Commerce and Industry stated that "the need of the hour is a competition law with a strong and effective authority in order to put our ailing economy on the right track." But he added that the law would be important to safeguard Nepalese industries from the potential anticompetitive practices of large multinational corporations. Another presenter urged government to "make extra efforts to ensure that the law would boost existing industries."See - - www.sawtee.org/uploads/events/competitionlaw.php for coverage of the 16March 2006workshop. OverviewofCompetitionLawandPolicyImplementation &.1 Control Authority to administer the law, and gave it the status of an autonomous and quasi-judicial body comprisingthree membersappointed bythe federal government for terms offiveyears.But nationalizationofa largenumberof privateenterprises inthe 1970s restricted the scope of the law almost immediately after it was enacted.The Monopoly Control Authority lost its status as an independent body and was merged with the Corporate Law Authority,focusing on corporatizing public enterprisesthat were already exempt under the law. And once the economy began to witness rapid deregulation, privatization, and trade liberalization in the 1990s, shortcomings of the law became more obvious. In particular, the law does not cover public enterprises-and since 2002 it does not cover privatizedpublic enterprises regulated by sector regulators. Penalties for noncompliancewith the law are so low that enterprises typically prefer to pay them rather than comply with the orders of the Monopoly Control Authority. In addition, the lawdoes not providefor compensationto affected consumers and other parties.Another shortcoming isthat it has no explicit provisionfor itsoverridingeffect on other laws. Issues moving forward. To remedy inadequacies of the Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance, in 2002 the Monopoly Control Authority-on its own-prepared a draft of a new competition law. For many reasons, including a perception that an effective competition law would discourage investment in the country, Pakistan's government was reluctant to move forward on the draft law's suggestions.Then, in 2005, the government requested assistancefrom international development partners to help modernize and strengthen the draft law and build capacity in a new competition agency. A finalized draft law was sent to the prime minister's office in July 2006. The government wants to submit the new draft competition law for legislative approval-either as law approved by Parliamentor as ordinance under the president's signature.Policy issues to be addressedinclude: Creation of an appropriate institutional framework that aligns the competition law with appropriate judicial review, investor and consumer protection, and broader regulatory reform. Appropriateaccessto marketdatafrom governmentand independentagencies, and agreementon the roleof enterprise registration. Effective penalties. Appropriate'efficient avenuesfor appeal. Effectivejurisdictional lines and cooperation protocols with sector regulators, the privatizationcommission,and other public agencies. Clarificationof the roleand form of competition advocacy. Agreement on the final form of independence, funding, staffing, and capacity buildingfor the new competition commission. rn competitionLaw and Policy:Challengesin SouthAsia Moving forward, three key risks need to be mitigated. First, as part of the general political complexities faced by policymakers guiding the transition of Pakistan's government from owner to regulator, strong and sustained political will is required for any new regulatory body to be effective and independent in its daily operations. Second, limited market transparency and data availability make accurate analysis difficult, while additional reporting and registration burdens on the private sector should beavoided. Betterand moretimely data sourcesare neededfor marketanalysis. Third, as amatter of lawthis subject is newto Pakistan-having beendormant since its inception. Judicial capacity is already weak and overburdened, and there may not be sufficient investment in the skills and knowledge required for this new and complex area of law. Building capacity in related professions should therefore be part of any program for implementation support. Sri Lanka Context. Sri Lanka has had a competition law since 1987, when it enacted the Fair Trading Commission Act No 1. This act provided for the establishment of the Fair Trading Commission, a quasi-judicial body under the Minister of Commerce and Consumer Affairs. The commission held wide-ranging powers over the control of monopolies, mergers, and anticompetitive practices-all of which were considered illegalonly iftheywerecontraryto theUpublicinterestllBut the lawcontained noclear definition of what constituted the public interest. The commission had the power to take into account "all matters that appeared relevant," which resulted in special considerations being given to safeguarding consumer and producer interests, and maintaining a balanced distribution of industrial activityi0 -considerations that could deviate from protecting the competitive processto insteadan anticompetitive stance of protecting existing competitors from the productivity-enhancing effects of genuine rivalry. The law also was not implemented effectively, as noncompliance with pre-merger notification was common. In addition, although the Fair Trading Commission had powerscommensuratewith thoseof a district court to conduct investigations,itdid not use those powers to consistently promote competition. For instance, commissioners believedthat the mergerof Glaxo-Wellcomeand SmithKline Beechamdid notfall within its authority, since it was an international merger. Inaddition, the commission's powers were considerablycurtailed by its inability to make binding interim orders, and by long delays in court proceedings. Thurairetnam (2006). OverviewofCompetitionLaw and Policy implementation QI In 2003 the Sri Lankan government repealed the Fair Trading Commission Act and passedthe ConsumerAffairs Authority Act.The new act providesfor the establishment of an investigative body, the Consumer Affairs Authority, and a separate adjudicative body, the Consumer Affairs Council. But while this act stipulates that the functions of the authority include controlling and eliminating restrictive trade agreements, it completely omits investigation of anticompetitive practices, promotion of effective competition between traders and manufacturers, and legislative provisions to deal with monopolies and mergers. In its current form, the Consumer Affairs Authority Act is a consumer protection law rather than a competition law. The lack of clear statutory provisions and guiding provisions has made effective implementation of pro-competition principles even more difficult than before. Issues moving forward. In many ways the Consumer Affairs Authority Act is a step backward. Effectiveenforcement and monitoring mechanisms capable of delivery the goals and objectives of competition law are lacking. In particular, there is a glaring omission in the Act with respect to monopolies and mergers. Furthermore, the Sri Lankan economy lacks a competition culture that could help promote competition as an integral part of economic policymaking, including policies on privatization and industry oversight.The first priority for further reform should be to achieve consensus among key national stakeholders on the benefits of competition, to move toward agreement on how to improve the policy and enforcement framework. -1 . ,LX Conclusionand [6, ,~ecommendations T his report's main conclusions and recommendations focus on challenges of unfulfilled potential-namely, the contrast between the size of the potential benefitsto South Asian economiesfrom increasedcompetition and the slow pace of competition reformsto date. Giventhe strongvested interests opposedto increased competition, South Asian economies need to take credible measures and provide supportto credibleinstitutionsto implement moreexplicit competition policies,so that disadvantagednew entrants somewhereto go for relief. SouthAsia has been relatively slow in adopting effectivepro-competition policies. South Asia has been moving only gradually from command and control policies to market reform and adjustment policies.The region remainsmoreclosedthan most to global competition (exceptfor Sri Lanka),regional competition, and intensedomestic rivalry. On the whole, South Asian economies suffer from a legacy of public restraints and bureaucratic hurdles that impede starting and closing businesses, employing workers, getting credit, international trade, and enforcing contracts. Corruption, and the attendant lack of a level playing field, is a top obstacle in most countries. The region's countries have been particularly slow in enacting competition laws, with only India (1969), Pakistan (1970),and Sri Lanka (1987)formally enacting such laws-and India's law overhauled and upgraded in 2002 but not yet fully effective, Pakistan considering a new draft, and Sri Lanka's law effectively downgraded to a consumer protection law in 2003. Enacting a competition law typically sends a strong signal to investors (domestic and foreign) that there are formal rules of the game for businessconduct, and hence promotes investment. Yet the record of enforcement across South Asian countries has been uneven, as noted in the World Bank's World Development Report 2005. Effective enforcement, in turn, requires committing sufficient public resources-to strengthening related skills, upgrading capacity, and building institutions-as well as independent investigation and adjudication, buttressed by appropriate checks and balances. Effective competitionrequires creating a "cultureof competition." Given that many South Asian countries suffer from high poverty, effective competition is even more important than in most other regions. By broadeningchoices and facilitating access to El Competition Law and Policy:Challengesin SouthAsia essential goods at lower prices, competition directly alleviates poverty.And by spurring growth and so creating new opportunities for entrepreneurship and jobs, it also raises the incomes of all. Although competition policies are both pro-poor and pro-growth, their effective implementation is too often thwarted by powerful vested interests- established, favored firms and certain government bureaucrats-that stand to lose acquired rents. These predatory vested interests have emerged over time, and their reluctance to sufficiently remove the legacy of public restraints and bureaucratic barriers to competition represents the most important bottleneck to enhanced competition in South Asia. Disarming such interests is extremely difficult-particularly in India, but also in Bangladesh, IVepal, Pakistan, and Sri Lanka, with each country facing its own challenges. Effective competition laws and policies can loosen such bottlenecks, but only with sufficient support for changefrom pro-competitionstakeholders.This, inturn, requires significantly enhanced efforts at strengthening as broad a base of support for competition as possible-starting with a much deeper understanding of what is at stake among the "natural" allies of competition, including associations of dynamic entrepreneurs and exporters that have gained from competition as well as consumer associations and other representatives of civil society, buttressed by enlightened champions within government. Threepolicy thrusts deserve special attention by SouthAsian authorities, whether within a formal competition agency or elsewhere within government, and by the private sector: a As part of efforts to promote competition,each national government should focus on enacting an appropriate competition law (withsufficient resources for effective enforcement) and on facilitating understanding of the impact and reducing the most important competition-related barriers to doing business-with an emphasis on local competition bottlenecks, where collusion is likely to be greatest but benefits are likely to be most visible.A key challenge is for pro-competition entities to acquirethe status and ability needed get the rest of government, at central and local levels, to adopt more pro-competition policies.Civil society should also play a greater role in promoting competition across South Asia: the promotion of competition is not a monopoly right held by government. Business associations of exporters and small and medium-size enterprises have a critical role to play, as do NGOs.South Asia's Consumer Unity and Trust Society (CUTS) has been particularly successful in increasing the demand for competition by raisingawarenessof its benefitsacrosscivil society.For example, CUTS has helped increase the accountability and transparencyof decisions by India's government on staffing senior positions, activities of the Competition rn Conclusionand Recommendations Commission,and regulatory policies related to infrastructure services. More of such efforts are needed throughout South Asia. As part of competition advocacy by business,the private sector should focus both on mobilizing natural allies of competition to provide political support for pro- competition policies and on improving the transparency and accountability of public procurement, aided by greater use of electronic procurement technologies. Governments are major buyersand sellers of goods and services.By improving transparency and accountability of public procurement and government- business relations more generally, competition authorities also help increase the efficiency of public spending-allowing more public resources to be channeled where they most helpthe truly needy.The productive private sector should do its part in each country to provide political support for such pro- competition policies. As part of advocacy efforts at the South Asia regional level, governments and businesses should analyze opportunities for regionalizing competition policy- allowing a broader range of stakeholders to participate and so making it harder for a single group to block such an important pro-growth, pro-poor initiative. As international trade and investment barriers fall, cross-border trade and investment is increasing in South Asia. South Asian countries would benefit from regional harmonization of competition policies-particularly in terms of thetreatment of cross-bordermergersand acquisitions,but also the continuing range of government regulations, controls on inward and outward direct investments, and conduct of private enterprises that limit access to national markets. It would be useful to establish a regional working group to develop a time-based plan for increasing regional competition, including agreeing on principles of mutual interest for regional cooperation on cross-border competition, trade, and investment. Just as the European Union plays a key role in spurring policy harmonization among aspiring Central and Eastern European member countries,a regional pro-competition initiative could play a similar role in South Asia,for the benefit of all the region's citizens. 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