When markets don’t work – is policy or the private sector to blame?

27 July 2010 12:00 - 13:30 GMT+01 (BST)
Public event
Streamed live online

Speakers:

Karen Ellis - Head of Business and Development Programme, ODI

Rohit Singh - Research Officer, Business and Development Programme, ODI
Discussant:

Alan Winters - Chief Economist, DFID
Chilufya Sampa - Director for Mergers and Monopolies, Zambian Competition Commission
Chair:
Arthur Pryor
- Independent consultant and Member of the UK Competition Appeal Tribunal

Description

A major ODI research project comparing economic outcomes across countries, shows huge differences in market performance caused by both policy and private sector behaviour.  These differences can have significant implications for poor people as consumers, employees and taxpayers, and for wider economic growth and industrial development.

Karen Ellis and Rohit Singh presented the results of the study, which involved primary research in Kenya, Zambia, Ghana, Vietnam and Bangladesh.

Key findings include:

·         Competitive markets can deliver dramatically better market outcomes, but market performance is often undermined by both government policy and anti-competitive business practices, with significant economic costs.

·         Governments should assess and take into account the likely impact of their policy decisions on competition and market dynamics.

·         Business behaviour needs to be monitored, and disciplined where necessary.

·         Strong vested interests – an economic elite of government and big business - often oppose the creation of more open and competitive markets.  They need to be tackled by mobilising the majority of the population, who stand to gain from reform.

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Karen Ellis and Rohit Singh presented the findings of a major ODI research project comparing economic outcomes across countries. 

Karen Ellis, Overseas Development Institute

Considering the policy context, market environment, degree of competition, and market outcomes the project assessed four markets in five countries. 

Countries

Markets

Bangladesh

Sugar

Viet Nam

Beer

Ghana

Cement

Kenya

Mobile Telephony

Zambia

The chosen countries differ in terms of their competition law and policy regimes. Kenya and Zambia have well established competition authorities, Vietnam has one in its nascent stages and Bangladesh and Ghana do not currently have Competition Authorities.  The four markets were chosen because they are structured very differently across the five countries and are of importance to development.

Karen presented the findings from the sugar and beer markets.  She said that sugar is an important agricultural product in many countries, and part of the staple diet in most, as well as being a source of rural livelihoods. As a result, the state is heavily involved in the sugar industry in many countries, including Bangladesh, Kenya and Viet Nam. In all three countries, however, the state-led sugar industries exhibit low productivity and poor performance and the use of obsolete technology and inefficient farming methods mean poor cane yields and sugar outputs. All three are struggling to compete and survive in the face of competition from sugar that is either privately produced or imported. They need substantial levels of costly government subsidisation, which is unlikely to be sustainable in the long run, thus jeopardising many livelihoods.

In stark contrast, Zambia, which has three privately-owned sugar producing companies, produces the highest amounts of sugar per hectare of the five countries, (three times higher than Viet Nam which is the next most efficient country). This very profitable, internationally competitive industry is expanding to take advantage of new market opportunities, and has the potential to create new jobs and growth. This suggests that private sector incentives and management expertise are important for creating a successful, efficient and internationally competitive sugar industry. Despite Zambia’s success in creating a growing private sector-led industry, it still has very high domestic sugar prices when compared to other countries. This is the result, at least in part, of the monopolistic market structure of the market.

Karen then talked about the beer market. She said that beer is consumed throughout much the developing world, including by the poor. The beer market is usually highly concentrated, as a result of its cost structure and the importance of marketing and brand loyalty, which represent barriers to entry. Hence it is an industry that is plagued by anticompetitive practices in many countries, and, ideally, it needs monitoring by a competition authority. Karen said that beer prices are highest in Zambia, with its concentrated market and monopoly beer producer, and lowest in the least concentrated market (Viet Nam, with seven beer producers). Non-price competition also seems strongest in the least concentrated markets.

Karen said that a number of competition problems were seen in the beer markets of these countries. Issues of anti-competitive exclusive dealing arrangements were seen in a number of the countries. In Viet Nam, there was a specific case where a new entrant was driven out allegedly as the result of exclusive dealing arrangements that prevented the effective distribution of their product. Many anti-competitive practices were identified in Kenya, including territorial allocation, exclusive dealership and price fixing. In addition, there was a price war followed by a regional carve-up whereby two beer producers signed an agreement to avoid competing directly in Kenya and Tanzania, and instead share in each other’s monopoly profits by buying shares in each other. This is a clear example where if there was a regional competition authority, such cross-border anti-competitive mergers could be prevented.

Rohit Singh, Overseas Development Institute

Rohit continued by presenting the project’s findings in the cement and mobile telephony industries.  Cement is necessary to build infrastructure and is important for economic growth.  In the cement industry, due to the high ratio of fixed to variable costs, the minimum efficient size is rather large.  This often leads to a highly concentrated market which is reflected in the African countries.  In Kenya there are three acting firms, however, the top company controls 65% of the industry and has ownership in the other two.  The cement industry in Zambia is a monopoly, with this business controlling 85% of the market.  Ghana’s market seems to operate as a duopoly in which one company follows the other.  These industries are susceptible to high prices and cartels because of limited new firm entry.

Due to a small number of firms in the cement sectors of the African countries, Rohit said that the competition authority plays an important role in monitoring anti-competitive practices.  

Rohit said that there seems to be a much greater degree of both price and non-price competition in Bangladesh and Viet Nam, which have cement industries that are less highly concentrated with many different market players. The two Asian nations enjoy the lowest prices of the five countries, and significant non-price competition, with cement firms trying to attract customers by offering credit, technical support and various promotions. Thus it seems that even though there is a high minimum efficient scale of production in cement which suggests having fewer firms is more efficient, the competitive stimulus of having many players in the market generates stronger incentives for reduced prices and efficient production.

Rohit talked about how the price of cement in Zambia has fallen by almost 10% since 2008, coinciding with the entry of a new market player in 2009 to compete with the incumbent cement monopoly. This happened during a period when cement prices rose in the other four countries, demonstrating that the introduction
of competition can have a significant and immediate impact on prices.

Rohit talked about how substantial evidence now exists for the development benefits of mobile telephony – an industry which is still evolving fast globally.  The study has found that competition drives rollout of services, increased market penetration, and falling prices. A more competitive environment also strengthens incentives to design services that will meet the needs of customers, including price and product promotions targeted at poor customers, and value added services with additional development benefits, such as money transfer services.

Rohit talked about the importance of effective regulation of the mobile sector.  In Ghana there appears to be intense competition between the operators. The country has good mobile penetration and relatively low prices, and an effective regulator that has facilitated a competitive market. There has been good regulation of interconnection and the liberalisation of the international gateway, as well as an effective form of universal access fund (a system by which mobile penetration in underserved rural areas can be improved by way of a levy on mobile operators´ profits). The lack of these elements has slowed down market development in other countries.

Karen and Rohit concluded by summarizing the broader conclusions of their research. They said that competition improves the performance of markets, generating better outcomes including lower prices, greater productivity and competitiveness leading to industrial growth and jobs, and better access to services. Appropriate policies are crucial to create the conditions within which competition can thrive, and competition authorities can help to build a culture of competition, and increase awareness of competition issues amongst policymakers and the public.

Ultimately, competition is fundamental to a wellfunctioning market economy. It can undermine the dominance of a few powerful players, allowing new enterprises to gain a foothold in the market, and underpinning private sector development, employment creation, and improved international competitiveness. It can, therefore, make an important contribution to the wider economic growth that is
needed to lift developing countries out of poverty.

Chilufya Sampa, Director for Mergers and Monopolies, Zambian Competition Commission

Dr. Chilufya discussed his views on competition policies and their impact on growth and development.  Through his Zambian experience, Dr. Chilufya stressed the difference between competition law and policy.  Dr. Chilufya talked about the Zambian experience of privatisation, where a number of previously state owned monopolies became privately owned ones. Had a competition authority been in existence at the time, perhaps privatisation could have been done in a way which facilitated more inter-firm competition – for example by privatising an industry in a number of parts.

Dr. Chilufya talked about how in developing nations, competition law and policy are new concepts which the governments and private enterprises in these countries are still getting to grips with.

Members of the competition authority in Zambia (ZCC) are appointed by the government and the government also controls the commission’s budget which limits the authority´s ability to act independently upon its mandate.   Dr. Chilufya said that reports, such as Karen and Rohit’s, make it much easier for the ZCC to advocate for changes to the government.

Laws must be competitive and market driven, but according to Dr. Chilufya, not all of Zambia’s policies align with these principles.  The commission’s role is to highlight issues and advocate change.  It has made some headway on many issues and is now recognized as an important agency in Zambia. 

Dr. Chilufya talked in particular about how the ZCC has been successful after years of lobbying the Zambian government to decrease the licence fee that private mobile operators must pay to operate international gateway infrastructure in a bid to bring down the high cost of communications. As a result, the fee charged has decreased from $12 million to approximately $100,000

Dr. Chilufya also talked about the fact that there were important policy changes required in order to make the sugar sector more competitive. Dr. Chilufya said that in the sugar sector, prices are three times the world market price, despite high efficiency, because the government requires that sugar must be fortified with vitamin A.  Dr. Chilufya mentioned that the Zambian government also benefits from the high taxes in the beer industry and therefore does not want the competition commission to intervene. 

In conclusion, Dr. Chilufya said that Karen and Rohit´s report will be used as a tool by the ZCC to push for further reform not only in the four markets studied but also in other markets.

Discussant: Alan Winters, Department for International Development

Professor Winters agreed with many of the conclusions drawn by Karen and Rohit.  He said that competition in markets generates growth, jobs, and incomes.  Competition also fosters innovation because the private sector is very good at technical efficiency which drives costs down.

Professor Winters also talked about the importance of free trade as a way of tackling competition issues – since if companies were subject to import competition this would enforce competitive discipline. However, even with liberal trade regimes, anti-competitive issues in transport can also prevent competition and this is a finding of a major world bank study.

Professor Winters talked about the fact that monopolies redistributed wealth from the poor to the business elite and raised important issues related to welfare and equity issues of development. 

Professor Winters said that while government is quite often the problem, it may also be the solution.  Nearly all policies, both industrial and governmental, should promote competition.  A Competition Authority with the ability to comment on government and private business is an important mechanism for keeping a check on both governments and business.

Question and Answer Session

The question and answer portion of the meeting focused on how industrial development could be achieved in developing countries along with competitive markets.

The opportunity for monopolistic profits in an industry in a developing country may prompt foreign firms to invest. Whether it is protection of local industries or foreign ventures, the panel maintained that permanent protection will never be the best solution. However it may be useful in the short term as a sort of time-limited form of infant industry protection in order to attract investment.

The growing dominance of a few large multinationals in some sectors was a threat to competition globally.  They are extremely difficult for any one competition authority to tackle effectively.  Some have argued that competition authorities in the EU and USA should be tougher on multinationals to stop them from becoming too dominant.