41334 occasional paper 19 Competition Policy and Promotion of Investment, Economic Growth and Poverty Alleviation in Least Developed Countries R. S. Khemani www.fias.net ©2007The International Bank for Reconstruction and Development /TheWorld Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: feedback@worldbank.org All rights reserved 1 2 3 4 5 10 09 08 07 This volume is a product of the staff of the International Bank for Reconstruction and Development /TheWorld Bank.The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors ofTheWorld Bank or the governments they represent. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Pub- lisher,TheWorld Bank, 1818 H Street NW,Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISBN: 978-0-8213-7318-7 eISBN: 978-0-8213-7319-4 DOI: 10.1596/978-0-8213-7318-7 Library of Congress Cataloging-in-Publication Data has been applied for. contents iii contents Acknowledgments iv Executive Summary 1 1. INTRODUCTION 6 2. INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION 9 3. PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 14 4. INVESTING AND "DOING BUSINESS" IN DEVELOPING COUNTRIES 24 5. NATURE ANDTYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 26 6. CONCLUSIONS AND RECOMMENDATIONS 36 Appendix:Tables 40 Reference List 44 LIST OF TABLES Table 5.1: Number of Countries with Competition Laws (CL), by Region 26 LIST OF FIGURES Figure 3.1: Competition, Entry, and Economic Growth 15 Figure 3.2: Intensity of Local Market Competition and Per Capita GDP 18 Figure 3.3: Effectiveness of Competition (Antitrust) Law- Policy and the Extent of Market Dominance 19 Figure 3.4: Business Competitiveness Index and Effectiveness of Competition (Antitrust) Law-Policy 20 Figure 3.5: Intensity of Local Market Competition and Effectiveness of Competition (Antitrust) Law-Policy 21 Figure 4.1: Ease of Doing Business Rank, 2006 24 Figure 4.2: High Entry Costs Inhibit FDI Inflows 25 LIST OF BOXES Box 3.1: The Benefits of Increased Competition:The Case of India's Automobile Industry 16 Box 5.1: Who Administers Competition Law-Policy? 28 Box 5.2: Examples of Anticompetitive Practices in Selected Countries in Sub-Saharan Africa and South Asia Regions 31 iv ACKNOWLEDGMENTS ACKNOWLEDGMENTS The research assistance and significant data inputs pro- FDI,Technology and Competitiveness, Geneva, March vided by Ms.Ana Carrasco and Ms. Giuliana Cane are 8­9, 2007; the Department of Economics, Delhi School gratefully acknowledged.This paper has benefited from of Economics (especially Prof.Aditya Bhattacharjea), the preparation of a complementary report by the Delhi, India, March 19, 2007; and the Chicago Kent author and Mark Dutz, Competition Law and Policy: School of Law Conference on Competition Policy in Challenges in South Asia,World Bank (2007), and various Latin America, Chicago,April 13­14, 2007.The views discussions held in this regard.The author also wishes expressed in this paper are those of the author and do to acknowledge with thanks comments and suggestions not necessarily reflect the position of theWorld Bank made byVincent Palmade and various discussants and Group, its staff and officials. participants at the UNCTAD Meeting of Experts on EXECUTIVE SUMMARY 1 EXECUTIVE SUMMARY Competition--the process of rivalry between business business infrastructure.The consumers in these cases enterprises for customers--is a fundamental characteris- were not only ordinary citizens but also enterprises tic of a flexible, dynamic market economy. By respond- whose competitiveness was undermined by artificially ing to demand for goods and services at lower prices rigged prices. and of higher quality, competing businesses are spurred The competitive process needs to be maintained, pro- to reduce costs, increase productivity, make investments, tected, and promoted. Herein lays the critical role and and adopt new technologies and organizational methods importance of an effective competition law-policy.A to innovate in processes and products. Both economic well-designed and effectively implemented competition efficiency and consumer welfare are enhanced. Success- law-policy aims at reducing or eliminating impediments ful enterprises become stronger and more competitive, to competition that unnecessarily arise from public poli- whether in domestic or international markets. cy interventions as well as private sector restrictive busi- However, the sustainability and benefits that accrue from ness practices. Such a law entails both enforcement the competitive process are not solely dependent on the actions against illegal business conduct and "competition business conduct of enterprises.They also depend on advocacy" to encourage government to reconsider the the business environment or investment climate in design and necessity of regulatory and other barriers to which they operate, including the legal and regulatory competition. It provides for mechanisms whereby framework, barriers to entry and exit, and prevailing injured parties can seek relief against anticompetitive conditions in markets for labor, land, finance, infrastruc- business practices. It also promotes better public and ture services, and other productive inputs. Moreover, private sector market governance through promoting even if most of the problems that enterprises often greater compliance with the law and adoption of sound confront in these areas--especially in developing coun- business ethics. In addition to helping realize the bene- tries--were mitigated, competition is not necessarily fits of competition, competition law-policy fosters ensured.The process of competition is not automatic. broader and shared economic development by reducing Vested interest groups, incumbent large monopolistic barriers to entry and competition, increased accounta- firms, and other stakeholders can dampen, distort, or bility and transparency in government-business rela- capture the benefits of market-oriented economic tions, and limiting opportunities for rent-seeking and reforms such as trade and investment liberalization, pri- corruption. vatization, and deregulation. Empirical studies and case However, there are differing views whether developing examples indicate that while such economic reforms are countries need to adopt competition law-policy early pro-competition, they are insufficient. Even in advanced on in the sequencing of their economic and regulatory industrial economies, consumers have fallen victim to reforms, or even to have a specific competition law domestic and international cartels and related anticom- and institutions.The case against enacting competition petitive business practices--despite the presence of fairly law-policy rests primarily on arguments that economic flexible and deep markets for labor, finance, and various deregulation, trade and investment liberalization will other inputs, diverse sources of commercial information, result in increased import competition and entry of new and well-developed market support institutions and 2 EXECUTIVE SUMMARY firms which will erode any excess profits and market varies across regions. Proportionately fewer countries power of incumbent firms.Actual experience suggests have embraced competition law-policy in sub-Saharan otherwise. Domestic markets can remain insulated from Africa, the Middle East and North Africa, East Asia and external competitive pressures due to high transporta- Pacific, and South Asia regions relative to countries in tion costs, non-tradable products and services, exclusive Europe and Central Asia and Latin America. In all these and restrictive distribution contracts, and domestic and regions, the least-developed countries (International international cartels and market sharing agreements. In Development Association [IDA] member nations, which recent years, even industrialized countries with well are eligible for grants and low-interest loans) have been established competition regimes have fallen victim to especially slow in adopting competition law-policy. international cartels in markets such as food additives, There is a wide variation in the institutional design and steel, large transformers and pharmaceutical products. implementation of these laws. In many of these coun- Developing countries that had not adopted or lacked tries, there are widespread allegations of anticompetitive effective competition law-policy were found to pay practices in markets for goods and services such as bak- higher prices for these products. eries, cement, cotton, fertilizers, fish processing, freight transportation, insurance, school textbooks, seeds, steel, Another line of argument is that developing countries staple food products (rice, sugar, vegetable oil), and lack strong supporting institutions such as independent telecommunication services.Anticompetitive practices judiciary, good governance, independent media, and in the pricing and supply of many of these products professional, well paid civil service.This increases the have a particularly adverse impact on the poor. Also risks that the law may get misapplied and become a on the growth of small and medium sized enterprises vehicle for unnecessary intervention in markets, corrup- which are often subjected to monopsonistic practices tion and bribery.These risks are undeniable but they by large firms that out-source various intermediate also equally apply to other important areas of govern- products and services. Nonetheless, there are case- ment services such as customs, tax collection, education, specific examples of anticompetitive practices that have health and safety among others. Instead of avoiding been successfully addressed through the application of these responsibilities of government, it is important to competition law-policy. Investigations of anticompeti- assist countries in creating and building effective institu- tive business practices under competition law-policy are tions with capable staff and appropriate system of checks primarily "demand driven" in response to complaints and balances.This process can be "jump-started" with registered by individual consumers and business enter- provision of technical assistance from more experienced prises. For example, the Competition Commission of countries, facilitated by multi-and bi-lateral donor India registered its concerns and contributed to the organizations. shelving of a proposal by the Department of Post & Telegraph to extend its postal monopoly to include During the past two decades, more than 100 countries packages and letters weighing less than 300 grams. Had have enacted or significantly revised and strengthened the proposed regulation been adopted, it would have their competition legislation--including many develop- destroyed the vibrant competitive private courier indus- ing nations. However, the adoption of competition laws EXECUTIVE SUMMARY 3 try. In Kenya, the Monopolies and Prices Commission concentration levels, existence of dominant firms, and has been instrumental in adoption of competitive- high barriers to entry and investment in these bidding policy in government procurement, which has economies.These factors also result in "missing mid- resulted in significantly lower prices for drugs, hospital dle"-size firms, closed and often opaque government- and school supplies, and road transportation services. business relations, entrenched vested interest groups, It has also investigated alleged cartels in retail gasoline, favoritism and corruption in government procurement, insurance, Internet services, and various agribusiness and a wide range of anticompetitive practices that product markets. Often the initiation of the investiga- undermine productivity and competitiveness. Drawing tions has had a deterrent effect on the anticompetitive on published data, this paper indicates that: behavior and resulted in lower prices even if no cases Higher levels and rates of growth in per capita gross were prosecuted. I domestic product (GDP) are associated in countries There remain, however, significant challenges in foster- that have high intensity of competition in local ing competition in most developing countries.These markets.The IDA countries tend to have low levels stem in part from the lack of political will, inadequate of competition intensity in local markets, and low financial and staff resources, and lack of requisite knowl- levels of per capita GDP. edge and expertise.There are also widespread miscon- I High intensity of competition in local markets is ceptions about the beneficiaries of competition, on associated with greater effectiveness of competition which vested interest groups capitalize by marshalling law-policy.Again, IDA countries have low effective- fears of unemployment and need for supporting ness in the application of competition law-policy. "national champions."A survey by the International I The higher the effectiveness of the application of Competition Network (ICN) found that strongest sup- competition law-policy, the lower is the prevalence of port for competition advocacy comes from consumer market dominance by few firms, and higher the rank- associations, academics and the media; less from entre- ing in the "business competitiveness index."The IDA preneurial and professional associations, legislators, and countries have a correspondingly greater degree of least from political parties, labor unions and local gov- market dominance, and rank lower in the business ernments.The least supportive or opponents to compe- competitiveness index. tition have the most economic and/or political power. The levels and growth in per capita GDP, extent of Moreover, international organizations, including the market dominance, and intensity of competition and World Bank Group and donor community, have paid business competitiveness are determined by numerous relatively scant attention to and provided little sustained other factors as well. However, the maintenance and technical assistance to foster competition law-policy. promotion of competition through the effective applica- This represents a missed opportunity to help developing tion of competition law-policy can undoubtedly play an countries address some of the most egregious and per- important role in mitigating concerns in this respect. sistent economic development and governance problems Economies that do not address anticompetitive situa- associated with high ownership and product market tions and lower barriers to entry and competition are 4 EXECUTIVE SUMMARY not likely to be attractive to investors. Firms that do not ­have an impact on the poor (for example, staple compete in their own home markets are less likely to food products, local transportation, water- become competitive in international markets. sanitation, energy); ­provide products and basic services that serve multiple upstream or downstream economic RECOMMENDATIONS activity and bear on industry value-chains and Several recommendations are put forward which the competitiveness (for example, ports, energy, World Bank Group, in partnership with other develop- telecommunications, financial services); ment organizations, client country governments, and ­engage in delivery and cost efficiency of govern- civil society organizations could engage in to assist ment procurement of goods and services to reduce developing nations strengthen competition in their opportunities for corruption, bribery, and domestic economy, and adopt and effectively implement favoritism; competition law-policy.These are: ­comprise of potentially competitive and distinctive industries and economic activities that could POLICY AND DIAGNOSTICS PROJECTS attract foreign direct investment and related tech- nology transfer and new organizational methods. (i) Extend policy advisory and diagnostics projects aimed primarily at reducing public policy-based TECHNICAL ASSISTANCE AND barriers to entry-exit, regulatory costs and delays, INSTITUTION BUILDING licensing, etc. to also cover restrictive business prac- tices engaged in by private sector firms, business (iii) Increase capabilities and responsiveness to requests associations, and those emanating from closed, by least-developed countries for technical assistance opaque government-business relations, especially for: in regard to government as a supplier or purchaser ­drafting new or revising existing competition of goods and services. legislation and regulatory policies, administrative and interpretation guidelines, and related materials INDUSTRY/MARKET STUDIES for effective policy implementation; ­providing advice and capacity development in (ii) Conduct industry/market-specific competition skills such as case management, investigative tech- assessments and regulatory impact analysis to niques, compliance programs, regulatory interven- identify the principal public policy- and private tions, industry/market competition assessments sector-created barriers to competition as well as and regulatory impact analysis, and competition "winners and losers," and explore alternative, less- advocacy; interventionist policy approaches to promote ­promoting greater intergovernmental cooperation broad-based competitive investment and growth. and coordination, and coherency and consistency Priority should be given to sectors that: in the application and formulation of economic EXECUTIVE SUMMARY 5 and regulatory policies to be least restrictive of unnecessary inter-departmental frictions.And con- competition; tribute to greater stability, coherency and consistency in ­facilitating cooperation and exchange programs, competition and regulatory economic policies. Policy sharing of information, and expertise with peer instability has been frequently identified by firms as a competition authorities in other countries. major deterrent to investment in developing countries. Consideration should also be given to encouraging INFORMATION DISSEMINATION, competition authorities in developing countries to focus BUILDING COALITIONS AND not only on protecting and promoting competition, but CREATING BROAD-BASED SUPPORT FOR COMPETITION POLICY also to play a more active role in supporting regulatory impact analysis. Economies such as Australia, Hungary (iv) Work with consumer associations, nongovernmen- and Korea among others have carried out radical tal organizations, private sector business organiza- reforms in which competition authorities played a tions and trade associations, academic research and key role. Other countries could draw lessons from this. policy institutions, and legislators to foster greater In developing countries, with financial and human understanding and appreciation of the benefits of resource constraints, drawing synergistically on relevant competition and encourage grassroots ownership expertise across different parts of government, with and demand for pro-competition policies. over-lapping and/or complementary responsibilities that bear on industries and markets, would result in avoiding 6 INTRODUCTION 1. INTRODUCTION A persistent challenge that faces the governments of have higher levels and rates of growth in per capita gross least-developed countries as well as policy advisors at domestic product (GDP), and lower rates of poverty.1 the BrettonWoods Institutions, the United Nations, and Promoting effective competition is often argued on aid agencies is: how to foster sustainable broad-based economic grounds that it spurs firms to focus on efficiency and growth, development, and poverty reduction. During the past improve consumer welfare by offering greater choice of two decades or more, various policy approaches have higher-quality products and services at lower prices. been explored. In the "first-generation reforms," the However, it also promotes greater accountability and World Bank Group and the International Monetary transparency in government-business relations and deci- Fund (IMF), among others, focused on promoting the sion making, and contributes to reducing corruption, macroeconomic stability and trade integration of coun- lobbying, and rent-seeking behavior.Additionally, by tries. Second-generation reforms moved from the broad lowering barriers to entry, it provides opportunities policy environment to encourage more microeconomic for broad-based participation in the economy and for changes, namely, improvements in the administrative, sharing in the benefits of economic growth.Without legal, and regulatory functions of the State. Of late, effective competition, firms are more likely to possess particular emphasis has been placed on the role of the considerable market power, which enables them to earn public sector in establishing an "investment climate" excess profits and wield political influence to tilt public conducive to promoting private sector-led investment, policy in their favor.There are also likely to be distorted growth, and poverty alleviation. price and profit signals and increased risk of misguided The quality of a country's investment climate deter- investment and output decisions, which can lead to mines the risks and transaction costs of investing in and economy-wide repercussions. operating a business.These risks and costs are in turn The merits and benefits of fostering open and competi- determined by the legal and regulatory framework, bar- tive markets have been recognized in many countries riers to entry-exit, and conditions prevailing in markets that have adopted various macro- and microeconomic for labor, finance, infrastructure services, and other pro- reforms. However, there is wide variation in the eco- ductive inputs. Essentially, the quality of the investment nomic growth and development of nations. Casual climate will determine the mobility and speed with observations indicate that there is also a wide variation which resources can be redeployed from lower to higher in the nature and extent of competition prevailing with- productive uses. For this to occur effectively, the nature in and across countries. Moreover, notwithstanding the and degree of competition in markets plays a pivotal merits and benefits of competition, there is no consen- role. In this regard, there is significant economic evi- sus or widespread support for promoting competition dence suggesting that private investment has grown within and across countries--especially developing faster in countries with better investment climates.Also, nations.This stems in part from the lack of understand- economies with competitive domestic markets tend to ing or appreciation of what effective competition can attract more domestic and foreign direct investment, 1. See ensuing discussion in Section 2 andWorld Bank 2005 and 2003. INTRODUCTION 7 tangibly contribute to the betterment of the lives of The lending and nonlending advisory services of the ordinary citizens, and in part from ideological differ- World Bank Group (and IMF) have paid relatively scant ences and the influence wielded by vested interest attention to promoting competition law-policy in client groups in both government and the economy at large. countries.While many of the suggested policy measures Although the differences in the economic growth and such as trade and investment liberalization, simplification development of nations cannot purport to be explained and reduction of the costs of regulation such as "Doing by the differences in the prevailing degrees of competi- Business" reforms,3 and privatization are pro-competi- tion, this paper argues that it is one of the important, if tion, they are insufficient.These measures primarily not critical explanatory factors. It is well established that change the role of the public sector in the organization least-developed economies are encumbered by limita- and conduct of economic activity, and they appropriate- tions of human and physical capital, governance and ly pave the way for an increased and less-encumbered institutional structures, and other resource constraints. role for the private sector. But these measures do not But they are also prevented from achieving their poten- address the restrictive business practices and rent-seeking tial by various types of public policy-based and private behavior of the private sector.The latter can have an sector anticompetitive business practices.The primary adverse impact on the benefits that flow from the com- message of this paper is that these countries need to take petition that other regulatory reforms promote. concrete, consistent, and coherent measures to integrate Some "schools" of thought and commentators question and promote effective competition policy as part of the need to enact a specific competition law and argue their overall government economic and regulatory that private sector firms cannot engage in anticompeti- framework.An effective competition policy should be tive business practices if open competitive markets are viewed as the "fourth cornerstone" of this framework-- promoted by lowering barriers to trade, investment, and along with sound monetary, fiscal, and commercial entry.Any rents that incumbent firms earn will be (international trade) policies. quickly eroded by the emergence of new competitors Competition policy refers to those government meas- seeking to also earn high profits.There are intertemporal ures that directly affect the extent of rivalry between and cross-section industry studies that indicate that with enterprises and the structure of industry. Competition tariff reductions and resulting increased import compe- policy typically includes both policies that enhance tition, the profit (price-cost) margins of domestic firms competition in local and national markets (such as decrease. However, case- and industry-specific studies liberalized trade policy, relaxed foreign investment and indicate that domestic firms and markets can remain ownership requirements, and economic deregulation) insulated from international competitive pressures due and competition law (also referred to as antitrust or to factors such as high transportation costs, nontradable antimonopoly law) designed to prevent anticompetitive products and services, perishable goods, and business business practices by firms and unnecessary government strategies such as exclusive dealing, foreclosure of interventions in the marketplace.2 important sources of inputs and distribution channels, 2. See Khemani and Dutz (1996). Presently, more than 100 countries have competition legislation. More than half of these nations have adopted or strengthened such policies since the early 1990s, but effective implementation varies because of factors such as inadequate resources, administrative capacity, and political support. See also the discussion in Section 5. 3.World Bank (2007 and earlier years) "Doing Business" reports are at http://www.worldbank.org and http://www.doingbusiness.org. 8 INTRODUCTION product standards, various domestic regulations, and not exploited, and both government and business adopt international cartels. Moreover, the business environ- good "market governance" principles.An effective com- ment prevailing in least-developed countries is fraught petition law-policy includes a set of instruments that with problems that raise barriers to entry: lack of buttress a healthy investment climate, thereby contribut- enabling physical and business infrastructure, underde- ing to investment, productivity, and broad-based eco- veloped financial (debt-equity) markets, informational nomic development.To further elaborate on these asymmetries and the like, as well as anticompetitive points, the ensuing discussion is organized as follows: practices and lobbying by large incumbent firms, which Section II discusses the implications of high product often have close connections to government and politi- market and ownership concentration, governance, and cians.There is an inherent tendency among firms-- institutional characteristics frequently observed in devel- whether in advanced industrial or developing oping countries that have an impact on competition. economies--to avoid the inconvenience of competition Section III presents empirical information on the pro- and monopolize markets to earn higher profits wherever growth and pro-poor benefits that arise from increased possible. Such tendencies need to be curbed to promote competition. Section IV discusses constraints that busi- merit-based competition. ness faces in operating in developing countries. Section V describes the nature and type of alleged anticompeti- While economic deregulation and lowering of barriers tive business practices encountered in developing coun- to trade and investment fosters competition, the com- tries, and SectionVI concludes the discussion and offers petitive process also needs to be protected and promoted. some recommendations that theWorld Bank Group, in This is the role of an effective competition law-policy. partnership with other international organizations and It provides for a system of checks and balances so that donors, could consider in strengthening and promoting businesses are free to pursue legitimate commercial effective competition policy in recipient countries. interests, consumers including other business firms are INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION 9 2. INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION Most developing and transition market economies (pyramid) ownership structures, buttressed by non- (including the previously high-performing nations in voting shares and interlocking directorates. Outside East Asia) have a number of common structural, institu- shareholders tend to have minority positions, without tional, and governance characteristics that include the recourse to adequate information disclosure require- following: ments, security regulations, and related safeguards for their investments.The family or closely held enter- I High levels of domestic product market concentra- prise groups loom large not only in specific markets tion, barriers to entry and trade, and a low degree of but across the economy as well, resulting in high interfirm rivalry-competition.While the liberalization levels of aggregate concentration.4 of markets for goods and services is on the rise, the I "Missing middle"-size firms. Industries and markets inherent structural features of high product market tend to be dominated by a few large firms, and many concentration tend to change slowly due to past gov- small-size (marginal) firms that rarely survive and ernment policies and interventions such as industrial grow to medium/larger sizes.The missing middle is policy, tariff protection, licensing, preferential pro- attributed to a range of factors, such as lack of access curement, and the like, as well as the relatively small to financial and managerial skills, and anticompetitive size of domestic markets in most developing business practices by large incumbent firms. economies and underdeveloped capital markets. I Lack of an effective "market for corporate control," I High levels of ownership concentration and inade- that is, the process by which inefficient firm manage- quate corporate governance regime. In many devel- ment is displaced through mergers and acquisitions. oping and emerging market economies, major corpo- This is due in part to policy-based restrictions against rations are family owned or controlled by small group foreign ownership and "reserved" lists of economic of influential investors.They also tend to have con- sectors, and in part to high levels of ownership glomerate holdings with extensive direct and indirect concentration.5 4. See Prowse (1998) and Claessens (1998).Various studies relating to developing and emerging market economies indicate the concentration of wealth and industry. In Pakistan during the 1960s, 22 mainly family-owned businesses controlled 66 percent of industrial assets and 87 percent of the banking and insurance assets. Forty-three families closely owned and/controlled 53 percent of the companies listed on the Karachi Stock Exchange, and the average four-firm concentration ratio was 70 percent in the 82 industries that accounted for the bulk of industrial production (see CUTS [Consumer Unity andTrust Society] [2002]). In the Philippines, 22 family-controlled groups account for 63 percent of the stock market capitalization, and purportedly dominate the congress and government economic policies (see Coronel [2004]). In Indonesia, former President Suharto and his extended family along with selected politicians and businessmen controlled virtually every significant financial and industrial sector in the economy. Until the economic-financial crisis in the late 1990s, the top 30 Korean chaebols (conglomerates) dominated every sector of the economy except agriculture.They owned or controlled roughly two-thirds of the 100 largest manufacturing firms and about 40 percent of manufacturing GDP, 16 percent of total GDP, 50 percent of exports, and 15 percent of commercial bank loans (seeYoo [1998] andYoo and Lim [1997]). In nine East Asian economies, for example, a survey of nearly 3,000 firms indicates that more than 50 percent are controlled by a single shareholder. High levels of industry, aggregate, and ownership concentration also exist in Argentina, Brazil, Chile, and Mexico, as well as the formerly socialist and recently privatized industrial sectors in economies such as in Russia.Although more up-to-date information on concentration and ownership is not easily obtainable, studies of other countries suggest that such structural patterns change very slowly over time, and these and other developing and emerging market economies are likely to be still highly concentrated. 5. Restrictions on foreign ownership and contested (hostile) takeovers remain in several developing countries. In many spheres of economic activity, firms require government permission or licenses to enter or conduct business.As theWorld Bank's Doing Business reports indicate, starting and registering a business, dealing with licenses and labor laws, enforcing contracts, obtaining credit, etc., impose inordinate delays and costs--especially in the least-developed economies. 10 INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION While the direction of causality between these sets and profits.With easy, if not assured profits and preferen- of factors is open to debate, they tend to be mutually tial treatment by governments, incumbent firms have re-enforcing and give rise to inflexible, inefficient, and little or no incentive to use resources efficiently.At any anticompetitive industrial and financial/capital market given time, firms insulated from competition generally structures. incur costs that are higher than what would be sustain- able under the best technical and managerial practices. In a number of economies, high levels of industry or Over time, these losses are compounded by the misallo- product market concentration may be the result of the cation of resources and "x-inefficiencies" stemming small size of the domestic market relative to efficient from monopolistic output levels, and managerial and scale of production, so that there is room for only a few organizational slack. However, in spite of these costs, firms. It could also be attributable to lack of an effective these firms may still produce satisfactory operating and competition law-policy that prevents monopolistic busi- financial results, and attract foreign investment and joint ness practices and mergers and acquisitions.Aggregate ventures as they know local market conditions and may and ownership concentration may have initially arisen have greater access to policy decision makers than do due to market and institutional failures and gaps such as new domestic firms. High prices and profits can mask absence of well-developed markets for credit and other high costs and poor investment decisions.7 inputs; paucity of relevant information and intermedi- aries; and an inadequate legal system for protection of High profits also provide increased incentives for property rights, resolving disputes, and enforcing con- entrenching the observed high levels of ownership tracts.This would necessitate enterprises to internalize concentration. many of these functions to minimize transaction costs Why would owners give up ownership control when on a and risks.6 High industry and ownership concentration risk-adjusted basis they can earn higher returns (that is, levels may have also arisen due to preferential treatment rents) in markets insulated from competitive pressures? by and industrial policies of government. Regardless of these underlying explanatory factors, which vary across economies, the observed high levels of concentration VESTED INTERESTS THWART COMPETITION create "incumbency benefits" for firms and make mar- kets less easily contestable by new entrepreneurs. While some argue that high ownership concentration is conducive to resolving or minimizing the "principal- High levels of product market concentration and weak agent" problem, that is, ensuring corporate management competition generally result in high (monopoly) prices (agents) acts in the best interests of a firm's owners 6. In this regard, a stream of theoretical and empirical studies examine different hypotheses. See, for example, Khanna and Palepu (2000a and 2000b) and various citations therein. 7. Glen et al. (2003) examine the persistence of profits of large firms across seven developing countries (Brazil, India, Jordan, Korea, Mexico, Thailand, and Zimbabwe) over the period 1980­1995 and draw some comparisons with results relating to advanced industrial countries. Counterintuitively, they find that both short- and long-term persistence of profits is lower, suggesting competition is equally if not more intense than in advanced countries. However, the sample is restricted to analysis of only 339 firms across the seven economies for which time-series data could be obtained, and the firms differ across countries in their industrial composition. Moreover, there is a selection bias in that the analysis does not cover firms that may have entered and exited during the period of analysis.The results, while interesting, cannot be interpreted as characterizing competition in the least-developed countries, most of which do not have functioning stock markets. INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION 11 (principals) by maximizing shareholder value, this argu- and the lenders operate.In some countries,commercial ment applies only when ownership and management are firms also own and control major domestic banks,creat- separate.When owners actively manage the firm, they ing business conglomerates with"in-house"sources of can exploit minority shareholders or outside investors, easy financing for themselves.For example,some of these engage in moral hazard behavior by passing on the risks practices contributed to the high leverage of leading firms and costs, and pursue various non-economically viable in East Asia,as well as the widespread corporate distress objectives such as catering to their prestige and egos. In and banking failures during the financial turmoil of the addition, high levels of ownership concentration late 1990s.More generally,preferred access to bank credit entrenches owner-managers and limits the extent to significantly reduces the need of incumbent firms to rely which the market for corporate control can act as a dis- on securities markets where external financiers often ciplinary force on their performance. In these circum- demand transparency and accountability of corporate stances, it is difficult to change ownership and control of insiders.And when outside nondebt capital is required, a corporation through mechanisms such as mergers and restricted or nonvoting and preferred shares are issued.9 acquisitions so as to redeploy resources from lower- to Inadequate competition limits access to capital by new higher-valued uses. It also undermines the development or small businesses.The lack of fair competition results in of a separate cadre of professional managers, as owner- lower profits and retained earnings as internal sources for managers appoint extended family members to key financing growth. Lenders and investors understandably management positions.8 Such situations provide little prefer more-established firms with significant business incentive for domestic and foreign direct investment. advantages. Over time, the industrial structure may They also preclude the benefits that tend to accrue in become skewed, with a few large conglomerates domi- terms of diffusion of new knowledge, technology, orga- nating the economy and a large number of small firms nizational methods, product innovation, productivity, struggling to overcome scant prospects for growth.There and competitiveness. emerges the missing middle that is observed in the size The commercial advantages of large,closely held incum- distribution of firms in many developing economies.A bent firms are not lost on banks and other financial insti- report by the United Nations Conference onTrade and tutions,which play a predominant role in financial inter- Development (UNCTAD) points out many of the diffi- mediation in developing countries.Banks maintain cozy culties that small firms face in least-developed relationships with established and often well-connected economies; these include business networks that provide businesses--a natural outcome in a protected and prof- support for insiders and make it more difficult for out- itable business environment in which both the borrowers siders to enter particular activities or markets; networks 8. In Korea, 29 of the 30 chaebols were (and most still are) family controlled. In many cases, chaebol owners are interlinked via marriages, interlocking directorates, cross-holdings, and investments. Marriages also cement links with senior government officials. Cummings (1997) points out that fully one-third of chaebol owners' sons or daughters were married to high-ranking government officials. In India, most of the 50 largest industrial groups are family owned according to Pramal (2003). SeeWorld Bank "Doing Business" reports, op cit. 9. Singh (2003) finds that stock markets in developing countries grew rapidly between 1980 and 1995 and contributed significantly to corporate growth through issuance of primary stock; this growth diminished in the post-1995 period. However, the analysis is based mainly on large economies such as India, Korea, andThailand, which have reasonably well-functioning stock markets, and the findings do not apply to the least-developed countries, the focus of this paper. 12 INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION that limit competition and lead to unproductive entre- duction of competition and entry by new domestic and preneurial activities; and inability to tap into capital foreign banks.Even in the stress of a financial crisis,major markets or to face very high rates on borrowing.10 conglomerates in East Asia were able to water down unfa- vorable reforms and stretch out the onset of implementa- As indicated above, owners of incumbent firms have an tion.Public sector enterprises are no exception.Difficul- incentive to retain control of profitable domestic opera- ties in privatization programs have been encountered over tions.They may chose to remain private or go public a wide range of cultural and economic environments,for without giving up control by retaining a controlling example,from Ghana to India andThailand. stake or issuing nonvoting shares.Available data suggest that a higher share of leading firms remain private in Another concern is that, with distorted prices that guide less-competitive markets. Even within the group of pub- business decisions, the pursuit of profits may be detri- licly traded companies, a higher proportion of closely mental to social welfare. Operations that are profitable held firms are observed in less-competitive economies.11 when based on domestic prices may actually produce a loss when the inputs and outputs are valued at world Regulatory and private restraints on the competitive prices.This certainly has been the case with many process have deeper ramifications. Because existing firms commodity monopolies in Africa and politically con- tend to be relatively large in size and few in number, nected conglomerates in East Asia. they have definite organizational and financing advan- tages in influencing the government's legislative and Rajan and Zingales (2003) state that: regulatory agenda. In more advanced countries, where "The corrupt version of capitalism--when powerful cor- there is a depth of informed opinions, competing inter- porations deliberately try to eliminate healthy competition ests, and independent media, powerful commercial to preserve their privileged position--generates economic interests may not always prevail. In most developing inefficiencies and social injustice, thereby undermining countries, competing opinions are more limited. In this political support for the free-market based system...."12 context, interest groups are more likely to succeed in They also observe that:"...while everyone benefits from furthering their own agendas. competitive markets, no one in particular makes huge The close connection between economic power and profits from keeping the system competitive and the play- political influence is generally recognized.Incumbent ing field level....Without a strong political constituency firms often use their political influence to entrench their supporting them and under the continuous pressure of market and ownership positions.For example,domestic vested interests markets are always too restricted, never too bankers in many countries have successfully resisted intro- free."13 10. See UNCTAD (2006). 11. See Khemani and Leechor (2000). 12. See Rajan and Zingales (2003). 13. In Crown Business Books (2003: 311), the authors argue that access to competitive financial markets is perhaps the most critical factor to sustainable economic development.Vibrant financial markets threaten the sclerotic corporate establishment and increase corporate mobility and opportunity, which translates into personal freedom and economic development for more people. Elites restrict access to capital and severely limit not only economic development but also that of individuals. In the end, such vested interests backfire as the excuse for suppressing competition to reduce risk, and they result in lack of innovation and exposure to market downturns. INTERPLAY AND IMPLICATIONS OF HIGH PRODUCT, OWNERSHIP AND FINANCIAL MARKET CONCENTRATION 13 Among the major impediments to development identi- and South Asia.14 Other constraints included anticom- fied by the authors is access to competitive financial petitive business practices, which tended to have greater markets. impact on small- and medium-size firms.15The impor- tance of the role of effective competition law-policy Access to finance as a major constraint to the operations becomes heightened in the context of the economic and growth of firms was also identified in theWorld structural, governance, and other characteristics preva- Bank's assessment of the investment climate across coun- lent in the developing countries discussed above. tries and regions around the world--especially in Africa 14. See Batra et al. (2003). 15. Ibid: Chapter 2. 14 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 3. PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH16 TheWorld Bank's Global Economic Prospects Report class companies can readily overcome obstacles such as (2003) points to the pro-growth and pro-poor benefits low levels of education or scarce local capital and allow of competitive markets. Research conducted for the workers to reach world-class productivity levels if report indicates that economies with competitive allowed to do so through open markets and a level play- domestic markets generally tend to have higher levels ing field where efficiency and innovation are appropri- and rates of growth in per capita income. Entry of ately rewarded.18The emergence of India as a major firms plays an important role in the competitive process global center for automotive design as well as manufac- (see figure 3.1).These economies also have lower rates ture of cars and components in a short number of years of poverty and attract more domestic and foreign as the result of an explicit set of policies to promote investment.This research is consistent with the broad competition in this sector is illustrative of the potential empirical finding that barriers to competition impede productivity benefits of competition (see box 3.1).19 innovation, growth, and prosperity.17 The increased competition and investment have also In a complementary fashion based on the detailed study given rise to increased employment in the automotive of individual industries and companies worldwide, and other sectors such telecommunications, consumer William Lewis and his colleagues at McKinsey & durables, domestic airline services, and IT (information Company document how undistorted competition in technology) software industries in India.20 More gener- product markets is the most important long-run deter- ally, the increased employment and lower prices that minant of productivity, and hence prosperity. Neither result from increased competitive pressures expand education nor lack of capital appears to be a binding markets and make goods and services more affordable. constraint on productivity. Direct investment by top- Indeed, various studies suggest that, when there are 16.The discussion in part is derived from Dutz and Khemani (2007). 17. See among others Baumol (2002), Easterly (2001: Chapter 9), and Klein (2003). 18. See Lewis (2004). 19. It should be noted that while India liberalized investment and entry into the automotive sector, it continued to maintain high levels of tariffs and instituted domestic content regulations. However, such policies did not limit competition in the domestic market given its large size relative to efficient scale of production, new entry and the number of competing firms, and pent-up high demand for better-quality vehicles.While such "industrial policy or strategy" may be possible for large economies such as India, the same options are not available for economies with smaller domestic markets. In this regard, Malaysia and its troubled state-supported automobile manufacturer Proton would be an example.Also, large domestic market size does not necessarily ensure success.According to McKinsey & Company, Brazil's car industry stagnated until the mid-1990s due to tariff protection and lack of competitive rivalry between firms.With gradual reduction in tariffs, productivity increased on average by 16 percent per year.A policy of tariff reductions is also recommended for the Indian automotive sector in order to reap the full benefits of competition. If followed, the Indian automotive sector could reach 80 percent of the U.S. benchmark productivity levels by the year 2010 (see McKinsey & Company [2001]). Economies with relatively small domestic markets can also have internationally competitive industrial firms.A case in point would be Sweden with such firms (among others) as Saab, Sandvik, SKF, andVolvo that have based their success on reputation for high quality, durability, and well-engineered products. Productivity gains in these firms were garnered through competition in export markets. 20.That increased competition can also result in unemployment is not questioned.Analysis by Auer Islam (2007) points out that there is a tendency for employment intensity to decline with economic growth; it varies across industries, in magnitude, and over time, and no specific sectors need to be targeted for special measures. However, the analysis recommends a mix of general policies for employment security including investment in training. Such approaches are not in friction with competition policy. PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 15 FIGURE 3.1: COMPETITION, ENTRY, AND ECONOMIC GROWTH 40,000 15 te (USD) ra a 10 pitac 20,000 wtho 5 r gr pe 0 GDP 0 GDP -5 3 4 5 6 7 3 4 5 6 7 competition competition 40,000 15 te (USD) 30,000 ra 10 a pitac 20,000 wtho 5 r gr pe 10,000 0 GDP GDP 0 -5 4 4.5 5 5.5 6 4 4.5 5 5.5 6 entry entry Sources: World Bank Economic Forum andWorld Bank SIMA Indicators."Competition" is the average response in each country to the question "In most industries, competition in the local market is (1=limited and price-cutting is rare, 7=intense and market leadership changes over time)." "Entry" is the average response to the question "Entry of new competitors (1=almost never occurs in the local market, 7=is common in the local market)." unnecessary regulatory impediments and insufficient Egypt, India, Malawi, and Mongolia (among others) has competition, the poor often pay higher prices and yet to come into full effect.As indicated earlier, measures receive lower-quality goods and services than the more such as trade and investment liberalization and deregula- affluent segments of society.21 tion can give rise to competition in the domestic econ- omy, whether or not specific competition law-policy is Not all countries in the sample in figure 3.1 necessarily in place.And enactment of competition law does not have adopted specific competition law-policy. Moreover, necessarily result in competition. However, having a recent legislation enacted in countries as diverse as 21. See for example theWorld Bank (2004) report 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. Other studies by theWorld Bank Group and various development organizations also point out that the poor pay more or receive lower quality for such services as water, sanitation, electricity, and even primary school education than do residents in the formal city. 16 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH BOX 3.1: THE BENEFITS OF INCREASED COMPETITION: THE CASE OF INDIA'S AUTOMOBILE INDUSTRY Notwithstanding their partial nature, India's 1991 economic reforms and subsequent sectoral liberalization fostered increased domestic and foreign investment, growth, and competitiveness. Nowhere is this more evident than in the automobile industry, which as of 2002 permitted foreign direct investment up to 100 percent for the manufacture of automobiles and components, with no minimum capital investment required for new entrants. Once characterized by the Economist as producing outdated 1940s' models referred to as "fossils on wheels," today the automobile industry accounts for: · Four percent of GDP, up from 2.8 percent in 1992­93. · More than $13.5 billion in investments. · More than 1.12 million automobiles produced annually, compared with 264,000 in 1994­95. · More than $21.6 billion in annual turnover of automobile sales. · Direct employment of half a million workers and indirectly 10 million, compared with less than 100,000 before. While two decades ago Indian automobile customers waited for up to five years or more, today they have a plethora of mod- els to choose from in all price ranges, from economy to luxury cars.Abroad, the Maruti Alto hatchback, manufactured in col- laboration with Suzuki, accounts for 19 percent of the small cars sold in the Netherlands. India also has become a significant exporter of automotive parts. The benefits of intensive competition and increased investment have also stimulated innovation. Mahindra & Mahindra spent only $120 million to develop its fast-selling Scorpio model--one-fifth of what it would cost in Detroit. Similarly,Tata Motors developed its Indica model for $340 million, compared to a global development benchmark cost of $1 billion. As a result, India has emerged as major global center for automotive design as well as manufacture of cars and components. Source: Evalueserve 2006 competition law in place signals to firms and markets in models of economic growth. Dutz andVagliasindi that certain business behaviors and commercial prac- (2000) found that effective implementation of competi- tices, as defined in the law, are illegal. It confers rights tion law-policy in transition market (former centrally and obligations on transacting parties and provides for planned) economies of Europe and Central Asia have due process to resolve disputes and obtain relief from a robust positive relationship with expansion of more anticompetitive practices. efficient private sector firms. In this connection, cross-country analysis by Dutz and Data derived from theWorld Economic Forum's The Hayri (1999) found that "perceived" effectiveness of Global Competitiveness Report 2006­2007 provide further competition policy helps to explain differences in eco- evidence of the importance of competition, and compe- nomic growth beyond the variables conventionally used tition (antitrust) law-policy, in fostering higher incomes, PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 17 broad-based markets (less-dominant firms) and global constraints in their business environment. In recent competitiveness (see figures 3.2 to 3.5).The data are years, many least-developed countries have experienced derived from "perception surveys" of opinions of poli- higher rates of economic growth. However, various cymakers, business executives, and various officials in reports point out this growth is fragile and primarily public and private sector organizations, including acade- commodity driven. It has not led to creation of produc- mia.The responses, collated and computed into various tive capacities and industrial upgrading. Figure 3.3 indi- indicators, do not actually measure factors such as cates that these countries also tend to have less-effective volume of trade, magnitude of intensity of local competition (antitrust) law-policy,25 which probably competition in terms of prices and firm turnover, and explains why local markets are dominated by few large effectiveness of competition (antitrust) law-policy firms.These economies also rank lower in terms of the implementation in terms of number of cases handled business competitiveness index (figure 3.4), which is and resolved, etc. Nonetheless, the indicators are useful, positively associated with effectiveness of competition as they are based on the views of key individuals who (antitrust) law-policy. Finally, figure 3.5 suggests that the are aware of the array of issues that have an impact on intensity of competition in local markets and effective- competitiveness in their respective countries.22 ness of competition (antitrust) law-policy tend to be positively correlated.As the discussion in the preceding Figure 3.2 indicates that the least-developed (based on section postulates, these characteristics of least-devel- International Development Association [IDA] ranking) oped economies result from the interplay and mutual countries,23 which tend to have low levels of per capita re-enforcement of market dominance of large firms, GDP, also have low intensity of competition in local weak state of competition in local markets and resulting markets.24The majority of these countries tend to clus- lack of business competitiveness.The data pertaining to ter together.While a few have a higher degree of local non-IDA countries, where these factors tend to have market competition, this does not necessarily translate higher correlations, suggest that this cycle could be bro- into higher per capita incomes, probably due to other ken by an effective competition (antitrust) law-policy. 22. For further information on the construction of these indicators, including the Global Competitiveness Index see Auer and Islam (2007: Chapter 1.1). 23. IDA provides interest-free (credits) and grants to the poorest developing countries in order to boost their economic growth and improve living standards.The list and regional distribution of these countries is in the appendix, table A-2. 24. In this and subsequent figures, the main outlier countries are India, Indonesia, and Kenya.This may be the result of the perception bias of the respondents. For example, India currently does not have an effective antitrust law--the Competition Act amendment bill is before Parliament and has yet to come into full effect. However, there is a markedly high intensity of competition in local markets, in part because of the relative large size of the domestic economy and number of firms. Indonesia has had a new competition law in force since 2000, with an autonomous competition commission that has investigated a number of cases in the fertilizer, cement, retail, paper, insurance, and other sectors. Its domestic economy is also relatively large, which sustains a number of rival firms, though the competition commission has confronted difficulties in areas such as getting information and collection of fines. In 1990, Kenya updated and replaced earlier legislation on prices and related matters with a RestrictedTrade Practices and Control of Monopoly Prices. Commentators have pointed to the need for Kenya to have a well-resourced, independent competition authority and greater harmonization with overlapping sector-specific laws that are less pro-competitive. Even so, the Monopoly and Prices Commission has investigated and prosecuted a number of cartels, other types of restrictive business practices, and merger-and-acquisition transactions. 25. See UNCTAD (2006). 18 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH FIGURE 3.2: INTENSITY OF LOCAL MARKET COMPETITION AND PER CAPITA GDP 40 High IDA Countries Non-IDA Countries 35 30 25 a pit Ca reP 20 GDP 15 10 5 Low 0 Low High Intensity Intensity of Local Markets Competition Intensity Source: Global Competitiveness Report 2006­2007 andWorld Bank DDP, 2005 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 19 FIGURE 3.3: EFFECTIVENESS OF COMPETITION (ANTITRUST) LAW-POLICY AND THE EXTENT OF MARKET DOMINANCE High Dominance IDA Countries Non-IDA Countries ncea Domin etk ar M of tentxE Low Dominance Low High Effectiveness Effectiveness of Competition (Antitrust) Law-Policy Effectiveness Source: Global Competitiveness Report 2006­2007 RANK CORRELATIONS IDA n = 43 rs = - 0.7201 Non-IDA n = 82 rs = - 0.8626 All countries n = 125 rs = - 0.79866 20 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH FIGURE 3.4: BUSINESS COMPETITIVENESS INDEX AND EFFECTIVENESS OF COMPETITION (ANTITRUST) LAW-POLICY High x Inde enessv ompetiti C sinessu B IDA Countries Non-IDA Countries Low Low High Effectiveness Effectiveness of Competition (Antitrust) Law-Policy Effectiveness Source: Global Competitiveness Report 2006­2007 RANK CORRELATIONS IDA Countries n = 39 rs = 0.61 Non IDA n = 80 rs = 0.90 All Countries n = 119 rs = 0.92 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 21 FIGURE 3.5: INTENSITY OF LOCAL MARKETS COMPETITION AND EFFECTIVENESS OF COMPETITION (ANTITRUST) LAW-POLICY High IDA Countries Non-IDA Countries ompetition C etsk ar Mla Loc of Intensity Low Low High Effectiveness Effectiveness of Competition (Antitrust) Law-Policy Effectiveness Source: Global Competitiveness Report 2006­2007 RANK CORRELATIONS IDA Countries n = 42 rs= 0.42 Non IDA n= 82 rs= 0.84 All Countries n = 124 rs= 0.86 22 PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH Michael Porter, in The Competitive Advantage of Nations ernment interventions.They found that the govern- (1990), observed that: ment-led model with major subsidies was almost entire- ly absent and found little evidence of interventions in Few roles of government are more important to the competition.27 Indeed, even casual observations in prod- upgrading of an economy than ensuring vigorous domestic ucts such as electronics, automobiles, and consumer rivalry. Rivalry at home is not only uniquely important to durables indicate that there is vigorous interfirm rivalry fostering innovation but benefits national industry...In between Korean and Japanese firms in their respective fact, creating a dominant domestic competitor rarely results home markets as well as abroad.And in recent years, in in international competitive advantage. Firms that do not both these economies as well as Singapore, vigorous have to compete at home rarely succeed abroad. Economies enforcement of competition law-policy has become of scale are best gained through selling globally, not central to reviving their economies. through dominating the home market. (page 662) Recently, Porter et al. has reiterated the importance of The role of government in promoting competitive rival- interfirm rivalry and competition in domestic markets, ry has been and continues to be debated among policy among other dimensions of the business environment makers and advisors, academic researchers, and others-- such as quality of infrastructure, removal of trade barri- especially in regard to the degree of protection and ers, protection of property rights, and regulatory stan- direct support that governments should accord to busi- dards for promoting competitiveness and economic ness.A commonly cited example is the success of the growth.28These and other microeconomic factors com- East Asian "miracle" economies of Japan, Korea, bined are found to account for more than 80 percent of Malaysia, and Singapore, where governments provided the variation in per capita GDP (on a purchasing power "administrative guidance" and departments such as parity basis). Decomposing the Global Competitiveness Japan's Ministry ofTrade and Industry encouraged car- Index and applying bivariate analysis, Porter reports tels and mergers and granted export credits to stimulate several other interesting results.The intensity of local productivity and dynamic efficiency. However, even competition accounts for about 42 percent (adjusted proponents of fostering competitiveness and economic R-squared) of the variation in GDP; effectiveness of growth recognize that maintaining oligopolistic rivalry competition (antitrust) law-policy 65 percent, and com- instead of concentrating resources and subsidies on a plementary factors such as presence of demanding regu- single or few selected "national champions" was a criti- latory standards 78 percent, property rights 72 percent, cal part of the industrialization strategy.26 Porter along judicial independence 59 percent, and trade 33 percent. with Japanese researchers revisited the "government-led Clearly, while competition and competition (antitrust) model" by examining in-depth a sample of 20 interna- law-policy are important, so are other factors--which tionally competitive sectors and seven uncompetitive combined form the physical and business infrastructure ones in terms of the nature, timing, and extent of gov- of a modern economy. As one would expect, variation 26. See, for example,Amsden and Singh (1994). 27. See Porter et al. (2000). 28. See Porter et al. (2007). PRO-POOR BENEFITS OF COMPETITION AND ECONOMIC GROWTH 23 exists across countries depending on their income tion, but rather the opposite.As discussed earlier, the and stage of economic development. Analysis of inherent ownership, industrial and financial market, country/economy groups conducted by Porter et al. and governance structures in least-developed countries indicate that factors such as intensity of local competi- coupled with inadequate physical and business infra- tion, effectiveness of competition (antitrust) law-policy, structure makes it difficult to foster competition.Also, trade, efficiency of legal framework, and presence of as the discussion below suggests, effective implementa- demanding regulatory standards are insignificant in low- tion of competition law-policy in least-developed income countries, less so in middle-income countries, economies is lacking.The process of competition is not and not at all in high-income countries.These results automatic, and takes time to develop--even in more- should not be interpreted as indicative of the unimpor- developed economies. It is dependent on both business tance of policies (and institutions) relating to competi- environment and institutional factors. 24 INVESTING AND "DOING BUSINESS" IN DEVELOPING COUNTRIES 4. INVESTING AND "DOING BUSINESS" IN DEVELOPING COUNTRIES The degree to which business environments allow the leading constraints.There were also salient regional entrepreneurs to engage in profitable and productive differences: In South Asia, respondents identified street economic activity varies considerably across countries. crime as a constraint; in Africa, respondents identified A survey of the investment climate conducted by the infrastructure.About 46 percent of survey respondents World Bank (2003) found that across nations, whether also indicated anticompetitive policies and business they are Organisation for Economic Co-operation and practices as an important constraint.The highest per- Development (OECD) members or developing coun- centages of respondents mentioning this were in tries, enterprises identified the principal constraints to Bangladesh (58 percent), Indonesia (62 percent), Krygyz investing and conducting business as taxes and regula- Republic (72 percent), Pakistan (57 percent), Philippines tions, financing, policy instability and uncertainty, and (66 percent), andTurkey (62 percent).29 inflation. Enterprises in developing countries also More recentWorld Bank surveys indicate that it is easier ranked corruption and inadequate infrastructure among to do business in developed,industrial countries than in developing countries.The Ease of Doing Business Index FIGURE 4.1: EASE OF DOING is computed using a number of factors,namely,the time BUSINESS RANK, 2006 (days),costs,and number of procedures that it takes to start a business,deal with licenses,get credit,export and Latin America & Caribbean import,close a business,employ and fire workers,and deal with other business-related issues.30 Figure 4.1 and tables Middle East & North Africa A-1 and A-2 in the appendix present information on the South Asia average rankings of selected indicators across regions and East Asia & Pacific globally for IDA and non-IDA countries.A higher rank indicates greater difficulty.For example,figure 4.1 indi- Europe & Central Asia cates that on average it is almost twice as difficult to do Sub-Saharan Africa business in IDA countries than in non-IDA ones.Also, Average all countries doing business is more difficult in the poorer regions of South Asia,sub-Saharan Africa,and the Middle East and 0 20 40 60 80 100 120 140 North Africa. Averages across regions Tables in the appendix suggest that some of the factors Non-IDA IDA underlying these averages, namely, the time, number of procedures, and costs of meeting the various regulations, Source: Source:World Bank (2007) "Doing Business Report." range widely across countries and regions. For example, Note: Higher ranking implies greater difficulties in doing business.All countries in South Asia in Equatorial Guinea, 20 procedures need to be com- are IDA members. 29. See Batra et al. (2003). 30. Refer toWorld Bank (2007) Doing Business for more information.These measures are also described in the notes to tables A-1 and A-2 (in appendix) of this paper. INVESTING AND "DOING BUSINESS" IN DEVELOPING COUNTRIES 25 pleted to start a business whereas Australia, Canada, and FIGURE 4.2: HIGH ENTRY COSTS New Zealand require only two. In Suriname, it takes 694 INHIBIT FDI INFLOWS days to complete business start-up procedures; in Aus- tralia it takes two days, and in many other advanced 3 industrial countries between two and eight days. Devel- 2 oping countries also tend to require more licenses to 1 conduct even general activities.The number of proce- 0 dures for obtaining licenses is highest in Sierra Leone FDI -1 (48),Taiwan-China (32), and Egypt (30). Hiring and let- ting go of workers, and closing a business also can be dif- -2 ficult and costly: In Egypt, laid-off workers receive 186.3 -3 weeks of wages, and in Zimbabwe, 446.3 weeks. Closing -4 -2 -1 0 1 2 3 a business in Chad and India can take up to 10 years. Entry Costs As Figure 4.2 indicates, difficulties in obtaining licenses and permits discourage foreign direct investment. Source: World Bank 2003. Related research suggests that strong rule of law, which Note: y= -0.5937x + 0.1851. Partial correlations control for market size, human capital, macroeconomic would include among others competition law, attracts stability.The entry cost measure used in this figure refers to the costs of obtaining the necessary permits and licenses and other procedures required to set up a new establishment. See Djankov et al. (2002). foreign investors.And barriers to entry become barriers that adversely affect productivity and impose real costs to the economy.31 ment Climate Assessments" and "Doing Business" indi- The difficulties of doing business in developing coun- cators published by theWorld Bank have raised the tries, which generally arise from ill-conceived or unnec- awareness of national governments on the urgent need essary government (public policy) interventions, deter to reduce the time delays and regulatory burdens that not only domestic and foreign direct investment but also they impose on business.There is increased demand for the mobility of resources so that they can be utilized in technical advisory programs at both the national and the most productive way.They also induce distortions subnational levels. Countries in Europe and Central Asia and rigidities into the economy and weaken the coun- and high-income OECD members are among those tries' ability to withstand economic shocks and further undertaking reforms, followed by sub-Saharan Africa. integrate into the global economic system.The "Invest- South Asia ranks low in initiating such reforms. 31. SeeWorld Bank (2003): 66, 90­92. 26 NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 5. NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES Currently more than 100 countries (not including work. Relatively few countries in the Middle East and regional blocs) have enacted initial or significantly North Africa region have done so. In all regions but updated competition legislation. Most of these most notably in Africa, many countries have yet to adopt countries--mainly developing and transition market competition law.As indicated above, some countries, economies--enacted competition laws during the most notably India and Malawi, have enacted laws 1990s.The adoption of competition law-policy has been but have not established the requisite administrative driven by a wide range of factors, including economic machinery to implement them. Reasons range from liberalization and deregulation, loan and policy condi- the legislature's overloaded agenda to higher economic tions of theWorld Bank/IMF, regional and multilateral and political priorities and possible capture by vested trade agreements, and aspirations to join the European interest groups. Union.The competition laws in most developing coun- tries mirror and contain the core provisions found in OBJECTIVES AND PRINCIPAL FOCUS such legislation in industrial countries. OF COMPETITION LAW-POLICY Table 5.1 indicates the number of countries by region, As has been noted above, most countries enact competi- including IDA member countries that have enacted tion law primarily to maintain and promote competi- competition law-policy. Countries in the Latin America tion to encourage economic efficiency and increase and Caribbean and Europe and Central Asian regions consumer welfare through provision of greater choice (the latter of which includes many former centrally of goods and services at lower prices. However, some planned economies) have included competition laws countries have the broader goal of promoting the as part of their economic and regulatory policy frame- "public interest or benefits," which encompasses eco- TABLE 5.1: NUMBER OF COUNTRIES WITH COMPETITION LAWS Latin America Middle East Sub-Saharan East Asia and Caribbean Europe and and Africa and Pacific + North America Central Asia North Africa South Asia No. of countries 47 32 31 57 21 8 in the region No. of countries 17 13 19 47 7 3 with CL (including 3 (including 2 (including 1 regional regional regional integrations) integrations) integration) No. of IDA 39 13 9 10 2 8 countries (11) (4) (3) (8) (0) (3) (with CL) NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 27 nomic efficiency and consumer welfare goals but also engaging in other forms of egregious monopolistic other social-economic and political objectives such as behavior. regional development; employment; protection of small- (iii) Reviewing and preventing mergers and acquisition and medium-size enterprises; and expansion of exports, activity, joint ventures, and other interfirm agree- equity, and fairness. Not all of these entire and at times ments that exceed a certain size threshold, to ensure conflicting goals can be quantified or reduced to a single that transactions do not result in significant "market economic measure. However, they reflect society's wish- power" and lessen competition substantially. If es, culture, history, institutions, and other values that transactions do this, they must have offsetting bene- cannot nor should necessarily be ignored. It should be fits, such as increased economic efficiencies and noted that most jurisdictions recognize the importance consumer welfare or attainment of other public and need to protect and promote the competitive interest objectives. process and not individual competitors--though the (iv) "Competition advocacy" directed at existing or implementation of competition law-policy often raises proposed public policies and regulations that the issue of the impact of competition on competing unnecessarily limit competition and entry, when incumbent domestic firms and labor. alternative approaches that are less restrictive of free-market forces may be feasible. Competition While details vary by country, an effective competition advocacy also entails conducting competition law-policy essentially comprises four sets of instruments assessments or market studies relating to the aimed at preventing anticompetitive business practices competitive dynamics at the industry level.These and market situations that substantially lessen or prevent often provide insights into binding constraints competition.These are: to public policy and private sector restraints to competition and growth.32 (i) Measures to prevent business firms from colluding or forming cartels to limit competition by entering It should be noted that competition law has certain into explicit or implicit agreements to fix prices, exceptions and exemptions, most notably relating to restrict output, allocate markets and customers, collective bargaining activities of workers, setting of and rig bids or tenders.Typically such interfirm standards, research and development cooperatives, and agreements or arrangements are strictly prohibited. development and exchange of statistics and other infor- The penal codes of some jurisdictions treat these mation, with the proviso that these activities do not practices as crimes. result in anticompetitive business practices. Many juris- (ii) Preventing dominant firms from abusing their dictions grant exemptions or differential treatment to market position by engaging in predatory prices; the financial sector (insurance, banking), professional foreclosing markets for inputs or distribution services (lawyers, doctors, organized sports, etc.), channels; setting discriminatory prices and terms regulated industries (utilities, telecommunication), of service; using tied selling, which forces customers and state enterprises.The economic rationale for to buy other products and services as a condition exempting or treating these sectors differently is of purchase of a particular product or service; and 32. See also Palmade (2005). 28 NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES BOX 5.1: WHO ADMINISTERS COMPETITION LAW-POLICY? Competition law-policy is generally administered by a specialist agency; this could be an independent body, subject to certain checks and balances and accountable either to a government ministry or department or to the legislative body.Alternatively, a competition agency could be a division or department within a designated government ministry, reporting to the minister in charge. Because competition law is a generally a law of general application that applies to all sectors and entities engaged in commercial economic activity, it is preferable to have an agency that is independent and insulated from political interfer- ence and influence of major interest groups/stakeholders in the economy. A 2002 ICN report indicates that 62 percent of competition agencies are independent authorities, 32 percent are within a ministry or department, 2 percent are in an area ministry, and 4 percent are specialized tribunals.Though having an inde- pendent competition authority is favored for reasons such as increased likelihood of being insulated from bureaucratic and political interference, no particular model or approach can be deemed superior to the other.The United States has two com- petition agencies, both widely regarded as being independent from such influences: the Federal Trade Commission and the Department of Justice's Antitrust Division. See also Dutz and Khemani (2007), World Bank (2000), and Kovacic (1997) for further discussion on such institutional design issues. increasingly questioned,33 in part because of develop- include lack of political will, limited staff and financial ments and new learning in industrial organization and resources, institutional design issues such as slow and regulatory economics, as well as the introduction of new inefficient courts, and insufficient knowledge and expe- technologies in such fields as finance, telecommunica- rience. In jurisdictions where exemptions are granted, tion, transportation, and energy. It also is because most they tend to raise barriers to competition by creating an exemptions are the result of lobbying and preferential uneven playing field between private sector firms and treatment of selected sectors. It is worth noting that state enterprises, and preferential treatment of politically because industrialized countries began enacting compe- connected firms. Moreover, promoting broad-based tition laws much earlier than developing countries--for grassroots support and business culture supportive of example, Canada and the United States first enacted fostering effective competition requires time, commit- competition laws at the end of the 19th century--they ment, and resources. Frequent change of governments, tend to have more exemptions.34 and political and policy instability that characterizes many developing economies are not conducive to Competition law-policy tends to be weaker in develop- building and sustaining effective competition law-policy ing, particularly low-income countries.The reasons regimes. 33. See Khemani (2003) for further details. 34. Ibid. NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 29 Views differ as to whether developing countries need to costly and become yet another vehicle for corruption adopt competition law-policy early on in the sequence and interference in an emerging market economy. of their economic and regulatory policy reforms, or Undeniably these risks exist. But they also apply to even to have a specific competition law-policy. One line other important areas of government services such as of argument is that trade and investment liberalization customs, tax clearance, public health, safety, and educa- and economic deregulation will create conditions for tion, and governments do not avoid attempting to create entry of new firms, and increased domestic and foreign effective institutions to improve delivery of such servic- competition will erode any excess profits and dominant es. Competition can succeed with proper policy formu- market position of an incumbent. However, as actual lation, institutions designed with systems of checks and experience and related research indicates, while these balances, accountability and transparency, and sufficient policy measures are complementary, they are not suffi- resources. International development organizations and cient to ensure effective competition. Domestic markets donors, with their experience and resources, can help may be still insulated from external competitive pres- jump-start this process. sures due to high transportation costs, non-tradable In this context, Clarke and Evenett have noted that products and services, exclusive and restrictive distribu- about a quarter of the documented competition law tion contracts, and domestic-international cartels and enforcement actions in developing countries involve market-sharing agreements, among other factors.35 For bid-rigging against state purchasers. If effective applica- example, international cartels have spanned such prod- tion of competition law deterred just 1 (one) percent of ucts as vitamins, steel-graphite rods, large transformers, the value of the state contracts and resulted in price and food additives (lysine).These cartels included both reductions of 15 percent, the cost savings would amount domestic and international firms, and jurisdictions to between 3 percent (in Zambia) and 170 percent (in that enforced competition laws had lower price over- India) of the budget of the competition authority.38The charges.36 Moreover, lower tariffs and increased import resultant savings, which do not include economic fines competition do not necessarily result in increased that are normally imposed, would release resources for productive capacity of domestic firms and new product other development priorities. and process development.37 Finally, it should be noted that the application of the A second line of argument is that developing countries main provisions of the first three sets of competition lack strong supporting institutions such as an independ- law instruments mentioned above (namely, dealing with ent judiciary, good governance, independent media, and cartels, abuse of dominant market position, and mergers well-paid and capable public servants. New laws and and acquisitions) are primarily "demand driven."That is, institutions will fail to meet their goals, and could be 35. See industry- and country-specific examples cited in Khemani and Dutz (1996), Evenett et al. (2001), and Evenett (2004). 36. See Clarke and Evenett (2003a). 37. See UNCTAD (2006) and Clarke (2004). Clarke finds the net effect of lower tariffs on new product and process development to be negative but small, and for the most part cancelled out. In contrast, stricter competition laws and better enforcement of those laws appear to increase the likelihood of new product and process development, especially when competition is treated as endogenous to the economy. 38. See Clarke and Evenett (2003b). 30 NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES business firms seeking relief from alleged anticompeti- dominant market positions or monopolistic practices tive market situations register complaints with the com- referred to foreign-owned or -controlled firms. Foreign petition authorities. If these complaints are considered firms also appear to take advantage of weak or lack of valid, the law generally requires the competition author- competition law-policy and anticompetitive market ities to investigate and resolve the matter.This legal obli- situations. Parenthetically, it is also worth noting that the gation has an important bearing on the degrees of free- majority of competition cases in advanced industrial dom with which the competition authorities can deal countries also relate to complaints registered by business with the multitude of case, sector, and systemic matters firms alleging cartels and other forms of anticompetitive that arise in an economy--especially in a developing business practices by firms supplying inputs that increase economy.The challenge for competition authorities in the costs and undermine domestic and international such an environment, with limited staff and financial competitiveness.As noted above, some recent examples resources, lies in finding an appropriate balance between include graphite steel rods, cement, paper, transportation the choice of instruments at their disposal, and the com- services, and food additives. petition issues they can reasonably address. In summary, competition can be generated and increased through various policy measures such as trade EXAMPLES OF ALLEGED and investment liberalization. Enactment of competition ANTICOMPETITIVE PRACTICES IN SELECTED COUNTRIES law-policy does not necessarily result in competition. However, as competition arises in existing or new Box 5.2 illustrates different types of complaints and alle- market economies, it needs to be protected and promot- gations of anticompetitive business practices in selected ed.The principal objective of an effective competition developing economies. Several of the (alleged) com- law-policy is to maintain and promote competition. It is plaints relate to intermediate products such as cement, to safeguard and foster the competitive process and not steel, banking, and transportation (trucking and ship- existing competitors. In doing so it becomes an impor- ping), as well as products for export such as cotton and tant if not critical vehicle for empowering entrepreneurs fish.These practices raise the costs of business and under- and investors, creating conditions for entry of new and mine competitiveness in domestic and international mar- expansion existing businesses, and increasing consumer kets. For example, in Morocco, a trucking cartel operated welfare--be they individuals or firms that purchase in the transportation of cut flowers for export, a major inputs for production processes. It provides for relief source of employment and foreign exchange earnings in from anticompetitive business practices whether these that economy.A database compiled from various news- emanate from government enterprises and public poli- papers and other publications relating to sub-Saharan cies or incumbent private sector firms. Liberalization of African countries indicates that many of the alleged trade, investment, and regulations are complementary private anticompetitive practices pertain to intermediate measures and not substitutes for an effective competition products.39 About one-third of the alleged abuses of law-policy. 39. See Evenett et al. (2006). NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 31 BOX 5.2: EXAMPLES OF ANTICOMPETITIVE PRACTICES IN SELECTED COUNTRIES IN SUB-SAHARAN AND SOUTH ASIA REGIONS Allegations of price-fixing, market-sharing, bid-rigging, East African Cement Producers Association transnational cartels and agreements, and abuse of dominant Cement: Consolidation and monopoly control of markets in market position are reported. Kenya,Tanzania, and Uganda; coordinated measures to pre- vent import competition from Egypt. Kenya Fish processing, Lake Victoria: Fishermen, government offi- West Africa cials, and local chiefs allege fish processors/exporters have Shipping: Europe-West Africa Trade Agreement and Europe- formed a cartel to exercise monopsonistic market power. West Africa Shipping Conference coordinate and significant- Fish sold at 2.5 times the purchase price paid to fishermen ly increase shipping tariffs, which is detrimental to exports. and "make a fortune and invest nothing back to improve the welfare of the people living around the lake." Nigeria Telecom services: Attempted monopolization alleged by Malawi Mobile Telecommunication Services against incumbent Cotton: There are very few buying companies, and they col- MTN Nigerian Communication. lude to exploit over terms and prices offered to cotton growers. Bangladesh Bakeries: While there are many bakeries, a few giant ones Staple foods (rice, potatoes, sugar): Widespread allegations of dominated the Master Bakers Association. Until government uniform prices/cartels. action in response to consumer complaints, the association Industrial products/inputs: Cartels in cement, fertilizers, and fixed the prices of baked goods. corrugated steel markets. Freight transport: The Transport Operators Association, con- Intercity passenger bus services: Price-fixing and route-sharing sisting mainly of a few large firms (Trans African Transport, agreements. Central African Road Services, Zagaf,Welsons, Fersons, and Government procurement: Bid-rigging and illegal manipulations others) set high transportation rates and include foreign in the purchase of aircraft for domestic airline services, and trucking firms as members. in the electric power sector. Ethiopia India Fertilizers, seed: Alleged domestic and import cartels formed Airline fuel surcharge: Domestic airlines meet to agree and fix by "party-statals" (firms owned mainly by the political party the level of fuel surcharges to be added to passenger ticket in power) with market-sharing agreements covering differ- costs. Meeting facilitated by Ministry of Aviation. ent farming regions have exploited and raised the costs to Staple products: Cartelization of supply of sugar, food grains, farmers, and the price of products. and vegetable cooking oil. Industrial products/inputs: Price fixing of cement, steel, truck- Kenya/Tanzania ing, banking; mergers to reduce competition in cement. Beer: Transnational market-sharing agreements and anticom- petitive mergers and acquisitions. Vietnam Insurance: Price-fixing. School textbooks, uniforms: Tied selling. Sources: Evenett et al. 2006, DFID (Department for International Develop- ment) 2006, and various reports and email newsletters by CUTS, Joint World Bank-DFID field investigations, Bangladesh, October 2005. 32 NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES COMPETITION ADVOCACY always sought, 23 percent participated "ex-officio," and 30 percent were occasionally consulted. Only 11 per- In many jurisdictions, competition authorities are cent stated they were only informed.The last statistic authorized to engage in "competition advocacy," that is, pertains primarily to developing countries. Of the to review and comment on various public policies and agencies that were always or frequently asked to provide regulations that unnecessarily restrict competition. input, 65 percent were involved at an early stage, and Instead of creating new government entities such as 16 percent were involved throughout policy formula- economic or regulatory reform units, some govern- tion process. Most successful advocacy activities were ments have opted to use competition agencies to review, reported in the telecommunications, electricity, and vet, and suggest alternative approaches to policies and transportation sectors, fewer in financial services, retail regulations that restrict competition, economic efficien- trade, and ports. Most successful participation related to cy, and consumer welfare--while balancing other socio- privatization processes (40 percent of respondents), economic-political objectives. In Australia, Korea, and removal of price regulations (22 percent), licenses and Russia, government ministries and other agencies are permits (22 percent), and concessions (16 percent).40 required to consult competition authorities in this regard. In Canada, the head of the Competition Bureau The ICN survey also indicates that the strongest support has a statutory right to appear before parliamentary for the advocacy role of competition authorities comes committees, commissions, and regulatory authorities to from groups such as consumer associations, academics, put forward pro-competition proposals and arguments. and media; less from entrepreneurial and professional In the United Kingdom, and increasingly in other coun- associations, legislators, and nongovernmental organiza- tries including several developing nations such as South tions (NGOs), and least from political parties, labor Africa, competition authorities and sector-specific regu- unions, and local governments.These results are not sur- lators have memoranda of understanding and other for- prising: Legislators and political parties worldwide are mal and informal mechanisms that guide their coordina- noted for "pork-barrel" spending to win financial sup- tion and consultation on regulatory matters that may port and votes. Several industrial organization economic have an impact on competition.This does not necessari- studies indicate that labor is paid higher wages in indus- ly imply that the views and recommendations are bind- tries with monopolistic market structures that insulate ing or always factored into the final decisions of the them from competitive pressures. Labor in such situa- relevant regulatory bodies, but it introduces greater tions becomes a willing partner of business in lobbying accountability and transparency in formulation of against pro-competition reforms. regulatory policies. To counter such challenges, competition authorities can The International Competition Network (ICN) survey forge strategic alliances with other competition advocacy indicates that 36 percent of the competition authorities groups. For example, lobbying for duties and increased reported their opinions on sector reform proposals are tariff protection against imported steel can be countered 40. See ICN (2002). NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 33 through studies that show the anticompetition repercus- APPLICATION OF COMPETITION LAW-POLICY sions of such policies and mobilizing support from the users of steel such as the automobile and construction Examples of application of competition law-policy are: industries, as well as consumer groups that ultimately will bear the higher costs of those products.These activities India also raise awareness of the benefits of competition and Due to a legal challenge and amendments in parliament, promote a competition culture in society.Appreciation the full force of the Competition Act (2002) has yet to of competition is markedly lower in developing coun- come into effect. However, in the interim, the Competi- tries than in advanced industrial economies, not only tion Commission of India (CCI) has been active-- in general society but also in the courts and within among other activities, it has conducted 38 advocacy and government itself.41 awareness building programs with leading industry, trade, and professional associations and civil society; conducted Experience shows competition authorities are most suc- a number of market studies/research projects; drafted cessful at advocacy when they eschew a confrontational regulations and interpretation bulletins on matters relat- approach, and instead work cooperatively with other ing to cartels, bid-rigging, predatory pricing, and intel- government departments and regulatory bodies, for lectual property and other rights; held consultations and example, offering alternative recommendations and pro- met with state governments on jurisdictional and inter- posals that are sensitive to the mandates of the other state competition matters; provided input and opinions organizations. In other words,"first best" solutions may on various policy and regulatory proposals; drafted a cur- not always be workable; compromise that is least damag- riculum for competition courses in law and economic ing to the competitive process may be needed. Nor programs in collaboration with academic institutions. should competition advocacy be directed solely at One notable example is that the CCI registered its con- government entities and competition-constraining poli- cerns and opposition to a proposal by the Department cies--the business practices of industry and trade associ- of Post &Telegraph to extend monopoly control on all ations and large firms may also be candidates for reform. letters and packages up to 300 grams. Had the proposed A balance must be struck between enforcement of, and policy been adopted, it would have ended the competi- fostering compliance with, competition law-policy, for tive private courier service.The CCI also indicated that litigation is costly to both government and business. a meeting between airlines to fix fuel surcharges, facili- Through information dissemination programs such as tated in part by the Ministry of Aviation, violated the publication of administrative and policy implementation cartel provisions of the competition act.The CCI is guidelines, business advisory opinions, and speeches and engaged with other government departments and advi- conference proceedings, competition authorities can sory bodies in drafting a "National Competition Policy" reduce uncertainty, and promote good commercial to foster greater coherency and consistency in govern- practices and business ethics in the marketplace. ment policy formulation and decision making as it relates to competition.42 41. Ibid. 42. See www.competition-commission-india.nic.in, and discussions by the author with CCI officials. 34 NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES Kenya Tunisia Kenya's Monopolies and Prices Commission (MPC), a The Competition Council enforces the competition law unit of the Department of theTreasury, administers the inTunisia. In a case involving abuse of dominant market RestrictiveTrade Practices, Monopolies and Price Con- position by a giant poultry firm, Poulina, the Council trol Act.The law has had limited success, in part because imposed a fine of approximately 240,000 dinars of institutional design flaws--for example, it contains (approximately US$194,000).While there were about provisions that could allow reinstitution of price con- 1,500 small producers of chickens and eggs, Poulina trols that in effect have been decontrolled since 1994-- dominated the market in not only the downstream and because of factors that impede its effective applica- market but also the provision of inputs. It imposed tion, including inefficiency and corruption in the public unfair conditions including exclusive dealing contracts and private sector, lack of adequate human and financial on distributors, foreclosing participation in the market resources, a judiciary inexperienced in competition law by smaller producers.44 and economic matters, and limited public support. In Zimbabwe (and Zambia) addition, the MPC is not an independent authority. The National Breweries Ltd. (NBL) has a market share Nevertheless, it surveils markets, receives complaints, and of 90 percent of the beer sector with a nationwide investigates matters to ensure competition rules are distribution network. Nesbitt Breweries entered the upheld. From 1989 to 2005, the MPC fully investigated market, but confined its entry to the town of Chiredizi. 234 cases relating to a wide number of business practices NBL countered by launching a sales promotion cam- and industries. It also has succeeded in introducing paign in Chiredizi, offeringT-shirts, free snacks, luck- competitive bidding and eliminated single-sourcing in draw prizes, and lowering its beer prices to partly absorb government procurement, resulting in significant reduc- normal transportation costs.The promotion campaign tions in prices of drugs and other supplies to hospitals, was not held in other markets.The Zimbabwe Compe- and road transportation services. It initiated cartel cases tition Commission found this behavior to constitute in the retail gasoline, insurance, Internet service, and predatory pricing with the intent of driving out Nesbitt, selected agribusiness products--which even while legal and issued a cease and desist order.45 proceedings were pending resulted in price reductions. As a consequence of MPC's actions, several merger- The commission has also investigated and resolved and-acquisition transactions that could have resulted in various cases relating to cement, poultry, soft drinks, and significant reductions in competition have been restruc- tobacco products. Merger-and-acquisition transactions, tured in markets such as food processing, pharmaceuti- most related to foreign takeovers of local or subsidiary cals, car rental services, and beer.43 firms, have generally been permitted to proceed, with certain restructuring, performance, and other condi- tions, to safeguard competition while not discouraging foreign investment. 43. See Njorge (2006). 44. Cited in Chakravarthy (2007). 45. Ibid, and UNCTAD (2002). NATURE AND TYPE OF ANTICOMPETITIVE BUSINESS PRACTICES IN DEVELOPING COUNTRIES 35 The experience in neighboring Zambia is parallel, and Despite theses successes, there still are obstacles to the has in some cases related to the same firms and product effective implementation of competition law and policy markets.46 worldwide but especially in least-developed countries, namely, lobbying by vested interest groups, lack of polit- Similar examples on the successful case- and sector- ical support, human and financial resource constraints, specific application of competition law and policy can and lack of relevant expertise in the judiciary. be obtained from theWeb sites and publications of various competition authorities.47 46. See Lipimile (2004). 47.These websites can be accessed from www.internationalcompetionnetwork.org 36 CONCLUSIONS AND RECOMMENDATIONS 6. CONCLUSIONS AND RECOMMENDATIONS The preceding discussion has highlighted the benefits of encouraged developing and emerging market promoting competition in domestic markets in develop- economies to adopt pro-competition measures such as ing economies.The adoption and effective implementa- trade and investment liberalization, privatization, and tion of competition law-policy fosters static and dynam- economic deregulation.These initiatives have been ic economic efficiency, increases consumer welfare by aimed primarily at reducing public sector policy-based spurring firms to produce greater variety and more barriers to entry, regulatory costs, and delays that unnec- affordable goods and services, reduces market domi- essarily constrain private sector economic activity. nance by large incumbent firms, contributes to greater Giving priority to these reforms and the overall positive accountability and transparency in government-business impact they have had on productivity and competition relations, and thereby reduces opportunities for corrup- are not questioned.They are, however, insufficient-- tion and bribery. Effective competition improves and they are complementary to but do not substitute for an buttresses the investment climate and makes it more effective competition law-policy.They do not address attractive for investment by domestic and foreign entre- the private sector restrictive business practices that can preneurs. It also facilitates integration of developing significantly impede competition. Unchecked, anticom- economies into global markets, and sustains broad-based petitive practices by dominant and politically connected economic growth and poverty reduction. firms and vested interest groups can capture or signifi- cantly reduce the benefits that accrue from competition. Competition law-policy has a broad interface with The freedom of economic action of new investors, other government economic and regulatory policies. entrepreneurs, and firms can be severely constrained To enhance coherency and consistency in these policies, unless there are avenues for legal recourse to obtain competition law-policy needs to be integrated as a cen- remedial relief.An effective competition law-policy is a tral platform.This will require increased efforts to foster vehicle for such relief and for curbing anticompetitive better understanding of the instruments, requirements, practices by both government and business. Competi- and benefits of promoting competition--in government tion does not arise or sustain itself automatically.The policy formulation and in the private sector and civil competitive process needs to be maintained, protected, society at large. It also will require reorienting the policy and promoted to strengthen the development of a sound advisory and support programs of theWorld Bank market economy. Group toward longer-term engagements with client governments to conduct country- and sector-specific There are misconceptions, doubts, and questions about analysis, institution building, and development of local competition in the minds of policy makers and the gen- capabilities. eral population in many developing countries; in partic- ular, they ask "who are the main beneficiaries?"To focus on public policy-based barriers to competition without REBALANCING OF POLICY ADVISORY AND DIAGNOSTIC PROJECTS simultaneously addressing private sector anticompetitive business practices helps competition's detractors, who For the past two decades or more, theWorld Bank argue first that market liberalization reforms are aimed Group and other development organizations have at benefiting the well-connected families that own/ CONCLUSIONS AND RECOMMENDATIONS 37 control large dominant firms and other vested interest (i) Information dissemination and knowledge sharing groups, including multinational enterprises, and second on effective implementation and beneficial impact that competition law-policy is yet another manifestation of competition law-policy--particularly in terms of of the "Washington Consensus" policies to open devel- the domestic economy. oping country markets and take advantage of emerging (ii) Country- and industry-specific competition opportunities without necessarily investing in and assessments and diagnostic projects that extend creating indigenous productive capacities. beyond public policy-based impediments to include in-depth analysis of the private sector restrictive Such views need to be dispelled. It is critical to promote business practices. Identify the "winners" and better understanding, appreciation, and local support for "losers" emanating especially from barriers created competition law-policy as an instrument to do the fol- by and/or favoring dominant firms and vested lowing: (a) Foster competition in the domestic industries interest groups. and markets to create opportunities for domestic firms and (iii) Work with consumer associations, NGOs, and entrepreneurs to participate in their own economy. In other private sector business organizations and trade words, competition law-policy aims primarily at remov- associations, to create local "voices" for fostering ing constraints impeding efficient functioning of domes- grassroots ownership and demand for pro- tic markets and not necessarily at opening them to inter- competition measures in government policies. national competition--that can happen later, as capable domestic firms emerge. (b)The application of competi- Priority Sectors tion law is mainly demand driven, in response to com- Competition law is of general application--it applies to plaints by customers that have been victims of actual or all sectors and agents engaged in commercial economic alleged anticompetitive practices. Indeed, the great activity. Few sectors and activities warrant exemptions. majority of complaints and cases in countries with com- Nevertheless, government policies and regulations, as petition law-policy regimes relate to intermediate inputs, well as lobbying by industry groups often do result in the high costs of and restricted access to which under- exemptions, exceptions, and differential treatment of mine competitiveness of downstream firms. (c) Competi- certain businesses. tion law-policy is essentially about empowerment. It is (B) It is recommended that: aimed at removing unnecessary restrictions imposed by government policy-based and artificial private sector (i) Countries' competition assessments and regulatory business firms' barriers to entry and competition. impact analysis include an audit of the nature and extent, and underlying economic rationale of the (A) It is recommended that theWorld Bank Group, in partner- exemptions, exceptions, and differential treatment ship with other development organizations, client country of various economic activities, taking into account governments, and especially civil society organizations (NGOs) the socio-economic-political objectives. should engage in a systematic program of: 38 CONCLUSIONS AND RECOMMENDATIONS (ii) Priority be given to economic activities that have such as granting exemptions to state enterprises and an impact on: preferential treatment of politically connected firms, raise barriers to competition and distort markets.This ­The poor (for example, staple food products, local undermines the development of a healthy private sector. transportation, water-sanitation, energy); In addition, continuous or multi-year technical advisory ­Products and basic services that serve multiple programs and assistance from theWorld Bank Group downstream economic activities and bear on and other development organizations is lacking-- industry competitiveness (for example, financial notwithstanding the requests of nascent competition services, factor inputs, basic infrastructure); regimes. Promoting and building effective competition ­Delivery and cost efficiency of government pro- regimes requires time, commitment, and resources. curement of goods and services to reduce oppor- tunities of corruption, bribery, favoritism; (C) It is recommended that theWorld Bank Group, in partner- ­Potentially competitive industries that could ship with other development organizations, develop a more attract and benefit from foreign direct investment. systematic technical advisory program and a set of criteria for selecting countries that meet certain requirements and show (iii) The appropriate role, coverage, and possible applica- prospects for developing and strengthening a competitive market tion of instruments of competition law-policy be economy.This technical advisory program should include: defined relative to sector-specific policies and regulations such as in financial services and provi- (iv) Assistance in drafting and revising competition sion of basic infrastructure services. legislation and regulatory policies, administrative and interpretation guidelines, and other related Institution Building materials for effective policy implementation. Currently at least 104 countries have enacted or signifi- (v) Advice and capacity development in case manage- cantly updated their competition legislation.The adop- ment, investigative techniques, compliance pro- tion of competition law-policy has been driven by a grams, regulatory interventions, industry competi- wide range of factors that include economic liberaliza- tion assessments and regulatory impact analysis, tion and deregulation, loan and policy conditions of the competition advocacy, and other skills. World Bank/IMF, regional and multilateral trade agree- (vi) Promotion of greater intergovernmental coopera- ments, and aspirations to join the European Union. tion and coordination in the formulation and appli- Competition laws in most developing countries mirror cation of economic and regulatory policies to least and contain the core provisions generally found in restrict market competition, while taking into industrial countries. However, competition law-policy is account other socio-economic-political objectives. perceived to be weaker in in those countries, particular- (vii) Facilitation of cooperation and exchange programs ly in low-income ones.The reasons for this include with peer competition authorities, including infor- limited staff and financial resources, institutional design mation sharing on transborder matters of mutual issues such as slow and inefficient courts, and insufficient interest and staff exchanges. knowledge and experience.Their government policies, CONCLUSIONS AND RECOMMENDATIONS 39 The Nexus of Public and Private Sector collection and dissemination of statistical information, Competition law-policy operates at the point where the as long as the initiatives do not become vehicles for public and private sectors interface and interact.To engaging in exclusionary and other business practices develop an efficient and competitive market economy, that substantially lessen competition. Government and both sectors must take part in its design and implementa- business increasingly recognize that enforcement litiga- tion.This requires trust, cooperation, and partnership-- tion in respect to cartels and other abuses of dominant the application of competition law-policy need not market position is costly compared to fostering compli- produce tension between sectors, nor among individual ance with the law. Even in areas most subject to compe- firms. Competition law-policy is not inimical to but tition law-policy, such as mergers and acquisitions, joint rather complements other approaches to fostering ventures, and strategic alliances that are primary vehicles competitiveness. For example, a modern competition for foreign direct investment, the vast majority of trans- law-policy contains provisions that facilitate legitimate actions proceed unhindered. Indeed, these transactions public-private partnerships and cooperative approaches. are facilitated by an effective competition law-policy, Competition law-policy plays a benign or facilitative role as it promotes ethical business behavior by establishing in many initiatives, such as development of standards, the rules and framework for proper functioning and research and development, underwriting and risk- governance of markets. mitigation relating to insurance and finance, and 40 APPENDIX APPENDIX: TABLES TABLE A.1: SELECTED DOING BUSINESS INDICATORS, AVERAGES ACROSS REGIONS (2006) Ease of Doing Business Rank Starting a business Dealing with licenses Procedures Time Procedures Time Non-IDA IDA (number) (days) (number) (days) Latin America & Caribbeani 82.54 88.88 10.2 73.3 15.4 198.7 Middle East & North Africaii 93.53 129.5 10.3 40.9 19.9 206.9 South Asiaiii (**) 104.75 7.9 32.5 16.1 226.6 East Asia & Pacificiv 54.63 91.33v 8.2 46.3 17.6 147.4 Europe & Central Asiavi 69 90.54 9.4 32.0 21.4 242.5 Sub-Saharan Africavii 87.77 134.83viii 11.1 61.8 17.7 230.2 Average all countries 64.01 117.45 Source:World Bank 2006. (**) All countries in the region of South Asia are IDA borrowing countries. i. Latin America and Caribbean's IDA borrowing countries include Guyana, Haiti, Bolivia, Honduras, Dominica, Nicaragua, Grenada, St. Lucia, and St.Vincent. ii. Middle East and North Africa's IDA borrowing countries include Djibouti and Republic ofYemen. iii. South Asia's IDA borrowing countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. iv. East Asia and Pacific's IDA borrowing countries include Cambodia, Indonesia, Kiribati, Laos, Myanmar, Mongolia, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste,Tonga,Vanuatu, andVietnam. v. No data available for Myanmar. vi. Europe and Central Asia's IDA borrowing countries include Armenia,Albania,Azerbaijan, Bosnia-Herzegovina, Georgia, Kyrgyz Republic, Moldova, Montenegro, Serbia,Tajikistan, and Uzbekistan. vii. Sub-Saharan Africa's IDA borrowing countries include Angola, Benin, Burkina Faso, Burundi, CapeVerde, Cameroon, CAR (Central African Republic), Chad, Comoros, Congo Republic of, Congo DR (Democratic Republic of), Cote d'Ivoire, Ethiopia, Eritrea, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, SaoTome and Pr., Senegal, Sierra Leone, Somalia, Sudan,Tanzania,Togo, Uganda, Zambia, and Zimbabwe. viii. No data available for Somalia and Liberia. APPENDIX 41 Employing workers Getting credit Trading across borders Closing a business Firing Public Private Recovery Difficulty costs registry bureau Time for Time for rate (cents of hiring (weeks coverage coverage export import Time on the index of wages) (% adults) (% adults) (days) (days) (Years) dollar) 34.0 59.0 7.0 27.9 22.9 27.9 2.6 25.7 29.7 56.9 3.2 7.6 27.1 35.4 3.1 25.7 41.8 71.5 0.1 1.3 34.4 41.5 3.6 19.5 23.7 41.7 3.2 10.1 23.9 25.9 2.4 27.5 34.2 26.2 1.7 9.4 29.2 37.1 3.5 29.5 44.3 71.2 1.5 3.8 40.0 51.5 2.6 17.7 42 APPENDIX TABLE A.2: SELECTED DOING BUSINESS INDICATORS: BEST AND WORST COUNTRY STANDINGS BY REGION (2006) Latin America Middle East Indicator Non-IDA average IDA average Best Worst Best Worst Ease of Doing 64.01 117.45 Rank(*) Puerto Venezuela Israel Egypt Business Rankix Rico (19) (164) (26) (165) Starting a 72.87 106.68 Rank(*) Puerto Haiti Israel West Bank & businessx Rico (8) (167) (15) Gaza (173) Procedures Grenada Paraguay Israel Algeria (number) (4) (17) (5) (14) Time Puerto Suriname Tunisia West Bank & (days) Rico (7) (694) (11) Gaza (93) Dealing with 75.01 103.21 Rank(*) St.Vincent Guatemala Yemen Egypt licensesxi (1) (165) (39) (169) Procedures Grenada Guatemala Yemen Egypt (number) (8) (23) (13) (30) Time Belize Brazil Tunisia Iran (days) (66) (460) (79) (668) Employing 81.5 97 Rank(*) Belize Bolivia Kuwait Morocco workersxii (14) (174) (20) (156) Difficulty St. Kitts & Panama Egypt Morocco Hiring Nevis (0) (78) (0) (100) Index Cost of Puerto Argentina Iraq Egypt Firing Rico (0) (138.7) (4) (186.3) (weeks of wages) ix. Ease of Doing Business--The table shows the overall ease of doing business ranking for each economy. Economies are ranked on their ease of doing business, from 1­175, with first place being the best.A high ranking on the Ease of Doing Business Index means the regulatory environment is conducive to the operation of business.This index averages the country's percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. x. Starting a Business--Bureaucratic and legal hurdles an entrepreneur must overcome to incorporate and register a new firm. It examines the procedures and time involved in launching a commercial or industrial firm with up to 50 employees and start-up capital of 10 times the economy's per capita gross national income (GNI).The indicators shown in the table include all procedures require to register a firm and the average time spent during each procedure. Rank--Higher rank values in the table indicate more rigid regulations to start a business including the following indicators (a) procedures required to register a firm, (b) average time spent during each procedures, (c) official cost of each procedures, and (d) the minimum capital required as a percentage of income per capita. xi. Dealing with Licenses--Procedures and time necessary to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.They include all procedures to build a warehouse and the average time spent during each procedure. Rank--Higher rank values in the table indicate more rigid regulations for building a warehouse and include (a) procedures to build a warehouse, (b) average time to build a warehouse, and (c) the official cost of each procedure. xii. Employing Workers--This indicator measures the flexibility of labor regulations. It examines the difficulty of hiring a new worker as well as the costs involved in dismissing a redundant worker.The table shows two indicators: the difficulty of hiring a new worker (Difficulty of Hiring Index) and the cost of a redundant workers, expressed in weeks of wages (Firing Costs). Rank--Higher rank values in the table indicate more rigid regulations for employing workers and include (a) difficulty of hiring a new worker (Difficulty of Hiring Index), (b) restrictions on expanding or contracting the number of working hours (Rigidity of Hours Index), (c) difficulty and expense of dismissing a redundant worker (Difficulty of Firing), (d) an average of the three indices (Rigidity of Employment Index), and (e) cost of a redundant worker, expressed in weeks of wages (Firing Costs). APPENDIX 43 South Asia East Asia & Pacific Europe & Central Asia Sub-Saharan Africa Best Worst Best Worst Best Worst Best Worst Maldives Afghanistan Singapore Timor-Leste Lithuania Uzbekistan South Africa Congo, Dem (53) (162 ) (1 ) (174 ) (16) (147 ) (29) Rep (175 ) Afghanistan India Hong-Kong, Indonesia Romania Tajikistan Mauritius Guinea-Bissau (17) (88) China (5) (161) (7 ) (166) (30) (175) Afghanistan Pakistan Tonga China Latvia Belarus Mauritius Equatorial (3) (11) (4) (13) (5) (16) (6) Guinea (20) Afghanistan Bhutan Singapore Lao PDR Turkey Belarus Central African Guinea- (8) (62) (6) (163) (9) (69) Republic (14) Bissau (233) Maldives India Thailand Timor-Leste Estonia Croatia Swaziland Eritrea (9) (155) (3) (173) (13) (170) (16) (173) Maldives Bhutan Vanuatu Taiwan, Estonia Moldova Guinea- Sierra (10) (26) (7) China (32) (13) (34) Bissau (11) Leone (48) Maldives Nepal Micronesia China Armenia Russia Namibia Cote D'Ivoire (118) (424) (73) (367) (112) (531) (105) (569) Maldives Nepal Marshall Taiwan, Georgia Estonia Uganda Sao Tome (5) (150) Islands (1) China (154) (6) (151) (8) (175) Maldives/Sri Bhutan/ Hong Kong, Taiwan, Belarus Latvia Botswana Tanzania Lanka (0) Pakistan (0) China (0) China (78) (0) (67) (0) (100) Afghanistan Sri Lanka Marshall Indonesia Romania Turkey Gambia Zimbabwe (4.3) (177) Islands (0) (108.3) (3) (94.7) (8.7) (446.3) xiii. Getting Credit--This topic explores two sets of issues--credit information registries and the effectiveness of collateral and bankruptcy laws in facilitating lending. The table includes two main indicators measuring the coverage of public credit registry (Public Registry Coverage as % of adults) and the coverage of private credit bureau(s) (Private Bureau Coverage as % of adults). Rank--Higher rank values in the table indicate more rigid regulations for getting credit and includes (a) the coverage of credit information registries and (b) the effectiveness of collateral and bankruptcy laws in facilitating lending. xiv. Trading Across Borders--Procedural requirements for exporting and importing a standardized cargo of goods. Every official procedure is counted--from the contractual agreement between the two parties to the delivery of goods--along with the time necessary for completion.The table shows two main indicators, which are the time necessary to comply with all procedures required to export and import goods. Rank--Higher rank values in the table indicate more rigid regulations for trading internationally including (a) the number of all documents required to export/import goods, (b) time necessary to comply with all procedures required to export/import goods, and (c) the cost associated with all the procedures required to export/import goods. xv. 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