Competition Policy, Deregulation, and Modernization in Latin America 9781685851958

Citation preview

Competition Policy, Deregulation, and Modernization in Latin America

A project of the Latin American Program of the Woodrow Wilson International Center for Scholars

Competition Policy, Deregulation, and Modernization in Latin America edited by

Moisés Nairn Joseph S. Tulchin

LYN N E RIENNER PUBLISHERS

B O U L D E R L O N D O N

Published in the United States of America in 1999 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 1999 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data Competition policy, deregulation, and modernization in Latin America / edited by Moisés Nairn and Joseph S. Tulchin. Includes bibliographical references and index. ISBN 1-55587-818-0 (he : alk. paper) 1. Competition—Latin America. 2. Latin America—Economic policy. I. Nairn, Moisés. II. Tulchin, Joseph S„ 1939HF1414.C6617 1999 338.98—dc21 99-11102 CIP British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library.

Printed and bound in the United States of America

@

The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1984. 5 4 3 2 1

Contents

Preface 1

The Political Economy of Regulation and the Geopolitics of Regulatory Regimes Joseph S. Tulchin

Part 1

2

3

vii

A General Overview of Competition Policy

Does Latin America Need Competition Policy to Compete? Moisés Nairn

15

Competition Policies for an Integrated World Economy F. M. Scherer

33

Part 2

4

5

6

7

1

Latin American Case Studies

State Reform and Deregulatory Strategies in Argentina Enrique Zuleta Puceiro

51

Competition Through Liberalization: The Case of Chile Nicolás Majlufand Ricardo Raineri

73

Competition Policy in Venezuela: The Promotion of Social Change Ana Julia Jatar

95

The Lessons of Mexico's Antitrust Initiative A. E. Rodriguez v

117

vi

Contents

Regulation and Deregulation in Colombia: Much Ado About Nothing? Rudolf Hommes

Part 3 9

10

11

Competition Policy at the Global Level

The Antitrust Experience of the United States: The Model for Regulation of a National Economy Confronts the Global Economy Barry M. Hager

193

Competition Policy in the European Economic Community: Lessons for Latin America Ana Julia Jatar

219

Harmonization of Competition Policies Among Mercosur Countries José Tavares de Araujo, Jr., and Luis Tineo

245

Part 4 12

151

Conclusion

Regulatory Regimes and the Consolidation of Democracy in Latin America Joseph S. Tulchin

267

Selected Bibliography The Contributors Index About the Book

271 277 281 291

Preface

Restructuring, reform, and privatization forced by economic crisis in the 1980s left behind a wake of confusion about the proper role of the state in Latin America. As governments let go of responsibilities for the provision of services that had been in the hands of the state since colonial days, consumers found themselves confronting private corporations to redress their grievances. These situations illuminated the absence of established mechanisms for the resolution of disputes and of respected institutions through which conflict could be negotiated. At the same time, in virtually every country in the region, the privatization of quasi-monopolistic or oligopolistic services made it painfully clear that the region was without effective policies to promote or guarantee competition in the setting of prices or in the provision of services. Ultimately, the region is realizing that regulatory reforms are not only a key to determining Latin America's economic future, but they also play a fundamental role in consolidating democracy. In order to understand the complexity of regulatory systems and bring to the attention of policymakers throughout the hemisphere the various ways in which emerging markets in the region have dealt with competition policy, the Woodrow Wilson Center created a project on "Regulation, Deregulation, and Modernization in Latin America." With the financial support and encouragement of Argentina's Subsecretaría de Asuntos Económicos, the center commissioned a set of studies to examine the evolution of competition and its regulation in five different Latin American countries that had undergone economic restructuring: Argentina, Chile, Colombia, Mexico, and Venezuela. Using a comparative approach to the study of competition policy at the global level, models offered by the United States, the European Union, and Mercosur were also explored. The commissioned research was revised to form the basis of the chapters in this volume. The goal of the project was to understand how regulatory systems evolve, their links to the political system and culture of each country, and vii

V¡¡¡

Preface

how specific social and political objectives might be maximized through learning about the experience of other nations. The project would not have been possible without the generous support of H. E. Jorge Campbell, Subsecretario de Asuntos Económicos del Ministerio de Relaciones Exteriores de la República de Argentina. We would like to express our gratitude to the authors who contributed to the volume and thank them for their patience and commitment to this project. We would also like to thank Joli Olcott and Judith Evans, who helped us revise the manuscript. Finally, we want to extend special appreciation to the Latin A m e r i c a n Program interns, Betsy A b n e y , A m e l i a B r o w n , and Jacquelyn Lynch, for their indispensable help in preparing the manuscript, and to Allison Garland, senior program associate, for getting the manuscript ready for publication. Joseph S. Tulchin

1 The Political Economy of Regulation and the Geopolitics of Regulatory Regimes Joseph S. Tulchin

When reformers went to work overhauling Latin American economies, they did so in the midst of severe macroeconomic crises. Their job was, first and foremost, to get economies wracked by foreign and domestic debt default, high inflation, disappearing growth rates, and rising unemployment back on their feet. And they had to act when the floodwaters had only begun to recede. To a great degree, an essential element in the task was one of economic modernization. For, in fact, what was discovered as the immediate danger passed were the shards of economic policies that, right or wrong, had been designed for previous eras when state intervention was considered vital for industrialization, public welfare, and national security. As the damage control went into effect and the macroeconomic indicators stabilized, Latin American reformers were able to turn to the structural adjustments needed to buttress longer-term solidity. Privatization, fiscal reform, trade opening, and deregulation were undertaken, cumulatively altering the landscape for both private and public economic activities. Only recently, not quite two decades after the debt debacle of the early 1980s induced the first round of reforms, have the region's policymakers, economists, and business communities begun to design, implement, and debate another set of reforms, the objectives of which are, broadly defined, to create—or, in some cases, re-create—the legal, regulatory, and statutory institutions complimentary to modern, competitive, global capitalism. Chief among these are the institutional frameworks and jurisprudence that restrict anticompetitive practices by economic agents and prevent their negative economic, social, and even political consequences. This book offers an analysis—we think the first—of competition policy as it evolved in the developed world, an assessment of where it stands today in Latin America, and an evaluation of where it may be (should be) reconceptualized and redeployed as a tool for consolidating the region's future. Rules for keeping the economic playing field level are necessary everywhere, but they may be even more so in Latin America. Why? 1

2

The Political

Economy of

Regulation

Decades of protectionist, clientelistic, anticompetitive behavior, growing out of prevalent state intervention, import substitution, and volatilityinduced defensive business strategies, created an entrenched web of collusive practices and a broad degree of acceptance of them. Moreover, there is little store of knowledge, experience, or public awareness of how to curb the negative impacts of price-fixing, rent seeking, high tariff barriers, and protective exchange rate policies. Nor has sufficient expertise accumulated for establishing frameworks for regulating formerly state-owned enterprises that are now in the private sector. This past weighs heavily on Latin America's present efforts to develop an approach and the institutional capacity to stem anticompetitive behavior or to encourage open competition. However, there are other significant hurdles, not the least of which is the spottiness of the record for antitrust and pro-competition attempts in developed countries and the situation of flux in which many regimes currently find themselves as globalization picks up speed. The heated debate over adding defense of competition to the World Trade Organization's portfolio and to the history of U.S. and European antitrust experience suggests that building such frameworks is never easy. Nor does the process set a single policy in concrete. As both the U.S. and European examples demonstrate, when political and economic ideas change, so does the implementation of antitrust law. This was clearly the case in the United States during the 1980s, for example, when radical free market advocates came into office, leading to a decline in cases brought against mergers. In fact, changed circumstances brought about by the growing internationalization of trade and investment have led to a global debate on competition policies, made more fractious and urgent since the outbreak of the 1997 crisis in Asia. Over the course of the late twentieth century, the pro-competitive policies of developing nations tended to adopt, with great variations, a kind of "infant industry protection" approach. Asia's tiger economies went the furthest, providing protection and nonmarket financing to firms with export potential. A generation earlier, the Japanese government had provided similar support to "sunrise" industries. Until November 1997, this strategy was widely regarded as successful and responsible for Asia's impressive international trade record. Since then, the model has come under attack for failing to restrict corruption, for contributing to the grave condition of banking systems in the region, and for encouraging noncompetitive practices ranging from the manipulation of macroeconomic information and cronyism to microeconomic distortions. Latin American policymakers may have looked enviously on Asia's economic growth rates and export success, but when they turned to reconstructing their own economies, a more U.S.-style model was chosen. It has

The Political Economy of Regulation

3

had, up to now, two pillars: open markets and regional trade agreements. As a result, trade barriers dropped precipitously throughout the region and, generally speaking, have remained low. In addition, such barriers tend to operate on imports from outside the region. These restrictions are understood to be temporary, with binding cutoff dates, designed to provide a breathing space during which local firms are expected to become internationally competitive. These dramatic efforts have proven more successful than was anticipated, as is evidenced by soaring intraregional trade and export growth as well as productivity gains. Moreover, the reforms have remained in place despite the turbulence caused by Mexico's devaluation in December 1994, skyrocketing both unemployment in several countries and the impact of the more recent Asian crisis. However, there are murky areas where it is hard to determine the degree or pace of success. Containing anticompetitive behavior is certainly one such trouble spot. Although there is no hard data for the region as a whole, experts claim that concentration is a predictable consequence of economic liberalization. More important, there is much anecdotal evidence to indicate that the public perception is of rampant concentration and foreign penetration, coupled with the impression that the state has given up its role as protector with far too much speed and alacrity. These two factors constitute a clarion call to Latin American policymakers urging them to accelerate their efforts to prove that action in defense of competition is an integral part of the reform process and that it can and will defend the public interest and the interests of individual consumers from the predatory behaviors of firms and markets. That ability is, after all, fundamental to the rationale for competition policy, which, in addition to claiming that competitive pricing leads to a better allocation of resources to meet consumer demand, also maintains that it has a positive effect on income distribution, especially when standards of living are very low. For these reasons, as well as specifically economic ones, pro-competition policies are to a great degree social and political tools for contributing to the legitimacy and sustainability of reforms. Effective conglomerate supervision also has a fundamental role to play in strengthening democracy in Latin America. Powerful economic groups, with direct access to the corridors of power and the ability to extract favors from political leaders, are an integral part of that past that regional reforms are designed to overcome. Judicial reform, acknowledged as fundamental for defending economic competition, is equally vital for political health, as only judicial systems that work can guarantee the rule of law for all citizens. Given this very broad and ambitious scope, what can Latin American governments reasonably be expected to do about fostering open, competi-

4

The Political

Economy of

Regulation

tive business environments? What are the obstacles to building the institutions that will be able efficiently to curb monopoly practices and simultaneously support the drive toward greater international competitiveness? As the Asian case sadly attests, misguided government intervention aimed at jump-starting the competitive dynamic can cause even greater harm than unbridled laissez-faire. Moreover, such systems, once entrenched, may prove extremely hard to dismantle. The boom and bust of the tigers is a cautionary tale to be read with great attention by Latin American policymakers. On the bright side, it does point very clearly to some surmountable obstacles. The development and training of institution builders may be among the most important tasks of this phase of reforms. Regulatory agencies, government antitrust legal units, supervisors to ensure open trading practices, judiciaries, legislative committees, stock exchanges, and professional associations are charged with complicated and sophisticated tasks for which they must have expertise not easily or quickly acquired under the present circumstances. But they are the public servants who will build the institutions and give them credibility. Critical to the success of any struggle against the power of hostile business concentration is the development of stronger, deeper local capital markets. Lack of access to credit at international rates of interest is one of the most significant barriers to entry by new, dynamic firms. One essential step—already taken in some countries—is taking advantage of the experience and knowledge available from stock exchanges in the Group of Seven countries. Collegial interaction with the New York Stock Exchange has proven its value to several Latin American countries. Borders open to foreign investment, with its ability to challenge and encourage higher technology incorporation, improved management techniques, more creative marketing and distribution, and a host of other improvements, comprise another of the essential prerequisites for constructing world-class economies. Finally, each country, and not only in Latin America, needs competition advocates. These may at times be lonely voices or officials in government-sponsored organizations; they may be leaders of private or public proexport groups, or they may be lawyers and legal authorities explaining or implementing legislation. Whatever the precise role, they are the salespersons on whom public understanding and support depend. The ability to judge the future for Latin America's competitiveness in the international marketplace is essential for anyone who invests, who does business in or with the region, or who seeks, more broadly, to understand how it is and will be inserted into the world. The dimensions of the issues raised in this book are, therefore, political as well as economic. And because competition policy, when it is well designed and efficiently and equitably implemented, is the bedrock of level playing fields, it has impact

The Political Economy of Regulation

5

on both domestic and international political perceptions. In fact, as several of the chapters herein underscore, the first goal of competition policy is to assure a nation's citizens—both as businesspeople and as consumers—that liberalization and structural reform open economies to new entrepreneurs and better-quality products and services. It is not going too far to say that the institutional structures required for free and fair competition—for example, transparent, efficient judicial systems and effective consumer protection—are integral to improving the quality of life. As a result, we believe that this volume will be of interest to a wide range of readers. Portfolio investors, multinational executives, economists, political analysts, and policymakers, as well as scholars and students of the region, will, we are convinced, find much to help hone their own competitive edges in this examination of competition policy and the ways in which it may have impact on Latin America. The principal reason I can make this assertion is the quality and experience of the contributors. As editors, Moisés Nairn and I looked for experts in the area of competition policy, but we also sought out authors whose experience in government and in the private sector could inform their contributions with a vision for the former and with the realism of the latter. It has been our great good fortune to have succeeded. As the chapters in this collection attest, the issues are complex and the differences of approach wide, but the need to engage in the debate is pressing. Without open, competitive economies, free and democratic societies are unlikely to flourish in Latin America—or anywhere. This book will, we hope, advance both the discussion and the decisionmaking on competition policies throughout the region. The first section of the book contains a general overview of competition policy. Moisés Nairn opens the debate with his examination of strategies for building competition in Latin American economies. He looks first at how macroeconomic conditions affect competition, arguing that liberalization is a necessary step toward ensuring competition. The import substitution policies prevalent in Latin America from the 1930s to the 1980s resulted in economies characterized by large businesses adverse to competition. After the debt crisis that swept the region in the 1980s, governments throughout Latin America abandoned the import substitution model and began liberalizing, privatizing, and deregulating. The result, Nairn contends, has been the creation of a more competitive, growth-oriented economy. Next, Nairn addresses the effectiveness of antitrust policy as a competition strategy and concludes that antitrust policy alone cannot ensure competitiveness. The strength of antitrust policy, even in developed countries, has varied according to macroeconomic conditions and other policy objectives. Furthermore, Latin America lacks the strong institutions necessary to implement and enforce antitrust policy, especially given the stresses placed

6

The Political Economy of Regulation

on institutions by the calls for new, more sophisticated forms of protectionism such as antidumping duties that have arisen in response to increasing globalization. As his final point, Nairn suggests that a key to developing an effective competition policy is the strengthening of local stock markets. Large businesses have access to international capital, but small and medium businesses that are arguably the real catalysts of economic growth are generally cut off from international markets. Nairn maintains that competition policy should support the development of the local stock market to provide companies with the capital they need to become competitive. Additionally, since companies must disclose more information about themselves as they go public, stock market growth also fosters competition by providing more data to regulatory entities and by forcing companies to be self-regulating. In the third chapter, F. M. Scherer considers the history and purpose of competition policy in the United States and Europe and the lessons that these histories have to offer Latin America. Until World War II, the United States and Europe had very different policy approaches. The United States pursued an active antitrust policy, while Europe followed a laissez-faire policy, interfering with monopolistic power only in the case of severe abuse. However, after the war, Europe adopted antitrust policies similar to those of the United States. Recent years have brought changes in U.S. policy: first the move toward deregulation begun in the 1970s, then the loosening of antitrust enforcement during the Reagan years, and finally the retightening of antitrust enforcement in the 1990s. Scherer cites four reasons for the creation of pro-competition policy. First, competition allows better allocation of resources through better pricing. Second, monopolies lead to social inequalities through a concentration of capital in the hands of a few. Third, other producers suffer from the barriers to entry that monopolies create. Finally, monopolies are inefficient since, without competition, they have no incentive to improve production. This exposition on the histories of competition policy in the United States and Europe leads Scherer to suggest that effective competition policies take time to develop; Latin America must have patience. Moreover, Latin American policymakers should focus on investigating monopolies and eliciting public opinion rather than centering their energy on the development of actual policies. The policies will follow with time. Also, protection must not be allowed to inhibit competition. Protectionist policies such as those regarding infant industry should always incorporate competition to some degree. As a means to gain access to new technology and in turn enhance competition, Scherer counsels Latin America to encourage foreign direct investment. The next section of the book offers a set of case studies. The first, on Argentina, by Enrique Zuleta Puceiro, begins with a general overview of the reform process, which he divides into three stages: a stage of economic

The Political Economy of Regulation

7

"shock" treatment and symbolic action, a stage of modest reform and continued stabilization that laid the groundwork for future reforms, and a final stage of broader, longer-term reform. He then narrows his discussion to a study of the process of deregulation, tracing the legislative history of regulatory reform and examining the effects of deregulation in several sectors of the economy. Although deregulation faces questions of constitutionality, the challenge of institutional weaknesses, and uneven application, deregulation has succeeded in lowering costs and prices, increasing investment, raising profit margins, and heightening stability in many economic sectors. However, the long-term implications of deregulation are still unclear. Zuleta Puceiro asserts that the reform process has precipitated a redefinition of control. The traditional notion of justice and control rests on abstract notions of the role of the state. The new form of control, however, focuses on the practical, not the abstract. Unlike the classic system wherein the procedure defined the goal, the goal defines the procedure in the new system. In the traditional system, the goal and the procedure were separate; in the new system, they are inseparable. Zuleta Puceiro calls for a system that balances both the new and the old—a system where procedure and due process are still important, but where public accountability and flexibility are also important. Regulatory guidelines are crucial in creating this new system of control. The Chilean case by Nicolás Majluf and Ricardo Raineri begins with a brief outline of the history of economic policy in Chile, from the liberal economy of the early 1800s, to the interventionist approach that culminated in the Allende years, to the system of "subsidiary government" of the Pinochet years. The discussion then advances to a survey of the process of privatization and deregulation in Chile, which Majluf and Raineri divide into two periods: an initial period from 1974 to 1981, which focused on the privatization of property appropriated by Salvador Allende's government; and a subsequent period from 1984 to 1990 (after the crisis of 1982-1983), which focused on reprivatizing property appropriated by the government during the crisis and extending privatization to areas such as public utilities. They then go on to summarize the other main economic reforms of Chile's liberalization: the deregulation of prices, trade, foreign investment, financial markets, foreign capital flows, and the labor market, as well as the respect of property rights, the globalization of the economy, Central Bank independence, and tax policy changes. An analysis of the transformations within the specific sectors of social security, telecommunications, energy, and mining follows. Majluf and Raineri conclude with an examination of some of the lessons and implications of Chile's liberalization. For them, letting the market be the major regulator is the key to modernization. The regulatory regimes that do exist apart from the market must be flexible and change

8

The Political Economy of Regulation

according to circumstance. To succeed, Chile must work to ensure strong, independent regulatory institutions. A comparison of competition policy in Latin America and industrialized countries with an emphasis on Venezuela is the focus of the next chapter by Ana Julia Jatar. After an abridged history of antitrust law in Latin America and an overview of Venezuela's recent transition from policies of import substitution to policies of liberalization, Jatar devotes the rest of the chapter to defining the specifics of the Latin American situation and how it differs from the situation of industrialized countries. Latin America, she explains, has approached competition policy historically very differently from the United States. In the United States, the goal of competition policy has been to break up monopolies, whereas in Latin America, the goal of policy has been to mediate the negative effects of monopolies by controlling prices. This tolerance of monopolies in Latin America has ingrained certain anticompetitive values in society that competition policy agencies should work to change through reeducation of the public and business leaders, Jatar argues. Competition policy should also serve as an advocate to help politics adapt to liberalization. Another difference between Latin America and industrialized countries is the high concentration of Latin American markets, which makes cartel behavior more of a threat. Also, in general, Latin American firms are highly diversified and vertically integrated. Jatar contends that the combination of high firm diversification and high market concentration requires different merger guidelines than the guidelines used in industrial countries. In Chapter 7, A. E. Rodriguez applies Jatar's argument on the inadequacy of U.S. and European competition models to Mexico. Rodriguez develops the argument by explaining the basic ideas behind competition policy and then offers an economic analysis of Mexico's liberalization. During the years of import substitution in Mexico, special relationships between government and interest groups characterized the economy. The value of capital depended on these special relationships. But with the recent liberalization and the dissolution of many of the previous governmentinterest group relationships, the value of sunk capital has fallen. Special interests can respond to the loss in the value of capital by seeking rents from the government and cartelization or by investing in new capital. The government route is still the most profitable for companies because the old networks have not yet completely disappeared. The relative cost of capital must fall further in order for companies to invest in new capital. Competition policy, Rodriguez asserts, is the key to changing the costs of capital. Strengthening antitrust policy raises the price of cartelization. Making collusion more expensive would make investment in new capital relatively less expensive. He concludes with a look at the implications of antitrust policy in Mexico. Mexico has begun to address the shortcomings

The Political

Economy of Regulation

9

of traditional antitrust approaches on a functional level, if not a legislative level. The results of Mexico's competition policy are yet to be seen. In contrast to Rodriguez's economic approach, Rudolf Hommes presents a political analysis of the reform process in Colombia in Chapter 8. He begins with an overview of Colombian industrial history; next examines the recent history of the public-private relationship in the specific sectors of mining, coffee, agriculture, and finance; and then outlines the liberalizing reforms that Colombia has made in recent years. He designates three stages needed in pro-competition reform. The first involves opening trade, privatizing public services, and encouraging foreign direct investment. This stage does not involve much political skill to implement, and Colombia has therefore made significant progress. The second stage involves the control of oligopolies within the domestic market, which involves a great deal of political skill. Colombia has not yet reached a level of political development sufficient to make control of monopolies and oligopolies possible. The final stage, also not yet attained by Colombia, entails deciding how much economic power an entity can have before it threatens democracy. Hommes lists several suggestions for achieving a competitive economy. Colombia must maintain an open economy. Also, the government must promote competition in the goods market and the financial and capital markets but at the same time allow firms to decide upon matters of size and integration. The state must continue privatization efforts too. Most important, however, Colombia must strengthen its political system and make the bureaucratic system more independent from politics. Moving beyond the national level of analysis of the previous section, the third section of the book brings the discussion of competition to a global level. In Chapter 9, Barry M. Hager examines the international implications of U.S. antitrust law and provides an overview of U.S. competition policy from the 1880s to the present, noting the major legislation and cases that shaped the general law, as well as more specific regulatory movements—that is, regulation within the financial sector. Hager then proceeds to review the changes that have taken place in U.S. antitrust policy in recent years. Both a shift in political attitudes started by President Ronald Reagan and continued by Newt Gingrich and a shift in intellectual attitudes brought about by the economists of the Chicago School have led to a more laissez-faire approach to antitrust policy. The view of the economy as rapidly globalizing, a view trumpeted often by President Bill Clinton, has also led to a decline in antitrust action. What would be a monopoly on a national level would not usually be a monopoly on a global level. However, this laissez-faire approach to antitrust policy that has arisen in recent years displeases Hager. He rejects the Chicago School argument as exaggerated and insists that bigness does in fact lead to monopolistic

10

The Political

Economy of

Regulation

inefficiency. Furthermore, he holds that although globalization has not yet progressed enough to require a global market view, U.S. competition policy does have an increasingly international role. Other countries, such as those in Latin America, would do well to adopt the U.S. antitrust model. Moreover, Hager contends that extraterritorial application of antitrust law, such as the use of U.S. antitrust law against foreign companies that threaten U.S. markets, is the wave of the future. If, in fact, the future of competition policy lies beyond national borders, then the European Economic Community (EEC) is blazing the trail. In Chapter 10, Ana Julia Jatar investigates competition policy in the EEC and its relevance to Latin America, with particular attention to issues such as collusion, distribution agreements, parallel imports, price discrimination, mergers, and industrial policy. In the EEC, a negative competition policy that prohibits monopolistic power has opened the way for the petitioning for exemption by hundreds of claimants. Given that such a large number of cases would overwhelm the weaker regulatory agencies of Latin America, Jatar warns that Latin America should not institute policy based on exemption. Latin America should, however, follow in the path of the EEC in using competition policy to promote free trade and in the development of supranational competition law. Competition laws that go beyond borders limit the power of national interest groups and prohibit transnational cartelization. Finally, Jatar recommends that Latin America follow the EEC's example in focusing on opposing price discrimination rather than instituting antidumping regulations. In Chapter 11, José Tavares de Araujo and Luis Tineo continue the discussion of competition policy at an international level, focusing on competition policy within the Common Market of the Southern Cone (Mercosur). Through a review of privatization and antidumping actions in Argentina and of tariff swings and the automotive regime in Brazil, they analyze the effects of the recent economic reforms on competition and competition policy in Latin America, concluding that market transparency and competition advocacy are crucial to encouraging competition. The second part of the chapter deals with competition policy within Mercosur, specifically the Protocol for the Defense of Competition. Tavares and Tineo evaluate the three goals of the protocol: the provision of mechanisms to control anticompetitive practices of Mercosur dimension, the establishment of an agenda for surveilling public policies that distort competition, and the convergence of domestic laws to ensure similar conditions for competition. The protocol faces many challenges. Defining what infractions fall under the protocol may be difficult, Latin American countries' limited experience with competition policy may lead to inconsistency, and countries may not enforce the protocol uniformly. If, however, Mercosur is able to overcome these obstacles to meet its goals and the goals outlined by

The Political Economy of Regulation

11

Tavares and Tineo, Mercosur's protocol will become a model for future competition policy. Drawing from the country case studies as well as from the analysis of global policies in this volume, I conclude in the final chapter that sound regulatory frameworks must be established and some mode of competition policy implemented to promote growth with equity and social accountability. In countries emerging from economic restructuring at the same time they attempt to consolidate new and fragile democratic polities, establishing a national regulatory system is a crucial step. Without competition policy innovation is blunted, technological change is thwarted, consumer rights are subverted, and the public good has no foundation. Competition policy is a necessary, though not a sufficient, requirement for the health of capitalism in a democratic society.

Part 1 A General Overview of Competition Policy

2 Does Latin America Need Competition Policy to Compete? Moisés Nairn

The Historical Context and the New Dilemmas In the early 1990s, an entrepreneurial Argentine, impressed by Chile's success with counterseasonal fruit exports, decided to make an effort to break into the European holiday strawberry market. He did his homework. A market study pinpointed the exact weeks in which the product had to arrive, the level of quality demanded, and the precise cities to target. Still, the effort was a failure. When asked what went wrong, he explained, "For an Argentine, it could only work if he owns his own airline." The project's downfall was not an inadequate supply of high-quality fruit at the right price; it was an inability to get the product out of Argentina. This anecdote about the inefficiency, if not downright corruption, at the Buenos Aires international airport is one, albeit somewhat humorous, example of the kinds of obstacles Latin American firms face as they strive to become internationally competitive. It gives the flavor of the dilemma but is not, as the contributions in this book document, the only barrier to competitiveness. In fact, as privatization improves the efficiency of existing infrastructure and as new investments begin to reduce the infrastructure deficit, export difficulties may comprise one stumbling block that is being dismantled.1 Latin American governments have won kudos internationally for their progress toward open market economies. The steps that have been taken— first in a forced march backward from the foreign debt precipice and later at a brisk gait in time to changing policy ideas and attitudes—took courage and determination. However, much of the adrenaline necessary for change entered the political system through the intravenous feeding of the crises. Today, Latin America's challenges are different. Above all, the lowered trade barriers and subsidy reductions are placing local companies of all sizes and among all sectors in direct competition with foreign firms. Can Latin American companies cut it? Should governments tolerate lower competition at home in order to allow local firms to attain the size needed to 15

16

A General Overview of Competition

Policy

compete abroad? What is the link between competition policy and international competitiveness? In this chapter, a review of the historical context and the changes introduced since the mid-1980s will lead directly to a closer look at the current state of competition policy in Latin America and, more specifically, its links with the anticompetitive bias of its past economic policies and the export-oriented ones of its present policy. The last section explores a set of suggestions—not completely new, but certainly less frequently emphasized—with the expectation that the reigning concepts about competitiveness and how to develop it can absorb some new wine in the old bottles and, in some cases, put some old spirits into new vessels. As the opening and reform of Latin America's economies move forward and even pick up steam, the obstacles to international competitiveness are likely to become less overwhelming. Throughout Latin America, much has been done since the 1970s to create a context in which Adam Smith's "animal spirits" have been unleashed by the growth of market opportunities. The regionwide reduction in trade barriers opened markets to products from all over the world, wakening consumers to their previous deprivation in terms of product quality, variety, and cost. Simultaneously, stability encouraged foreign investment in distribution and commercialization systems. The so-called Wal-Mart effect 2 introduced previously unknown practices such as discounting, comparative shopping, and price competition. Across the board, improvements in exports and, especially, the growth in intraregional commerce as trade agreements took effect led business leaders to raise their sights beyond their own borders. These seemingly superficial changes serve as just the more visible tip of an iceberg that consists of the massive tectonic plate movements in Latin American economic policy that owe their force and inexorability to the debt crisis of the early 1980s. As has been widely observed, the collapse of state finances left governments with little choice but to disassemble—some more quickly than others—the reigning import substitution policies put in place between the Great Depression and World War II. Grafted on to colonial and postcolonial economic models based on state monopolies, with all the attendant emphasis on privilege and disregard for innovation and merit, import substitution wove itself seamlessly into the cultural canon. The effects of half a century of state intervention in economic policy and business practice, as well as in other equally important areas of civil society, remain pervasive and are particularly embedded in the region's business cultures. However, the reforms already implemented—trade opening, deregulation, privatization, fiscal restraint, redefinition of the state's role—are, in election after election, supported by Latin Americans even as they decry the painful dislocations. Without these reforms, there would be no need or

Does Latin America Need Competition Policy to Compete?

17

reason to discuss competition, either how to foster it or how to prevent its being sabotaged. Still, developing a competitive private sector in the context of rapid globalization is more easily said than done. The questions, dilemmas, and paradoxes involved are legion and growing. Nor are they limited to the countries of Latin America or even, for that matter, to developing countries. A growing consensus is emerging that makes open trading rules and competition policies crucial issues for the global economy as a whole. The challenges for Latin America are especially daunting, given its history of import substitution with its creation of protected monopolies, both private and public. While the region passed antitrust laws as early as 1923, in the form of Argentina's statute, the wide adoption of the import substitution model leaves little in the way of accumulated experience in implementation or even in public understanding or acceptance. 3 As the chapters in this book on the United States and the European Economic Community explain, the traditional weapon for protecting competition has been antitrust law. Although this field has distinct groundings in jurisprudence, the main aim of all antitrust legislation is to prevent or inhibit anticompetitive behaviors exhibited either through collusion among rivals or through exclusionary practices. However, the historical context in which the United States—a turn-of-the-century, Continental economy— undertook to protect consumers from potentially rapacious, price-fixing trusts and that of the association of European states, with the aim of consolidating a Continental economic unit, are extremely different. As a result, the application of antitrust legislation in the United States was generally less indulgent of cartels and the arguments in favor of industrial efficiency than in Europe. It should nevertheless be pointed out that all nations' attempts to dismantle monopolies rose and fell with the exigencies of macroeconomic conditions and other objectives. In postwar Japan, for instance, export growth took absolute precedence over fostering domestic competition. Its powerful Ministry of Trade and Industry never flinched in ignoring the basic tenets of antitrust regulations if they interfered with the export-oriented industrial policy for which it became famous. And in most Western economies, the pursuit of monopolies came to a virtual standstill during the Great Depression. The ebb and flow of antitrust enforcement has been accentuated, as Barry Hager documents in Chapter 9 regarding the U.S. experience, by interpretations of economic globalization and its impact on American policy. In what may turn out to be a convergence with the European approach, he predicts that "the antitrust laws associated with a concern over bigness, concentration, and monopolization . . . do not appear likely to be much invoked within the United States in the near future." This view has multiple policy implications for Latin America, where monopolization has such a

18

A General Overview

of Competition

Policy

long history and where, up to now, privatizations and trade opening appear to have accentuated the concentration of economic power. 4 Like several other authors, Hager's analysis leads to a questioning of whether the traditional antitrust approach should be the focus for Latin America at a point in history when private firms are faced, as never before, with competition from outside and opportunities within regional markets. In fact, some argue that the vigorous application of standard Western antitrust policy has two potentially negative impacts in developing countries: retarding investment and making it more difficult for firms to enter long-term contracts.5 With regard to the former, they argue that the principal need is for direct capital investment, in part to offset the hardship caused by reform, and that, therefore, the short-term anticompetitive effects may backfire in reforming economies where the degree of risk requires a compensatory approach. Moreover, many mergers and joint ventures that might be considered unacceptable in a developed economy might have to be tolerated in reforming countries where the markets, given the weakness of judicial systems, need to rely far more on self-enforcing contracts. On the other hand, the available evidence shows that in order for countries to become competitive abroad, strong competition at home is a very important precondition. It is very hard for a company to develop the managerial practice, the organizational culture, and the cost structures that are needed to conquer international export markets if it enjoys the comforts of a protected, subsidized, monopolistic market at home. This, indeed, was the case for a great number of Latin American firms that were born and grew in a business environment where competition was more the exception than the norm. This extremely brief summary indicates that there are dueling concepts about one of the basic tools of antimonopoly practices, and it should thus be read by Latin American policymakers as a cautionary tale. Maintaining open trading systems and fostering competition may involve structural trade-offs. Both processes are stop-and-go affairs, not linear codifications immune to changes in historical conditions. And, at this juncture, the world has experience and a successful track record in opening trade, while competition policy in developing countries is a road only recently embarked upon and with few signposts that clearly indicate policy success or failure. In any case, there is mounting evidence that while liberalized trade is, in general, a powerful tool for the promotion of competition, antitrust laws are weaker instruments—not because they are inherently flawed, but because their effectiveness hinges on institutional and political preconditions that are not always present in the countries that adopt them. 6 Before moving on to the case studies of liberalization and competition policy in Latin America, the historical roots of trading policies in the region should first be considered. This historical perspective provides a clue as to why trading policies in Latin America developed differently from those in

Does Latin America Need Competition

Policy to

CompeteÌ

19

the United States or other formerly colonized regions. Having considered the historical background, Chapter 3 will then frame some models for competition policy available to Latin America, including those of Europe, the United States, and the Asian tigers.

The Nonissue: Latin America's Competition Policy Until the late 1980s, when Latin America, led by Chile, began its far-reaching economic reforms, the obstacles to competition were innumerable. Not that anyone ever attempted to count them. The very notion of "noncompetitive" business practices did not exist under the prevailing policy model. On the contrary, agreements among producers on pricing, accords between employers and employees on wages and benefits, government subsidies for private-sector enterprises, and government ownership of production facilities, extractive industries, and services, among other practices, were considered desirable adaptive strategies. In most countries, the creation of an industrial base was embraced as a fundamental goal, with the lack of competition just one of the tactics for its achievement. The hope was that, in the long run, such policies would engender economic structures capable of providing the same standards of living as those found in the advanced nations. The initial costs, according to this theory, would eventually disappear or be greatly reduced. The traditional impediments to dynamic, competitive private sectors would be no more than historical footnotes had they not lasted so long and become so ingrained in Latin America's economic and business culture. Broadly speaking, beginning in the 1930s and lasting through the 1980s, the policies of Latin American governments, their paltry leverage in the world trading systems, and the interests of the business sectors as they were then understood created markets in which there was little, if any, competition. For mass-market products, such as food, cement, and fuel, prices were fixed for both public and private producers. Higher-end goods, such as automobiles, were manufactured by a limited number of firms that seldom competed on the basis of price. Imports were restricted by high tariffs, quantitative limits, nontariff barriers, direct prohibitions, and foreign exchange availability. The state, often the most important economic actor, was constrained by its own mandates to buy only from national suppliers and often to open public contracts only to domestic firms. Over the decades, manufacturers' organizations became powerful groups lobbying, with support from trade unions and from within the governments themselves, to maintain the status quo and maximize the rents they could extract from the state. Within this context, family-owned businesses, some of great size, were characteristic, while publicly traded companies were a small minority and,

20

A General Overview of Competition

Policy

even then, often facades for family ownership with little liquidity or transparency. These conglomerates, with privileged access to tariff protection, government information, subsidies, and credit, had to expand both horizontally and vertically if they were to grow within the confines of limited local markets. Because of their favored position, these firms were often the ideal partners for foreign companies, forming joint ventures, technology transfer agreements, and consortia. On the other side of the track were small- and medium-sized firms that, while often under fixed-price regimes and other market limitations, did face more competition from other domestic producers and had little or no access to capital or technology. Under these conditions, macroeconomic policy was both hostage and perpetrator of a system that distorted investment, stifled competition, and eventually prevented a market-based allocation of resources. A simple comparison of the impact of past and present interest rate policies on competition illustrates the contrast in business strategies that the two different approaches are likely to induce or even require. Under a state interventionist system, interest rates, like many other costs, are seldom market determined. Rather arbitrary criteria and access to privileged credit, whether for individuals or sectors, often grant negative interest rates to some, sometimes to counter the very high rates needed to prevent capital flight. The intention—to subsidize productive investment by means of an interest rate subsidy—leads to uncertainty even on the part of beneficiaries and therefore fails to encourage the quantity or the quality of investment desired, creates a tendency to arbitrage between the cost of the subsidized credits and higher-yielding financial investments, and fosters strong lobbies intent on perpetuating the system, all of which have negative fiscal implications and distort monetary policies. In addition, in most cases, a lack of market-based interest rates favors large companies and conglomerates at the expense of small- and medium-sized companies, which, in some developing countries, as a number of experts maintain, have become the dynamic forces for growth, innovation, and employment. In contrast, with the advent of more transparent lending practices and market-based interest rates, companies are forced to factor in the real cost of capital when projecting for all operations, whether they regard maintaining adequate levels of working capital and stocks or planning for borrowing and investment needs. Inventories, to give an illustrative example, can be used as competition inhibitors when selected firms have access to subsidized interest rates that make their financing cheaper. Further, more competitive lending markets are an incentive for companies to take actions that help them meet the criteria of private banking institutions. As it works with interest rates, so it works for exchange rates. Multiple exchange rate systems function to keep the playing field from being equal, both among domestic firms and between local producers and foreign competitors. In the case of Latin America's recent history, as J. Luis Guasch

Does Latin America Need Competition

Policy to Compete?

21

and Sarath Rajapatirana have demonstrated, "Latin American countries were reluctant to liberalize their import regimes and to replace various export promotion measures with exchange rate adjustments." 7 In fact, one policy required the other, they argue. Overvalued exchange rates made export subsidies necessary—concessional credits, duty drawbacks, and special exchange rates, to name the most frequently used—in order to reduce the bias against exports caused by currency disequilibrium. Latin American business strategies, under volatile and uncertain exchange rate regimes, had myriad perverse consequences. For one, exports were serendipitous: this week you export; next week you do not. In the decades in which domestic markets were growing, which for much of the region lasted from the 1950s through the 1970s, appreciating real exchange rates, as A. E. Rodriguez's chapter herein points out, meant that local manufacturers had no incentive to export. This left Latin American firms with little experience in foreign markets and, in a number of cases, with a reputation for unreliability. In general, manipulated exchange rate policies retarded the incorporation of technology, leaving plant and equipment, packaging, design, and a host of other competitive factors behind many other regions of the world. Exchange rate predictability, like market-based interest rates, makes it feasible to tally real costs and make more informed investment decisions. For example, since the introduction of exchange rate bands in Chile and Mexico and of the convertible exchange rate system in Argentina, firms have bought, replaced, or increased their imported inputs, even when the currency is thought to be overvalued. Moreover, in the domestic economy, a slow process of relative price realignment is taking place, which is inducing price reductions in nontradable goods and services, such as private schooling, dry cleaning, photocopying, and printing services. As the two examples just cited underscore, the impact of macroeconomic reforms on business strategy, though somewhat indirect, is crucial in shaping firm behavior and, more to the point, is a defining force in inhibiting or strengthening competition. But the degree of competition within a sector is not defined only by the macroeconomic environment. When it comes to the main issue treated in this chapter—competition—the picture becomes more complex and cloudy. There are factors that fall within the sphere of government: institutional weaknesses, such as inadequate or nonexistent regulatory agencies and insufficient trained professionals to staff them. Some of these issues are related to larger policy questions, such as promoting export versus encouraging domestic competition or intellectual property rights. Real questions arise around the very meaning of "underdevelopment" and its impact on research and development resources. There is also the real dilemma of efficiency as it relates to market size and the propensity for conglomerate growth. Moreover, the "unfair" advantages of multinational companies become a paramount con-

22

A General Overview of Competition

Policy

cera as the formulation of an effective competition policy becomes a matter of national interest. Restraints on competition continue to exist in Latin America, but, like the wolf in the sheep's clothing, they are now harder to detect and even harder to defang, given the parameters of the prevailing free market paradigm.

Stabilization, Reforms, and Regionalization: The Impact on Competition Even a cursory look at Latin America's macroeconomic statistics since the 1980s provides a clear idea of the impact of economic reforms there. The hyperinflation and recession typical of the 1980s have given way in the 1990s to low inflation, the restoration of a modicum of economic growth, and booming financial markets. While the region's macroeconomic turnaround has yet to be reflected in any noticeable way in the daily lives of the majority of the population, it is increasingly apparent in the business world. Take the changes reforms have made in airline schedules and routing, for example. There are now more direct flights between New York and Latin American capitals and more among the region's major cities than ever before. Moreover, business-class seats on any of these routes are more often sold than not. Businesses—both foreign and regional—are looking for and making deals within the Western Hemisphere on an unprecedented scale.8 The liberalization of trade and foreign investment, privatization, and deregulation are, perhaps, the most critical factors for competition in Latin America. The years between 1988 and 1998—encompassing Carlos Salinas's election as president of Mexico, Argentina's adoption of its Convertibility Plan, and the sale of Brazil's mining giant, Companhia Vale do Rio Doce—will be recorded as ten years of adjustment and consolidation. It will also be remembered as the decade in which economic regionalization advanced more than in any other period in Latin America's history, despite the setbacks produced by the Mexican, Asian, and Russian crises. It is hard to overestimate the importance of the groundwork laid by stabilization and the introduction of structural reforms in this period. Both foreign direct investment and portfolio capital flows grew dramatically and, though stalled by the December 1994 Mexican devaluation, picked up rapidly. In total, between 1990 and 1994, according to the World Bank, $132.8 billion poured into the region's equity markets. From a high of $9.5 billion in 1993, U.S. equity investment dropped to $2.2 billion in 1995 and hit $2 billion by the end of the second quarter of 1996. On a macroeconomic level, the most immediate and visible consequence of regional stability and structural reforms has been the dramatic redefinition of what the state should and should not do. Privatizations,

Does Latin America Need Competition Policy to Compete?

23

especially in Argentina, Chile, and Mexico, have removed the state from such immense industries as telecommunications, television and radio, postal services, transportation enterprises, banking, the oil industry, and mining. As a result, the percentage of private investment in the gross domestic product has increased while that of public investment has decreased. The private sector, in addition to owning more of a share of the economy, also faces competition in most of the areas that it took over from the state. Some of that competition is from other domestic firms, which, with foreign partners, now operate the services previously provided by the state. In other cases, expanded investment by foreign firms or the opening of trade is challenging formerly protected sectors, such as automobile and electronic goods production. More broadly, in most countries, consumer goods, for example, have felt the impact of dramatically lowered tariffs. A number of countries began to exhibit significant trade deficits with China by the mid-1990s. Yet in a number of areas, the competitive context is imperfect. In the Argentine privatization of the state telephone company, for instance, rates and earnings were fixed for geographical areas, leaving residents with no choice of carrier, a dead end that some have gotten around by using semilegal "call back" systems. Telmex, the formerly state-owned Telefonos de Mexico, has held the nation's rapidly growing communications sector as a private fiefdom since it was sold in 1990 and accounts for almost a quarter of the local stock market's capitalization. The same situation exists in other countries. Examples such as these have justified concern over one of the initial fears raised by privatization: public monopolies becoming private monopolies. In most of these cases, however, the contracts include important investment requirements and obligations to improve service, equipment, and costs. Per these contracts, some companies, such as Telmex and Venezuela's CANTV, are obliged at some point to supply additional firms in the same sector and to open new areas in the market, such as long-distance services. As many of the state enterprises that were sold were bought by local groups, often in association with foreign companies, the financial burdens written into the sale, lease, or concession contracts are, de facto, restructuring big business in Latin America. There is increasing evidence that the large local conglomerates are divesting the noncore businesses acquired in vertical expansion, which was characteristic of the region in past decades, to focus on core areas, many of which have grown through privatizations. 9 Small- and medium-sized companies are also restructuring, although at a slower pace and in a wider variety of ways. One of the newer and most interesting developments is the formation of local venture capital firms that are buying into companies and revamping their management to meet the

24

A General Overview of Competition

Policy

demands and opportunities of the changed environment. For example, the Exxel Group in Argentina is focusing on health care providers (comparable to U.S. health maintenance organizations) and merging them to gain a larger share of a service industry that had grown out of pension and health care reform. In addition, foreign venture capital firms are combing the region for small- and medium-sized firms with the same basic objective. The Latin America Enterprise Fund of Miami, for instance, a closed-end fund, has invested $54 million in promising unlisted companies like Chile's Ceresa, a metal processing company and the region's largest producer of plastic sacks for fish meal and fertilizer. By the late 1990s, more than one hundred private investment funds were set up to invest in Latin American companies. Especially important has been the growth in international joint ventures among Latin American companies. Chilean investors have led the way, backed by the liquidity and access to funds brought by high domestic savings rates, which, in turn, were catalyzed by the growth in pension fund assets. Acquisitions by Chilean companies in the Argentine power and beverage sectors stand out, but Argentine companies, as well, are forming partnerships with Brazilian firms as they aim to take advantage of Mercosur and its opening to Brazil's larger markets. The banking sector is another example of incipient regionalization: Brazil's Banco Itau, for example, is expanding its operations in Argentina and is forecast to become one of the larger banks in the country. Colombians have invested in Venezuela as never before, and Peruvian firms are buying companies in Bolivia. Multinational firms have not been exempt from reform-induced restructuring. The most dramatic example is the automobile sector, in which there have been disassociations—namely, Ford and Volkswagen's Autolatina and Fiat's recuperation of its licensing operation in Argentina— as well as significant production expansion projects and several distribution agreements for firms that do not have production facilities in the region. Another example of multinational change is Nike's decision to license the Argentine firm Alpargatas for production and distribution in Brazil. The exponential growth in public offerings on international capital markets by Latin American companies is another interesting consequence of the reforms. Although somewhat slowed down by the uncertainties growing out of the Mexican devaluation of December 1994, the overall numbers are, nonetheless, a remarkable indication of the willingness of publicly quoted Latin American companies to meet the criteria of disclosure demanded by foreign investors. Raising capital in international markets, at interest rates and maturities that are unavailable at home, has, of course, been limited to only the largest and most recognized firms. This ability has given them an enormous competitive advantage over smaller firms and calls attention to the far-slower move toward going public than might have been expected on the part of companies that clearly ought to be anxious to lower their cost of borrowing.

Does Latin America Need Competition Policy to Compete?

25

These examples give a small indication of two major points. The first is that Latin American companies, across the board, are modifying their management and operational structures and leaving behind the borderbound ambitions of the past. Before market-oriented reforms, diversification within the home market—with little concern for costs, efficiency, or competition—was the only way to grow; this is not so anymore. Today, Latin America's business executives have to think about efficiency and competition all the time; to grow, they have to reach beyond their own borders. This cannot be done without specializing and concentrating on their core advantages, an issue that leads to the second point of emphasis: the effects and reach of these changes are uneven, and their implications for the quality of competition is uncertain.

The New Challenges: Building the Economic Institutions of Contemporary Capitalism "Globalization" is a word used so frequently today that its specific meaning and its real impact are in danger of getting lost in what some have called "globaloney." However, no matter how it is defined or how loosely the term is used, one thing is absolutely clear: contemporary capitalism is defined by the increased movement of goods and services across political boundaries. Adapting to the fundamental challenges, institutionally and for competitiveness, brought about by this rapidly growing international integration is not easy. A few selected facts will give some indication of the scope of the changes and, therefore, the magnitude of the transformations taking place and the new demands on policymakers worldwide. Since 1985, direct foreign investment flows quadrupled, to $235 billion annually, or twice the growth rate in world trade. Capital flows have, in addition, incorporated newcomers in amounts that far exceed those of the 1960s, the quintessential era of postwar growth. Today, 45 percent of foreign investment flows are destined to developing countries compared to 25 percent during that period. While global trade has grown more rapidly than it did between 1974 and 1984, it has nevertheless fallen behind the annual 8-9 percent steadily reached during the 1960s. Moreover, the previously existing link between economic growth in the central economies and that among the countries of the developing world appears to have been broken. Since 1989, Latin America, Eastern Europe, and East Asia have grown at rates considerably above the sluggish performance of the developed nations.10 One explanation frequently offered by trade experts for the seeming discordance in the data is that institutional lags have dented the efficacy of what were the standard mechanisms governing trade in the past. As a result, it is asserted, nontariff barriers are proliferating, and trade dispute machin-

26

A Cenerai Overview

of Competition

Policy

ery is proving inadequate to handle the growth in, for example, antidumping claims, questions over the imposition of countervailing duties, and other trade-impeding or "managing" actions. Furthermore, the proliferation of regional trade accords is changing the functioning of the multilateral trade system set up under the Bretton Woods agreements and tailored to the contours of the Cold War. With the North American Free Trade Agreement, Mercosur, and the steps being made among the Central American countries, Latin America has joined the other prime culprits—Europe and Asia—in economic regionalization. With the full implementation of Mercosur in 1995, nearly 90 percent of intraregional trade was liberalized. Intra-Mercosur trade has, as a result, taken off. Exports among the member countries grew from $5 billion to an estimated $16 billion in 1996. However, the growth in trade disputes is keeping pace with expanded trade. Argentina created a new entity, the Comision Nacional de Comercio Exterior, in 1994 and put a number of new procedures in place. Consequently, there has been a sharp rise in antidumping and countervailing duty action against imports. While there were only nine recorded cases between 1986 and 1990, seventy cases were opened between 1991 and 1995. In addition, actions were most frequently taken against Latin American countries (39 percent), followed by Asia (25 percent), compared to the previous dominance of Western Europe. Brazil led with 25 percent of the cases, followed by China with 10 percent. The Argentine authorities are obviously attempting a case-by-case damage limitation strategy to protect firms from the impact of rising imports, placing new and sophisticated demands on recently created institutions. Frequent reliance on antidumping and countervailing duties is taking place in other countries too. In the past, Latin American companies usually resorted to import substitution arguments to induce their governments to protect them from competition. This often resulted in the erection of insurmountable trade barriers, essentially based in high tariff barriers and quotas.11 In this new era, the arguments are instead built around more sophisticated issues like "unfair competition." 12 High tariffs and quotas have now been replaced by antidumping regulations, rules of origin, phytosanitary permits, and the like. In many cases, these practices are completely justified, given the predatory tactics that are not uncommon in international trade. But just as frequently, the generalized use of these measures is essentially driven by the same protectionist impulses that made high tariffs and quotas characteristic of the past. The new "state-of-the-art" protectionism has, in turn, complex links with competition policy.13 There is little that an agency charged with the promotion of competition can do to counter the negative impact that higher countervailing duties or other such measures may have on competition. Obviously, there is a danger that this tension between competition policy and state-of-the-art protectionism will overload

Does Latin America Need Competition

Policy to Compete?

27

the relevant state regulatory entities that lack sufficiently trained professionals, thus endangering their efforts to earn credibility. Another approach to understanding the challenges to Latin America is to look at the impact of deregulation on the financial sector, as it is likely to be concentrated on small- and medium-sized firms. Without competitive capital costs—that is, interest rates that approach average international rates—these companies stand little chance of driving export growth forward, as many experts think they have the potential to do particularly well. Or do they? Have fears of monopolies led to an unrealistic appreciation of "bigness"? This debate has been engaged in the European Economic Community, which is attempting to harmonize rules for competition among its members. However, Portugal, for example, favors concentration because, with its small market, it argues that it must allow the development of single, strong national firms to compete in the rest of the Community. From a theoretical perspective, a number of economists argue that private monopolies, given the imperfect functioning of markets, are not necessarily damaging to domestic competition. Microsoft, the favorite example, is a near monopoly but one that occupies contested terrain. Some economists go even further and argue that public monopolies, or what are often called "natural monopolies," cannot necessarily be assumed to be competition foes. Public goods, such as national defense, law and order, and, of course, Ronald Coase's Nobel Prize-winning lighthouse, are often cited as examples in this context. For all that Latin America shares with other regions in regard to the many changes and challenges growing out of globalization, it has, so far, been unique in one important way: despite its recognized dependence on international liquidity, little has been done to modernize domestic stock markets or to make them viable investment or capital-raising vehicles. Stock market development has been a salient characteristic of some Asian countries, India, Eastern Europe, Turkey, and even of small economies such as Jordan. There are several exogenous reasons for this growth (e.g., globally, the cost of debt rose relative to equity, and price/earnings ratios rose worldwide), but the most important factor is that "the developing country governments have played a major role in the expansion and development of these markets." 14 Likewise, there are many motivational factors pushing the development of stock exchanges: stock offerings to boost privatizations, the need to attract non-debt-creating foreign portfolio investments, the strengthening of local capital markets, and pressures from international financial institutions. Mechanisms used by countries to encourage foreign stock purchases include incentives for nonresident citizens to lower corporate tax rates, stabilization funds to lend price stability to shareholdings, withholding limited liability status from nontraded companies, setting

28

A Cenerai Overview of Competition

Policy

debt/equity ratios, and special discounts on entry costs for companies below a certain size. These measures raise some important questions. The most fundamental is how essential domestic stock markets are for providing capital at internationally competitive costs to Latin America's local medium-sized companies. If the answer is "very essential," then other questions follow. What have Latin American governments done to encourage local stock market development? Why are Latin American equity markets not able to attract new listings in quantities similar to those of other developing regions? What are the factors that determine decisions by Latin America's privatesector firms on going public? What is known empirically about capital demand in Latin America? What would encourage domestic investors to hold equity assets in local public companies? Historically, two issues have been especially relevant for the equity supply side. First, subsidies of various kinds meant that most large Latin American firms had no shortage of capital or overriding concern about capital costs to drive them into domestic capital markets. Second, disclosure regulations, even with lax enforcement, also acted to deter firms from going public. Tax evasion was probably the main reason for this deterrence, but general reluctance to divulge information about private wealth was also an important factor, especially after the wave of kidnappings of company executives that took place between the 1970s and the 1990s and continues to this day in several Latin American countries. But perhaps the single most important factor was fear of loss of control in what were, by and large, family-owned corporations. All over Latin America, one can hear horror stories, usually dating to the 1960s, the last time stock markets were active, of how aggressive, noncontrolling shareholders in Latin America were able to pull off hostile takeovers. 15 It is also true that minority shareholdings in Latin America are essentially in the hands of those who control the corporation, and normally these assets are at their disposition for their own benefit, excluding the interests of noncontrolling shareholders. Here again, the dismal condition of the judicial system makes it too costly and especially too risky to rely on the courts to enforce the rights of wronged shareholders. Reliable bankruptcy procedures are just one example of a major disincentive to the deepening of capital markets. 16 On the demand side of the equation, since firms—even when listed— were in fact owned by family members and their surrogates, there was no pressure to pay dividends and little concern over price/earnings ratios or yields. This has been the case even in countries where firms were permitted to issue substantial percentages of nonvoting shares. In addition, markets were highly illiquid with little or no trading movement. For outside investors, therefore, there were few ways and even fewer incentives to get into the markets. In fact, foreigners were often not allowed to own more than very small percentages of equity. Aside from giving stockbrokers the

Does Latin America Need Competition

Policy to Compete?

29

easiest jobs in the region, these factors enveloped equity markets and the idea of public listing in suspicion and irrelevance. What, if anything, in this picture has changed? The available data indicates that the short-term answer is "not much." According to the Emerging Markets Data Base of the International Finance Corporation (IFC), there were fewer listed companies in 1994 than in 1985 in Argentina (156 to 227), Brazil (576 to 615), and Venezuela (90 to 108). Only Chile (279 to 228) and Mexico (206 to 157) showed more companies being publicly traded in 1994 than a decade earlier. From 1982 to 1995, the number of listed companies grew by a total of only 6.76% in Latin America, compared to 165.5% in Asia. Moreover, in all cases, a small handful of firms accounted for a dramatically high proportion of market capitalization (see Table 2.1).

Table 2.1 Country Argentina Brazil Chile Mexico Venezuela

Latin American Market Capitalization, 1994 No. of Listed Companies 156 576 279 206 90

No. in IFC Index

% Market Capitalization

30 83 40 80 17

50.9 59.1 66.1 63.9 81.6

Note: Only companies indexed by the IFC are represented in the market capitalization figure.

It would therefore be a mistake to read the IFC's data as an indication that going public is not the wave of the future. Many of the changes that have accompanied economic reform have also overturned barriers to listing in the stock markets. Most of those changes involve the pressures to better capitalize the companies and to get more funds to restructure debt and to force better disclosure and greater transparency. More effective tax systems, partnership in privatizing consortia, participation by venture capital firms, management consultant contracts for advice on restructuring, and participation in international bond and depository receipt markets have led many Latin American companies to clean up their accounting acts. Knowledge about a greater number of companies in the region is more expansive and detailed than ever before. Increased competition itself—whether from lowered tariff barriers, price liberalization, privatization, deregulation or more aggressive marketing, distribution, product enhancement, and a host of other factors—is exercising pressures that will lead other firms to go public. Small- and mediumsized firms need competitively priced capital; many firms are competing in a small pool for talented managers and will want solid financial informa-

30

A General Overview of Competition

Policy

tion and performance-based equity participation; and finally, a tiny minority of firms in Latin America are even realizing that their competitive edge may be in research and development. All of these factors mean a greater need for capital, a need that goes beyond the internal capacity of companies and beyond a reasonably priced lending capacity in local financial sectors. While international capital markets may fill the gap for the larger, more recognized firms, that will not be an option for the majority. Perhaps the most salient change has been in public attitudes toward Latin American equity markets. Portfolio investors are more willing to hold Latin stock shares than ever before, producing more demand-side pressure and more supply-side incentive. For governments anxious to increase domestic savings rates and to encourage private-sector transparency, an effective policy to encourage stock listing is an imperative component of competition policy. What can they do to design and implement such actions? Asia offers some clues. Several countries there have organized a dual market, with one level for small- and medium-sized companies in which the costs and red tape are reduced. In Latin America, too, efforts are being made. Yet undoubtedly, more is needed. 17 More important, as growth becomes more and more of a challenge, the positive role that stock markets can play will be a major incentive for governments to put energy and imagination into taking advantage of their ability to be catalytic forces.

Conclusion The link between competition policy and the development of active equity markets has not received the attention it deserves as a component of market-oriented reforms and private-sector restructuring. However, there is a growing sense that opportunities—especially for non-blue-chip companies—are being missed because of scarce and expensive local capital. In itself, this impedes Latin American private sectors from competing for their own domestic markets, not to mention international markets. The enforcement of competition policies requires regulatory agencies to have access to a great deal of information and high-quality analysis. Nothing increases the amount of information available to these agencies— and to the investment community—more than the public listing of companies. Publicly listed companies are no less likely to adopt anticompetitive behavior than private companies. Nonetheless, the quality and effectiveness of competition policy can be greatly enhanced if companies that are large enough to move markets and shape the comportment of whole sectors are listed and, therefore, responsible for and protected by their public disclosure. This specific point highlights the central message of this chapter. There

Does Latin America Need Competition Policy to Compete?

31

is more competition today in Latin America than ever before, but there are still significant impediments to the full expression of business competition among rival firms. The region's animal spirits remain tethered, although no longer caged. The temptation is, of course, to rely on antitrust-type laws to spur competition or to inhibit anticompetitive practices. But more important than competition policies are those other aspects of economic policy that, while not self-evidently linked to competition promotion, are more effective than legal mechanisms. Free trade; unfettered entry for foreign investment; flexible, efficient, and liquid capital markets; stable macroeconomic environments; and trustworthy and efficient judicial systems can do more to protect a company from the competition-killing behavior of rivals than a legal code erratically enforced by poorly trained, poorly paid, and easily corrupted civil servants. There is a role for competition policy and the agencies designed to enforce it. However, they should not be overburdened by unrealistic expectations or overly ambitious goals. Nor should they be expected to counter the competition-inhibiting effects of ill-conceived economic policies. There is very little an antimonopoly agency can do to promote legitimate rivalry in an environment where prices, exchange rates, and interest rates are defined by government bureaucrats or where inputs must be bought from state-owned monopolies, imports are controlled, and business decisions are overregulated.

Notes 1. Optimism about improvements in infrastructure has to be tempered by estimates, like that of the World Bank, that maintain that the region as a whole will need $60 billion in infrastructure investment by 2008. 2. See David Pilling, "Argentina Tackles the 'Wal-Mart Effect,'" Financial Times, January 9, 1996. 3. The Argentine Chamber of Deputies approved a new antitrust statute in early 1995. Chile reformed its code of the 1970s in 1980. In recent years, Brazil, Guatemala, Mexico, Peru, and Venezuela have either passed or reformed antitrust legislation. See Pilling, ibid. 4. For a revealing analysis of how privatization has created what the authors Daniel Azpiazu and Hugo Nochteff call a "duopoly" in the Argentine steel industry, see "Industrial Performance and Transition of Economic Sectors: The Argentine Steel Industry," Facultad Latinoamericana de Ciencias Sociales (hereafter FLACSO) (December 1994). 5. See A. E. Rodriguez and M. B. Coate, "Limits to Anti-trust Policy for Reforming Economies," unpublished paper. 6. An impressive work on this subject is William S. Comanor, "Anti-trust in a Political Environment," Antitrust Bulletin (1982): 733ff. 7. J. Luis Guasch and Sarath Rajapatirana, "The Interface of Trade, Investment, and Competition Policies," Policy Research Working Paper No. 1393 (Washington, DC: World Bank, 1994).

32

A Cenerai Overview of Competition

Policy

8. According to Miguel Almeida, "As Trade Soars, So Do Language Lessons," Christian Science Monitor (March 20, 1996), another measure of crossborder business trade is the flood of interest in language courses. 9. See the six-part series on family conglomerates published in the Wall Street Journal in December 1995. 10. See Diana Tussie, "Argentina and the Global Economy: Facing the Dilemmas," FLACSO (April 1996). 11. See Paul H. Ruben and Mark A. Cohen, "Politically Imposed Entry Barriers," Eastern Economic Journal, 18, no. 3 (1992): 333-344. 12. S. Ostry and R. Nelson, Techno-Nationalism and Techno-Globalism: Conflict and Cooperation, (Washington, DC: Brookings Institution, 1995). 13. See Saul Estrin and Martin Cave, eds., Competition and Competition Policy: A Comparative Analysis of Central and Eastern Europe (London: Pinter, 1993). 14. See Ajit Singh, "Corporate Financial Patterns in Industrializing Economies," Technical Paper No. 2 (Washington, DC: International Finance Corporation, 1995). 15. Although the spurious structure of most Latin American equity markets makes the fear of minority stockholders particularly strong, one has only to leaf through the financial press to realize that developed markets struggle persistently and continuously with the same problems, even though their institutions and information sources are far more developed. See Michael R. Sesit, "Montedison Shareholders' Group Seeks to Split Company," Wall Street Journal, May 13, 1996, and "Ownership and Control," editorial, Financial Times, May 11, 1996. 16. The well-known Franklin-Templeton emerging market fund has threatened to sue the Brazilian company Mesbia for irregularities in its treatment of shareholders when it sought that country's equivalent of Chapter 11 bankruptcy. See Financial Times, December 23, 1996. 17. See V. Bulmer Thomas and P. Rodas-Martini, "Data Bases for Large Latin American Companies," Latin American Research Review, 31, no. 3 (1996).

3 Competition Policies for an Integrated World Economy F. M. Scherer

A first step toward understanding the importance of competition policy is to examine the question from a historical and comparative vantage. My research on the economic foundations of competition policy has focused mainly on the United States and Western Europe and, less comprehensively, East Asia. From this perspective, it is evident that national policies toward monopoly and competition diverged dramatically during what might be called the "second industrial revolution," that is, the closing decades of the nineteenth century. However, I would suggest that there was an earlier divergence—indeed, a divergence dating back to the colonial period. By viewing competition policy from a historical perspective, we can provide the first part of the response to the question posed by Moisés Nairn, for the historical record reveals the importance of competition policies as well as the necessity of allowing those policies to mature and grow into their role over time. This chapter will consider the colonial roots of policy toward monopolies in the Americas, comparing the policies of various imperial powers. I continue by comparing developments in the United States and several European countries during the course of the nineteenth and twentieth centuries. Finally, this chapter demonstrates why competition policies and the ancillary information-gathering agencies are indispensable to industrializing economies.

The Spanish and English Traditions Latin America inherited the traditions of imperial, feudal Spain and Portugal. The Crown regularly granted to its favorites exclusive privileges—in effect, monopolies—to pursue commercial and industrial activities in a designated geographic area. Although the nations of Latin America shook off much of their imperial heritage as they won their independence, 33

34

A General Overview of Competition

Policy

they retained a bias toward having economic activity conducted under franchises granted by government authority. Sometimes the franchises were held by private individuals or families who had won the government's favor through some form of rent seeking; in other cases, the government itself operated the franchise through a state-owned enterprise. What is important is the absence of a presumption that individual lines of industrial endeavor should be open to any would-be entrepreneurs who wish to try their hand at the game. The Latin American nations are still struggling to distance themselves from that tradition. The United States and Canada, by contrast, built upon a quite different British heritage. During the sixteenth century and continuing through the reign of Queen Elizabeth I, it was customary for the Crown to dispense, as in rival Spain, exclusive business privileges to its favorites. But the English courts, which, with support from Parliament, had gradually gained power independent of the Crown, began taking exception to this practice. A key turning point was the case of Darcy v. Allein, also known as the "Case of Monopolies," decided by the Court of King's Bench in 1603.1 The court found that a monopoly of playing card sales granted by Queen Elizabeth to one of her grooms was null and void, not only because "after the monopoly . . . the commodity is not so good and merchantable as it was before," but more important, because a monopoly grant tends to the impoverishment of diverse artificers and others, who before, by the labour of their hands in their art or trade, had maintained themselves and their families, who now will of necessity be constrained to live in idleness and beggary. . . . Every man's trade maintains his life, and therefore he ought not to be deprived or dispossessed of it, no more than of his life.

In this, the court enunciated a principle that tradespeople should have freedom to practice their chosen trade without restraint from exclusive grants of royal privilege, just as, in an earlier case cited by the court, it had been decided that "every subject, by the law, has freedom and liberty to put his cloth to be dressed by what clothworker he pleases, and cannot be restrained to certain persons, for that in effect would be a monopoly, and, therefore . . . void." Two decades later, during the reign of King James, Parliament codified the common law in the Statute of Monopolies, which declared void all royal monopoly grants "for the sole buying, selling, making, working, or using of anything," singling out as the only exception what we now call "invention patents," that is, "any letters patent or grants of privilege for the term of one and twenty years, or under, to be made of the sole working or making of any manner of new manufactures within this realm, to the true and first inventor or inventors of such manufactures." Although royal monopoly grants within the British Isles were prohibit-

Competition Policies for an Integrated World Economy

35

ed, the Crown continued to grant exclusive privileges to conduct business abroad. The most famous example was the East India Company, against which Adam Smith fulminated in his Wealth of Nations (1776). Individual towns also continued, to an extent diminishing over time, to limit entry into specific trades practiced within their boundaries. But the dominant presumption from the time of Queen Elizabeth on was that individuals should not be blocked by governmental decree from entering particular trades.

Economic Development in the New World This tradition was sustained in what had been the North American colonies after they rebelled, inter alia, against Crown requirements that they import "enumerated" manufactured goods from England rather than producing and trading them locally, that West Indies sugar be sent to England for taxation before being landed in the colonies, and that their tea be procured only from the East India Company (the monopoly against which the Boston Tea Party was directed). There remained, to be sure, an extensive overlay of local laws and institutions regulating the conduct of business activities.2 But with rare exceptions, individuals were permitted to enter into whatever businesses they found compatible with their talents and inclinations. And except in activities that later came to be considered natural monopolies (such as canals and railroads), diversity thrived. In this respect, the dominant pattern in North America was quite different from that of Latin America. It would be wrong to infer from this that competition was uniformly vigorous in the United States during the nineteenth century. Outside the great coastal, lake, and waterway junction cities, the population was thinly dispersed. In many smaller towns and rural areas, there was enough demand to support only one or a very few firms specializing in particular manufactures or services. Interregional competition was also inhibited by vast distances and high transportation costs, especially during the winter, when the inland waterways were frozen. For many manufactured products, the United States in the year 1850 is best characterized as a collection of localized monopolies and oligopolies. But this changed radically in the second half of the century with the spread of railroads, which greatly reduced transportation costs, and the telegraph, which made it possible to arrange transactions and manage organizations over considerable distances. During the same half century, there were major advances in the technologies of steelmaking, artificial illumination (first through kerosene and gas and then with electricity), electric motive power, many kinds of industrial and agricultural machinery, industrial chemistry, and much else. Business firms that had previously served geographically isolated markets began interpenetrating one another's territo-

36

A General Overview of Competition

Policy

ries, precipitating sharply increased competition and sometimes price wars. Companies that proved especially adept in embracing the new technologies, the new methods of distribution, and the new organizational forms grew rapidly. There were attempts to curb price warfare by entering pricefixing agreements, but these often broke down owing to incomplete adherence and chiseling. Under the leadership of John D. Rockefeller, Standard Oil of Ohio led the way to a new solution: merging rivals into a single market-dominating enterprise. Great fortunes were amassed by those who organized and financed such consolidations. The price-raising, monopolistic price discrimination, increasing inequality of wealth, and (as cartels waxed and waned) price fluctuations accompanying these changes in industrial organization evoked cries of outrage from many citizens, especially farmers and small business owners, whose relative positions were adversely affected. Similar transformations occurred in Europe, although with less stress on the consolidation of business enterprises and more on cartelization. Governments were forced to choose policy responses. I leave it to scholars better versed in Latin American history to articulate why the industrial changes were less profound in the Southern Hemisphere and why the policy reactions were different. The traditions carried forward from earlier regimes surely mattered. In the Northern Hemisphere, choices were made from a menu of four main alternatives: laissez-faire, regulation, nationalization, and what we in the United States call "antitrust" and other nations call "pro-active" competition policy. In the United States, there was protracted debate during the last three decades of the nineteenth century over the proper policy choices.3 Laissezfaire was clearly unacceptable; there was too much public concern over the new business organizations and their practices. Nationalization of "natural monopoly" industries was advocated by Richard T. Ely, who chaired the organizing meeting of the American Economic Association in 1886 and who had studied the operation of state-owned enterprises in rapidly industrializing Germany. But except in such traditional areas as the postal service, 4 armaments manufacture, and a limited array of local utilities, the state-ownership approach was shunned by U.S. voters, who inherited an aversion to "big government" from the extraordinary group of philosophers and statesmen who led the American Revolution a century before. Attention focused mainly on regulation of the new business organizations and antitrust. And, in fact, both approaches were enthusiastically endorsed in partly distinct and partly overlapping industrial domains. The railroads, built in the United States with private capital supplemented by generous governmental land grant subsidies, were the first subject of formal federal government regulation. Their unique cost structure and the tendency it imparted toward cutthroat competition had been documented in a brilliant book by economist Arthur Hadley, later the president of Yale University.5 The Interstate Commerce Commission was established

Competition

Policies for an Integrated World

Economy

37

by statute in 1887. It set a pattern for later public regulation of privately owned municipal utilities, the electric power companies, telecommunications, interstate trucking, the airlines, and natural gas pipelines, among others.

Divergence and Convergence in Europe During the formative period of U.S. antitrust policy, the leading nations of Europe were making quite different choices. The British and German experiences are illustrative. 6 The presumption in favor of free occupational choice from Elizabethan times and Ricardian arguments for free trade gradually displaced feudal restrictions and mercantilist international trade monopolies. Between 1889 and 1892, while antitrust laws were proliferating in the United States, the British courts addressed squarely the legality of concerted and collusive actions by business firms. In a key decision, the Court of Appeals ruled that because such restrictions were contrary to law, the courts would not intervene to compel their enforcement. 7 But unless the concerted practices injured rival business firms through fraud, intimidation, or molestation, the courts would also not reach out to enjoin them. In effect, except in cases of grave abuse, a laissez-faire policy was to be pursued. In Germany, the Reichstag debated what to do about the U.S.-based Standard Oil Company's near monopoly of kerosene sales. Recognizing, inter alia, that action against Standard Oil would have to be mirrored by challenges to entities such as the Rheinland-Westphalian coal syndicate, it reached no decision and hence adopted by default a laissez-faire position. The Reichsgericht (German High Court) went further. It ruled in 1897 that cartel agreements were lawful and binding under the freedom of association accorded workers and businesses under German law. Thus, the courts would view them as contracts legally enforceable against recalcitrant cartel participants unless they led to "an actual monopoly" or extreme exploitation of consumers—cases that seldom, if ever, seemed to come to the courts' attention. That cartels were permissible and even enforceable by legal authority except in cases of serious abuse continued to be the German policy, implemented after 1923 through a newly established Cartel Court and later by a Nazi government eager to bring business under its sway. The approach characteristic of most European nations during the first half of the twentieth century was to accept cartels and monopolistic consolidations as lawful but to endorse governmental intervention in (rarely) demonstrated cases of abuse. This philosophy was reflected in a resolution adopted unanimously by the European participants at a conference of the Inter-Parliamentary Union during 1930:

38

A General Overview of Competition

Policy

Cartels, trusts and other analogous combines are natural phenomena of economic life towards which it is impossible to adopt an entirely negative attitude. Seeing, however, that those combines may have a harmful effect both as regards public interests and those of the state, it is necessary that they should be controlled. This Control should not take the form of an interference in economic life likely to affect its normal development. It should simply seek to establish a supervision over possible abuses and to prevent those abuses. 8

Something quite remarkable had to occur to move European (and other) nations away from this approach toward an approximation of U.S. competition policies a half century later. In fact, several important developments had a role. One was a consequence of military authority following World War II. The Allied powers imposed upon occupied Germany and Japan new competition laws patterned after U.S. antitrust law. When the occupation ended, this left a sour taste in Japan, allowing the Japan Fair Trade Commission to cultivate its ability to intervene against price-fixing agreements and mergers only gradually over the course of several decades. In Germany, the foreign competition policy transplant proved hardier, largely because of the influence of Ludwig Erhard and his "Freiburg School" colleagues on early West German economic policy. The Freiburg liberals believed passionately in competitive free market processes. They perceived cartels as destabilizing, market-distorting elements and as active contributors to the infringement of individual liberties under the Hitler regime. Consequently, a tough law against restraints of competition was passed in 1957, and a highly motivated Federal Cartel Office was established to enforce the law. During the 1970s, it flirted with an active "abuse" approach, seeking to determine whether the prices charged by multinational petroleum companies, pharmaceutical manufacturers, and Volkswagen were unreasonably elevated. However, like the U.S. Supreme Court a half century earlier, the German courts recognized the difficulty of making such determinations. 9 Since then, the Federal Cartel Office has tended to prosecute price-fixing per se and (given changes in its legal powers) curb monopoly-enhancing mergers rather than attempting to assess the reasonableness of monopolistic prices. In England, the triumph of Keynesian macroeconomic theory underlay fears that cartels' rigid pricing policies might prevent the attainment of postwar full employment objectives. 10 The Monopolies and Restrictive Practices Commission was created in 1948 to investigate monopoly situations, publish reports on its findings, and make nonbinding recommendations for change. Its reports, similar to those of the U.S. Bureau of Corporations fifty years earlier, documented a panoply of problems and set the stage for passage of the Restrictive Trade Practices Act in 1956. The new act established administrative and judicial agencies with the power to prosecute and prohibit undesirable trade restraints. A tough line was taken

Competition

Policies for an Integrated World Economy

39

in early Restrictive Practices Court decisions, causing U.K. competition policy to converge toward the policies pursued in England's former colonies across the Atlantic Ocean. An even more important step occurred with the formation of the European Common Market (ECM) in 1957. The Treaty of Rome included language declaring abuses of dominant market positions and concerted practices such as price-fixing agreements to be inconsistent with the ECM if they affected trade among member states. Its rationale was explained by an ECM commissioner in the debate over measures implementing the treaty's competition policy provisions: It is . . . beyond dispute—and the authors of the Treaty were fully aware of this—that it would be useless to bring down the trade barriers between the member states if the governments or private industry were to remain free through economic or fiscal legislation, through subsidies or cartellike restrictions on competition, virtually to undo the opening of the markets and to prevent, or at least unduly to delay, the action needed to adapt them to the Common Market.11

An enforcement organization was established in ECM Directorate General IV, and after a slow start-up phase, "DG-IV" proved to be an aggressive enforcer. Like its German counterpart, DG-IV tried its hand at determining whether powerful sellers' prices were "unreasonable." But like the German Cartel Office, it realized how difficult the task was and thereafter concentrated its efforts on setting behavioral bounds beyond which restrictive practices could not transgress without penalty and attempting to shape market structures in pro-competitive directions through merger control. These developments in some of the world's most successful industrial economies during the 1960s and 1970s, combined with the example of the United States, set a pattern emulated by scores of other nations. By the 1990s, no self-respecting nation dared to be seen among the community of nations without the protective garb of pro-competition laws. In many cases, as the essays in this volume show, the adornments were purely cosmetic, with little or no serious effort devoted to enforcement. But at least procompetition laws existed.

The Economic Rationale The crucial question remains: Are pro-competition laws in fact beneficial, especially in nations that have not yet completed the transition to successful industrialization? 12 There are four main reasons why the answer is affirmative. The rationale given most commonly in economics textbooks is probably also the least important: that prices under competition foster a better

40

A Cenerai Overview

of Competition

Policy

allocation of resources to meet consumer demands than do monopoly prices. The assertion is correct, subject to diverse second-best qualifications too complex to be addressed here. 13 But numerous studies show that the "dead-weight losses" attributable to monopolistic resource misallocation are quite small—typically much less than 5 percent of gross domestic product. 14 A second reason is that the redistributions of wealth effected through monopoly may be considered unacceptable on equity grounds. Their unacceptability probably increases the lower the standard of living for an average citizen is.15 As Senator John Sherman stated in his main address supporting the (subsequently amended) law that bears his name: "The popular mind is agitated with problems that may disturb social order, and among them all none is more threatening than the inequality of condition, of wealth, and opportunity that has grown within a single generation out of the concentration of capital into vast combinations to control competition and trade and to break down competition." 16 The third reason played an important role in the choice of antimonopoly policies in the United States and Germany. When monopoly positions are insulated by entry barriers maintained through the protective exercise of governmental power or when powerful firms practice price discrimination to inhibit entry into their markets, individual producers' economic opportunities are restricted. Finally, and perhaps most important of all, the pressure of competition forces firms to adopt the most efficient production methods, to eliminate fat and organizational slack, and to seek new and superior product and process technologies lest they be overrun by more progressive rivals. As Adam Smith remarked, "Monopoly . . . is a great enemy to good management." 17 This point is especially pertinent to the nations of Latin America, where, as many comparative studies have shown, productivity—that is, output per worker—is much lower on average than in the industrialized nations of the world. Indeed, Latin American productivity has fallen behind sixteen leading European and former English colonial nations' standards by increasing relative and absolute margins over the past century.18 There are no free lunches, and competitive market structures do not always come as an unmitigated blessing. Trade-offs may have to be made. Two merit attention here. 19 One prerequisite for least-cost, maximum-productivity operation is the attainment of all relevant scale economies. In relatively small national markets, achieving this objective can conflict with sustaining a sufficient number of producers to ensure vigorous competition. Small markets may accommodate only one or a very few plants of minimum efficient scale, 20 or they may make it difficult to reach minimum-cost output levels in manufacturing products subject to high start-up costs and/or persistent learning-

Competition Policies for an Integrated World Economy

41

by-doing economies. The smaller the market, the sharper the conflict between competition and scale economies is likely to be. Specialization combined with international trade is the classic means of escaping these dilemmas. If a small nation produces only for itself, it will sacrifice scale economies; but if it produces a more limited array of products for the whole world, importing other products from specialists abroad, it can be both efficient and prosperous. This, it has long been recognized, is more easily said than done. When other nations' industries are already producing state-of-the-art products at efficient scales and when they have progressed to the foot of their learning curves, producers in newly industrializing nations are at a disadvantage. If they attempt to compete in an open international marketplace, they may be overrun, as America's first Treasury secretary, Alexander Hamilton, 21 and his disciple, Germany's Friedrich List, 22 recognized in advocating temporary protection from imports for what have come to be called "infant industries." Costs and prices are initially higher than they would be under free trade. But over the longer run, Hamilton argued, The contrary is the ultimate effect with every successful manufacture. When a domestic manufacture has attained to perfection, and has engaged in the prosecution of it a competent number of Persons, it invariably becomes cheaper. . . . The internal competition, which takes place, soon does away every thing like Monopoly, and by degrees reduces the price of the A r t i c l e to the m i n i m u m of a r e a s o n a b l e p r o f i t on the Capital employed. 2 3

The nations of Latin America pursued this logic in attempting to develop their industries through import substitution policies. But by letting local producers come to believe that they would be protected into the indefinite future, and by suppressing internal competitive forces, they bound the infants into their cradles and failed to achieve the transition to competitiveness anticipated by Hamilton. With occasional deviations and swerves, the United States also pursued protectionist policies for more than a century after the time when Hamilton wrote. Indeed, in 1890, when the Sherman Act was passed, Congress raised tariffs to an average level of 51 percent. 24 But with its vast market and (after the 1870s) strong internal competition, the United States could have its cake and eat it—preserving a sufficient number of independent producers, each realizing all known economies of scale, to sustain strong competitive pressure. Most Latin American nations lack that luxury, especially when the scale economy requisites for efficient production have risen more rapidly than the growth of their (underdeveloped) internal markets. Now they are confronted with difficult strategy choices. There appear to be only three

42

A Cenerai Overview of Competition

Policy

realistic escape paths. They can go "cold turkey," eliminating barriers to imports from highly developed nations and hoping that some domestic enterprises survive the competitive bloodbath. They can emulate the Asian tigers by providing protection that is avowedly temporary, forcing the makers of traded goods to become export and import competitive in a designated period of time. Or they can create true free trade blocs among comparably situated nations, erecting protective walls against outside imports, and attempt by enforcing vigorous competition among relatively less efficient enterprises to stimulate the emergence of firms fit for the struggle in the wider world arena. In any of these three scenarios, pro-competition policies must play an important role. The second noteworthy difficulty in adopting pro-competition policies is the one associated with the writings of Joseph A. Schumpeter. 2 5 Implementing technological innovations on a broad scale, Schumpeter argued, is much more important to economic development than achieving "static" allocative and productive efficiency at any moment in time. And the industrial environment most conducive to technological innovation, he continues, is one shot through with monopolistic structures and restrictions. Schumpeter's provocative hypotheses have elicited much theoretical and empirical research. 26 There is no room here to treat the findings in detail. Two summary statements must suffice. First, Schumpeter was more wrong than right. Some market imperfections, such as the protection afforded by patents and first-mover reputational advantages, are essential for technological innovation. But vigorous competition is at least as important in spurring a rapid pace of innovation. Second, the most pressing problem in nations like those of Latin America, as the Asian tigers have shown, consists more of adopting technologies already pioneered elsewhere in the world than of inventing and developing wholly new technological contributions. And although some minimum scale of operation is usually needed for rapid adoption, the pressure of competition accelerates the process once that scale is attained and other prerequisites (such as a substantial cadre of well-educated engineers) are in place.

Regulation Revisited I return now to the role that governmental regulation of businesses plays, focusing only on the recent U.S. experience. As indicated previously, formal federal government institutions for regulating enterprises were crafted at about the same time as the Sherman Act was passed. The victory of Woodrow Wilson over Theodore Roosevelt helped ensure that the regulatory approach was largely confined to a modest subset of all industries designated as "public utilities." Although dissent always existed, both scholars and the general public were for the most part satisfied with the functioning

Competition Policies for an Integrated World Economy

43

of these regulatory instruments. Gradually, however, and especially during the period following World War II, dissatisfaction grew. The reasons for that discontent were complex. Here, only a fragment of the story can be told. 27 The shot that might be said to have triggered a revolution in scholars' thinking was a book demonstrating that the regulated pricing imposed upon railroads—the original locus of federal regulation— led to massive inefficiencies in shippers' choices between rail and truck modes, which were allowed to compete in service but not in price. 28 Another book in the same spirit showed that airline price regulation induced inefficient trade-offs among frequency of service, empty seats, and economy. 29 This finding, plus evidence that unregulated intrastate airlines operated more efficiently than regulated interstate carriers, led to the deregulation of the airlines during the 1970s, followed by substantial deregulatory measures in railroads and trucking. AT&T's stubborn opposition to technological innovations that came from outside its own laboratories, its use of the regulatory process to inhibit the entry of competitors, and its discriminatory pricing in response to MCI's competitive entry triggered both deregulatory measures and (in 1982) the breakup under antitrust law of the Bell System into several independent entities. This happened despite continuing disagreement among economists as to whether the telephone communications system had the cost characteristics of a natural monopoly. In effect, the changes in U.S. communications policy reflected a view that competitive technological innovation was more important than squeezing the last penny from costs incurred under static technologies. And in electric power, economic research showed that the power-generating facilities of the electric utilities were not naturally monopolistic, even if high-voltage transmission and local distribution continued to be. The first major restructuring reflecting this revised view of the world occurred in the United Kingdom during 1990.30 When the deregulation movement accelerated during the mid-1970s, the United States was struggling with "stagflation"—persistent inflation combined with high unemployment and disappointing economic growth. There were hopes on Capitol Hill and in the White House that deregulation would help stem the stagflation and restore growth. Regulated companies resisted deregulation less than they had in other periods because inflation and high interest rates, combined with the regulatory authorities' sluggishness in granting price increases, squeezed their profits. As chief economist of the U.S. Federal Trade Commission at the time, I recall President Gerald Ford's leadership in pushing deregulation and his insistence that as regulatory controls were relaxed, it was all the more important to maintain strong antitrust enforcement. We were offered more budgetary support for our programs than we believed we could spend wisely. There are cycles (or perhaps random fluctuations) in the policies pursued toward competition and regulation in the United States.31 The 1970s

44

A General Overview of Competition

Policy

were a period of intense antitrust enforcement as well as the upswing of a continuing deregulation cycle. There had been slumps in antitrust enforcement previously—notably, between 1920 and 1936. In the 1980s, the cycle turned down again. The Reagan administration installed in the antitrust agencies, and especially in the Federal Trade Commission, new leaders who believed fervently that markets seldom fail on their own accord—for example, because of monopoly—and that the most important monopoly problems arose from protective government intervention. Antitrust efforts dropped perceptibly despite a massive merger wave. Many mergers that would have drawn challenges in previous decades passed without a murmur. A. E. Rodriguez observes correctly in his chapter herein that staff were reallocated from antitrust and Rooseveltian information-gathering functions to what became known as "regulatory advocacy." We disagree on the consequences. I believe that considerable good can come from careful studies by agencies such as the Federal Trade Commission demonstrating to the Congress, which for better or for worse passes the laws, flaws in governmental policies and urging corrective legislation. My own firsthand experience and my conversations with regulators suggest that interventions by antitrust agency staff before other regulatory agencies are counterproductive: more likely to anger the regulators into taking actions that spite the intervenors than to induce policy choices sought by antitrust agency advocates. But on this, as on so many other issues, reasonable observers can disagree. When President George Bush perceived that a weak antimerger enforcement record could be a liability in his 1992 election campaign, he reversed field and appointed new antitrust officials with a mandate to reinvigorate their efforts. President Bill Clinton's appointments were committed even more strongly to tough but rationally informed enforcement. Whether the cycle has swung decisively once again remains to be seen.

Conclusion The path to vigorously pro-competitive policies in the world's leading industrialized nations has resembled a primitive mountain road more than a superhighway. Once the United States stood nearly alone in its enforcement of the Sherman Act. Now many nations have analogous laws. Appreciable differences remain in the laws of the leading nations and in the vigor with which they are enforced. One of the important lessons of history is that a considerable interval typically ensues between the time when new competition laws are passed and the time when they are enforced diligently. Time is required to train staff, to build their confidence that tough measures will not

Competition Policies for an Integrated World Economy

45

provoke painful repercussions from legislators and other agencies, and, except in rare circumstances such as those that attended the passage of the Sherman Act in the United States and the 1957 German Competition Law, to cultivate broad-based public support. Some of the more successful implementations, such as the early U.S. effort and the U.K. Monopolies Commission, devoted substantial resources to fact-finding, analysis, and the publication of reports educating legislators and the public about the nature and severity of existing monopoly problems. Experience, in turn, leads to amendments in national laws—typically, at least since World War II, in a more pro-competitive direction, implying a gradual convergence of policies. Thus, as the nations of Latin America take their first faltering steps toward competition policies, they would be well advised to develop enforcement capabilities by having their agency staffs investigate thoroughly the most salient domestic monopoly problems (which implies, inter alia, giving the agencies strong information "discovery" powers) and make their findings available for widespread public scrutiny. Enforcement actions, when needed, will follow logically in due course. Difficult choices will be faced when industry operations are subject to significant static and dynamic scale economies, so that national markets can accommodate too few efficient-sized producers to achieve effective competition. Existing firms may be too small, or too inefficient, to survive the competition of world-class rivals from other nations. If protection is given, it should be avowedly temporary, to be phased out over a clearly prescribed time span (e.g., five years). Unlike their Latin American counterparts, whose mañana never seemed to come, the Asian tigers succeeded because their entrepreneurs knew that the protection they were accorded was temporary and, therefore, that they had to become competitive quickly or perish. The transition to international competitiveness can also be bridged by reducing protective trade barriers first within regional markets such as Mercosur. If that strategy is chosen, it will be important to implement vigorously pro-competitive policies linking the member nations, among other things, by prohibiting restrictive agreements and mergers that would appreciably reduce competition across national borders. According to the essay by Moisés Nairn in this volume, competition among Mercosur members has been inhibited by the extensive use of dumping complaints to protect local producers. Following the example of the European Common Market (and more recently, Australia and New Zealand), Latin American nations forming a regional trade bloc would be well advised to substitute the rules of competition law governing predatory price discrimination for traditional antidumping remedies. As Latin American nations advance toward the frontier of best-practice technology, intellectual property rights are likely to pose increasingly significant competition policy dilemmas. Historically, the vast majority of the

46

A Cenerai Overview

of Competition

Policy

invention patents issued by small and less developed nations have gone to multinational enterprises with home bases in highly industrialized nations. Under the Uruguay Round treaty, governments will no longer be able to deny patent protection simply because patent holders do not "work" (i.e., produce) their inventions in the patent-granting nation. To induce local production and the technology transfers it can bring, Latin American nations will have to make their markets attractive to foreign direct investment. In the cases that will inevitably arise under which patent (and other intellectual property) rights are exercised abusively, recourse may be made to Article 40 of the Uruguay Round TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement, which permits competition policy interventions against intellectual property exploitation with "an adverse effect on competition in the relevant market." Because the agreement provides no comprehensive list of practices that might trigger such intervention, Article 40 initiatives are likely to be controversial until their scope is clarified by World Trade Organization decisions. The new World Trade Organization will carry difficult burdens implementing the many tasks it has been assigned under the Uruguay Round treaty. Eventually, however, pressure will mount for a transition from the "shallow integration" implied by the present General Agreement on Tariffs and Trade regime to "deeper integration" involving, among other things, the implementation of worldwide competition policy rules and institutions.32 I have argued elsewhere that developing nations will benefit on balance from this evolution because the enforcement of global competition policy rules will inhibit other nations' cartelization of critical capital goods, technology, and raw material supplies and because it will enhance foreign market access for nations pursuing export-led growth strategies.33 To prepare for that change, the first requisite is that the developing nations set their own houses in order, evolving internal competition policies that function effectively. This volume illuminates well both the possibilities and the pitfalls. Turning now to the case studies of Latin American nations, both the necessity and the difficulty of implementing successful competition policies become clear. The case studies include two industrial economies with recently established democracies (Argentina and Chile), one industrial economy with a more mature democracy (Venezuela), and two countries (Mexico and Colombia) that rely heavily on a single natural resource (oil and coffee, respectively) and have had deep-rooted problems with corruption and state patronage. As with the diverse European cases, competition policy must be implemented and nurtured differently in these distinct Latin American cases. An exploration of some of these contexts will allow informed speculation regarding the future of competition policy in the region.

Competition Policies for an Integrated World Economy

47

Notes 1. The court's decision is reprinted in my edited compendium, Monopoly and Competition Policy, vol. 1 (Hants, UK: Edward Elgar, 1993), pp. 5-11. For an excellent analysis of the development of English common and statutory law toward monopolies, see William Letwin, Law and Economic Policy in America (New York: Random House, 1965), chap. 2. 2. See Jonathan R. T. Hughes, The Governmental Habit: Economic Controls from Colonial Times to the Present (New York: Basic Books, 1977). 3. Representative publications characterizing the principal contending views are assembled in my Monopoly and Competition Policy, vol. 1. 4. In 1906, William D. Boyce, founder of the Boy Scouts of America, organized a company capitalized at $300 million and offered through it to purchase the U.S. postal system. Before a congressional committee, he promised that his privatized postal service would cut postal rates by half and refund to the government any profits exceeding 7 percent of the company's investment. The offer was not accepted, but it discouraged a postage increase that would have fallen heavily upon magazines published by Boyce. 5. Arthur Hadley, Railroad Transportation (New York: Putnam's, 1886). 6. For a more comprehensive analysis, see F. M. Scherer, Antitrust Policies for an Integrated World Economy (Washington, DC: Brookings Institution, 1994), chap. 3. 7. Mogul Steamship Co. v. McGregor, Gow & Co., 23 Q.B.D. 598 (1889), affirmed A.C. 25 (1892). 8. Quoted in William Boserup and U f f e Schlichtkrull, "Alternative Approaches to the Control of Competition," in John Perry Miller, ed., Competition, Cartels, and Their Regulation (Amsterdam: North-Holland, 1962), p. 59. 9. See Ingo Schmidt, "Different Approaches and Problems in Dealing with Control of Market Power," Antitrust Bulletin, 28 (summer 1983): 417-460; and Erich Kaufer, "The Control of Abuse of Market Power by Market-Dominant Firms Under the German Law Against Restraints of Competition," Zeitschrift fiir die gesamte Staatswissenschaft, 136 (September 1980): 510-532. 10. For a more skeptical view, see John Jewkes, "British Monopoly Policy, 1944-56," Journal of Law & Economics, 1 (October 1958): 1-19. 11. From a speech by Hans von der Groeben, quoted in U.S. Senate, Committee on the Judiciary, Subcommittee on Antitrust and Monopoly, Hearings, Antitrust Developments in the European Common Market (Washington, DC: GPO, 1963), p. 96. 12. For a much more extensive treatment of this issue, see my paper "International Competition Policy and Economic Development," presented at a conference on "The Multilateral Trading System in a Globalizing World," East-West Center, Hawaii, August 1996. 13. See F. M. Scherer and David Ross, Industrial Market Structure and Economic Performance, 3rd ed. (Boston: Houghton Mifflin, 1990), pp. 1938. 14. Ibid., pp. 661-667. 15. On the large redistributions that can occur over several decades from fairly modest monopoly profits, absent tough inheritance taxes, see William S. Comanor and Robert H. Smiley, "Monopoly and the Distribution of Wealth," Quarterly Journal of Economics, 89 (May 1975): 177-194. 16. Congressional Record, 21 (March 21, 1890): 2460.

48

A General Overview of Competition Policy

17. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1937), p. 147. 18. Angus Maddison, Monitoring the World Economy: 1820-1992 (Paris: Organization for Economic Cooperation and Development, 1995), pp. 23-24. 19. I ignore the debatable benefits of on-the-job leisure. 20. For comparative statistics on six nations and twelve industries, see F. M. Scherer, Alan Beckenstein, Erich Kaufer, and R. Dennis Murphy, The Economics of Multi-Plant Operation: An International Comparisons Study (Cambridge, MA: Harvard University Press, 1975), chap. 3. 21. Alexander Hamilton, Report on the Subject of Manufactures (1791), in Harold C. Syrett, ed., The Papers of Alexander Hamilton, vol. 10 (New York: Columbia University Press, 1966). 22. Georg Friedrich List, The National System of Political Economy (1841), trans, by Sampson S. Lloyd (London: Longmans, Green, 1916). 23. Hamilton, Report on the Subject of Manufactures, p. 266. 24. See Thomas W. Hazlett, "The Legislative History of the Sherman Act Reexamined," Economic Inquiry, 30 (April 1992): 263-276. 25. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942), esp. chaps. 6 and 7. 26. For a survey, see F. M. Scherer, "Schumpeter and Plausible Capitalism," Journal of Economic Literature, 30 (September 1992): 1416-1433. 27. Important contributions with broader sweep include Alfred Kahn, The Economics of Regulation, 2 vols. (New York: Wiley, 1970); George J. Stigler, "The Theory of Economic Regulation," Bell Journal of Economics and Management Science, 2 (spring 1971): 3-21; and Paul L. Joskow and Roger G. Noll, "Regulation in Theory and Practice: An Overview," in Gary Fromm, ed., Studies in Public Regulation (Cambridge, MA: MIT Press, 1981), pp. 1-77. 28. John R. Meyer, M. J. Peck, John Stenason, and Charles Zwick, The Economics of Competition in the Transportation Industries (Cambridge, MA: Harvard University Press, 1959). 29. George W. Douglas and James C. Miller, Economic Regulation of Domestic Air Transport (Washington, DC: Brookings Institution, 1974). 30. See S. C. Littlechild, "Competition, Monopoly, and Regulation in the Electric Industry," white paper, U.K. Office of Electricity Regulation, 1993. 31. See Arthur M. Schlesinger Jr., The Cycles of American History (Boston: Houghton Mifflin, 1986), chaps. 2 and 9. 32. See Robert Z. Lawrence, Albert Bressand, and Takatoshi Ito, A Vision for the World Economy (Washington, DC: Brookings Institution, 1996), chaps. 3 and 4. 33. Scherer, "International Competition Policy and Economic Development."

Part 2 Latin American Case Studies

4 State Reform and Deregulatory Strategies in Argentina Enrique Zuleta Puceiro

The path to economic liberalization in Argentina provides substantial insight into the measures necessary to implement a national competition policy. Following seven years of bureaucratic authoritarianism, a military dictatorship that waged a "dirty war" that terrorized the Argentine population with disappearances and torture, and the precipitation of the Latin American debt crisis in 1982, Raul Alfonsin, the leader of the Radical Party, gained the office of the presidency in 1983. The combined crises of economic destabilization and the lack of public confidence in the state created particular circumstances for economic liberalization. Both Alfonsin and his successor, the neo-Peronist Carlos Menem, needed to find avenues that not only completely transformed the role of the state, but also transformed the public perception of the state, garnering the political legitimacy required to implement such far-reaching reforms. Both presidents faced spiraling inflation and unemployment, as well as substantial pressure from such international agencies as the International Monetary Fund and the World Bank, to impose dramatic "structural adjustment programs" similar to those implemented in Chile. As Argentina now turns to the development of competition policy, its recent history demands a particular emphasis on the transparency, stability, and public support of those reforms. In the decade between the implementation of Alfonsin's Austral Plan and the first true test of Menem's Convertibility Plan, prompted by the effects of the Mexican crisis, the Argentine economy underwent a series of profound and irreversible transformations. As an indicator of the importance these changes held, it should be noted that during the first Menem presidential term (1989-1995), one-third of the Argentine economy shifted from the public to the private sector. By 1993, with the first phase of the privatization program completed, the transfer had already included 158 corporations belonging to sectors not long ago considered "essential public services." The transfers occurred in basic sectors such as telecommunications, oil, electricity, gas, water, airlines, railways, ports, chemicals and 51

52

Latin American

Case

Studies

petrochemicals, roads, and sanitation systems. In 1996, at the initiation of the program named the "Second Reform of the State" by the government, the areas pending privatization had been reduced to the postal service, nuclear energy plants, the hydraulic power plants of Yacireta and Salto Grande, and minor stocks that remained in the hands of the state and provincial companies and banks. The reasons behind the reform were twofold. On the one hand, there had been a profound change in ideas concerning the role of the state in the economy, shared by a majority of the countries in the region. On the other hand, real second-tier objective needs resulting from the adjustment and structural reform policies needed to be addressed. Alfonsin's and Juan Sourrouille's Austral Plan of 1985 and Menem's and Domingo Cavallo's Convertibility Plan of 1991 shared, in spite of significant technical differences, a similar strategy for redefining the functions of the state within the framework of changes required by the new dimensions of the global economy. Fiscal equilibrium, privatizations, economic opening, labor flexibility, and deregulation of the economy are the basic instruments of the strategy to gradually dismantle the populist state. The consolidation of the populist state occurred after World War II and had been maintained by both civil and military governments. Political convictions, real needs dictated by economic policy, and external conditions were combined in varying degrees depending upon the government and the era. During the initial years of the reform and throughout the 1980s, the debate centered on the problems concerning the legitimacy and timing of privatizations and state reform. Toward the mid-1990s, ten years since the implementation of the reform and with some of the fundamental goals having been met, the concerns focused more on the meaning of the regulations, the new functions of the state, the demands for legal stability, and institutional consolidation of the reforms in order to overcome the state of emergency that dominated throughout the first phases of the reform. The results of this stage are still waiting to be fully evaluated and, in any case, will depend upon the final outcome of medium- and long-term policies that are still being implemented. For the moment, it is of interest to simply highlight the importance of the change in ideas shared by widely differing ideological and political points of view. This change was ultimately expressed in substantial modifications to the public agenda. The Argentine experience is, in this sense, particularly revealing. In the new context of the postprivatization state, new functions and new relationships are defined. Within these relationships, customers, service providers, the state, and control agencies are addressing the need to rethink a large part of the ideas they inherited regarding public service, public functions, regulation, control, and so forth. New problems and realities demand new approaches and modern answers. It is important to understand that to deregulate necessarily means to "re-regulate." Therefore, new answers are

Argentina

53

needed to satisfy new questions concerning the relationship between what is public and what is private. The issue is complex. It requires, first of all, complete understanding of the global economic context, as well as the requirements of an increasingly informed, demanding, and dynamic society, inevitably affected by social issues and uncertainties resulting from the transformation. The space for purely ideological decisionmaking is minimal. In contrast with the naive vision—often amplified by political rhetoric—that transformations are simply the fruit of new convictions adopted by the political elite and of their courage in bringing them forth, there is evidence that these types of changes are present, with obvious differences, in almost all of today's economies. However important the convictions of the political leaders are, completion of the program depends, in the end, on a number of factors. Paramount among these are the technical and political skills of the government staff in implementing reforms, the strength of the political coalitions upon which they depend, the veto power of groups in control and interest groups that oppose them, and particularly, the strength of the economic and political institutions and the implicit and explicit public consensus necessary for the success of the reforms in the medium and long term.1 State reform, privatization, and deregulation programs reflect a global tendency. Specific objectives can vary depending upon the region or country, but the inherent meaning does not change. Within the countries of Latin America, these programs make resources available to reduce the external debts that had accumulated over the previous decades. In Eastern Europe, however, the objective is to alleviate the effects of the large fiscal deficits incurred by the social state. In Southeast Asia, governments are looking to attract the international capital needed for achieving the more general goals of modernization. In each of these cases, the drive to transform has been a response more to the real needs of adapting to adverse circumstances than to the virtue and conviction of the main protagonists. The new perception of the functions of the state abandons the idea of an activist and promotional state in order to highlight the objectives of control, guarantees, protection, preservation, information, coordination, instigation, dissuasion, interpretation, and targeting. These objectives are sought in order to complement, not substitute, the classic functions of the classic constitutional branches: legislation, administration, and jurisdiction. The strength of the postprivatization state—along with the strength of the state's essential role in the social system—depends precisely on its ability to confine itself to the specific areas of its authority. In the Argentine case, deregulation policy has proceeded alongside the pursuit of larger goals. These include reducing the state apparatus and privatizing a significant proportion of its main activities. As with the rest of the economies in Latin America, Argentina has not been exempted from the process of rapid change from a corporate society and assisted capitalism to

54

Latin American Case Studies

a more competitive society. This society is oriented toward the market, highly vulnerable to external conditions, and based on the new superiority of information and knowledge—scarce resources in a continent virtually paralyzed by its own incapacity to generate science and technology. It is also an issue of moving away from fragmented economies—to a certain extent isolated by protectionism—toward a global economy with intense competition and constant increases in international flows of goods and services. In this new scenario, the problems related to administration and reform of the state take on radically different dimensions from those previously assumed by the traditional theory of state and government. Most important, the idea of what constitutes the public sector changes. The ideal type around which the entire traditional theory of public administration revolves is structured on the basic idea that a distinction exists between administration and politics. According to this theory, the goals of the institutions are defined by politics and implemented by a specialized technical bureaucracy, trained for the development of rational and goal-oriented methods. However, the new approach emphasizes the irrelevance of the distinction between administration and politics. It also emphasizes the diminished and relative character of administrative logic and conflicts in the decisionmaking process. The economic policy of state reform reflects changes shaped by the general political culture and the basic standards that regulate competition among social actors. The ability to maximize political opportunities appears not to depend so much on the skills of the various actors in anticipating or generating spaces for action as on their ability in understanding those changes and demands. Under these conditions, initiative and leadership of the reform process require not only the ability to adapt to these inevitable changes, but also the skill and ability to survive in an increasingly complex political environment. Thinking about state reform implies, most of all, reflecting on a new set of values and expectations, which are predominant in today's democracies.

The Original Meaning of the Reform The state reform program implemented by the Menem government was, in effect, a continuation of initial efforts made under the structural reform policies of the Alfonsin government between 1985 and 1989. A new political coalition was formed around Menem's own Justicialist (Peronist) Party's majority in the Senate and a majority in the Chamber of Deputies resulting from agreements negotiated with provincial parties and the center right. Beginning in July 1989, this coalition permitted the development of a

Argentina

55

sharper strategy, comparably more efficient than the rest of the alternatives introduced in many of the other countries on the continent. The basic institutional design of the state reform was based on the content of two framework laws, approved by Congress during the transition period that took place between the beginning of the new presidential term in July 1989 and the formation of a new Congress in December of the same year. During the first six months of Menem's term, his government did not enjoy a majority in Congress and needed to rely on the consent of the opposition. Therefore, the Economic Emergency Law 23.697 and the State Reform Law 23.696 were born from a transitional pact made between the two main parties, interested in facilitating a complex transition in the face of a continuously worsening economic situation. It is the only moment in which the government and the opposition were in agreement, at least implicitly, on the reforms. The Economic Emergency Law was aimed at the suspension or elimination of a large number of automatic or indirect income transfer mechanisms: subsidies, special tariffs, price differentials, grants, and promotional or protective regulations that either directly or indirectly affected the resources of the national government, the Central Bank of the Republic of Argentina, and state-owned companies. Simultaneously, the law established a compensation system f o r debts among state-owned companies and between state-owned companies and private creditors—debt-for-equity swaps—that will have a crucial impact on the viability and success of subsequent privatization programs. The State Reform Law established a legal basis for profound structural changes in the state apparatus. To begin with, this law established an administrative emergency situation that affected the provision of public services and the execution of administrative contracts. It also initiated a readjustment of public finances. Concurrently, it established legal and technical guidelines for privatization and deregulation programs in the public sector. Initially, the reform had to address a basic problem, which had clear consequences for the future. According to the institutional tradition of the country, the concept of legislative reform was based on the principle of parallelism. 2 That is to say, the rules through which a reform is implemented must be at a level comparable to that of the rules that have been changed. Following this principle, a monopoly created by a law can be abolished only through another law. A transitional pact negotiated with the outgoing government granted the new government a political advantage. However, this advantage was weak, making it necessary to create a mechanism that would delegate legislative authority from Congress to the executive branch. This mechanism was based on a global repeal of the legal tools employed by an interventionist state, accompanied by the widespread redirection of disputes to new rules designed to fill the legal vacuum generated by the

56

Latin American Case Studies

reform. Article 10 of the State Reform Law enabled the executive power to "order, when necessary, the exclusion of all of the privileges and/or monopolistic clauses and/or discriminatory prohibitions, even if allowed by law, whose existence obstructs the goals of privatization or impedes de-monopolization or deregulation of the respective service." Decree 1.105/89, which implements the corresponding bill, established in Article 10 the "tacit repeal" of "every law or regulation that establishes privileges, prohibitions or monopolies that are not specifically named in the decree." The same decree stated that a company, activity, or good is declared "subject to privatization," according to the rules of Article 10. The State Reform Law allows the delegation of legal authority through the mechanism of "de-regulation." The law suspends the principle of parallelism and grants a number of exceptional legislative powers to the president. The reform took place under very exceptional circumstances, and some clear phases can be observed in its development. The first stage covers the period from 1989 to 1990 and is characterized by highly symbolic actions, that is, political "signals" to internal and external markets. It is especially important to underscore the degree of conviction with which the new government addressed the need for a reform program: the sale of 60 percent of ENTEL (the telephone conglomerate) and 85 percent of Aerolíneas Argentinas (Argentine Airlines) to consortia operated by Spanish public companies and by international lending banks, accomplished through the swap of foreign debt instruments—then valued at 15 percent or less of their nominal value—for equity in the new companies. These actions maintained the strategy implemented by the Alfonsin government, which initially selected the Spanish state-owned company as a potential partner of the local ENTEL. Simultaneously, the government unblocked the paralysis produced precisely in these two areas by the opposition of the Justicialist Party in Congress before the party's electoral triumph in 1989. During this stage, the structural reforms were directed at, above all else, reinforcing parallel anti-inflationary, monetary, and fiscal stabilization "shock" treatment policies in the face of pervasive macroeconomic instability. The collective memory of anti-inflationary plans that had failed because of a lack of continuity and a stronger emphasis on structural elements was a major obstacle to be overcome. Therefore, the first privatizations were presented as "exceptional," which explains, at least in part, their provisional character and the faults in the design of some of their core mechanisms. The goal was to acquire resources to pay off the massive external debt, which would afford a better negotiating position in relation to international creditors. The second phase started with the new Convertibility Plan initiated by Minister Cavallo at the beginning of 1991. The objective in this stage was to accelerate structural reform of the state apparatus with greater transparency than that allotted to the first stage. This area of the reform focused on the rapid sale of public assets, with the twin objectives of collecting

Argentina

5 7

cash resources to alleviate the large fiscal deficit and thereby creating the conditions for further advances in the reform process. The sale of primary and secondary oil ventures and the public offering of stock in Telefonica de Argentina and Telecom—the companies resulting from the privatization of the state-run ENTEL—provided an operating surplus indispensable for the viability of the monetary convertibility model. It was an attempt to utilize a one-time financial bridge, which, in turn, would make the definitive phase of the reforms possible. The third phase benefited from the fact that government finances had been brought under control. It also enjoyed the possibility of moving forward in attaining the strategic goals of far-reaching fiscal cleansing, while simultaneously pursuing the goals of state reform: the establishment of adequate regulatory guidelines, assurances of greater relative competitiveness, defense of consumer rights vis-à-vis natural monopolies, and the reinforcement of medium- and long-term investment commitments. The adjudication process was carried out on a case-by-case basis by groups of international operators. Use of this method was aimed at improving the conditions for privatization compared to prior experiences and at guaranteeing the continuity and future provision of services internationally considered to be essential and of a basic public responsibility. It was during this phase that the privatization program enjoyed the greatest autonomy. From the very start, advances made in the state reform program were directed at stabilizing the economy: stabilizing adjustment and structural reform created a synergy. This explains why only recently, in 1991, with the reinforcement of the stabilization policy through passage of the Law of Convertibility, could the privatization program produce significant results in those sectors wherein privatization had been unthinkable just a few years earlier: oil, electricity, gas, water, sewage, mail, and so on. In the previous decade, between 1980 and 1990, the national Treasury had transferred $22.4 billion to the top ten public companies to ensure that they would be able to provide essential services. During that time, this group of companies collected an amount equal to only 63 percent of costs, which left a 37 percent deficit. This deficit was completely and regularly covered by the Treasury. Seen in perspective, the Argentine privatizations during the 1990s can be viewed as mirror images of the nationalizations that took place during the 1940s.3 At one time or another, the strategy was seen as a miraculous recipe for the solution of all of the nation's political and social problems. Rejection of the ideas that dominated at the time was not only the result of a growing sensibility toward changes in economic ideas, but more specifically, the result of demands stemming from the collapse of the concept of the corporate state. Simultaneously, the new government had to accentuate the radical change in its notion of the state. The burden of its populist tradition forced the state to overact and be rigid. The goal was to create a base

58

Latín American Case Studies

for a new economic management model and for a new set of social and political coalitions.

The Deregulation Policy Both the Argentine deregulation policy and the plan to abolish the corporate state have rather similar origins. From the early 1930s until today, a complex network of regulations has dictated almost all areas of economic activity. The distortions thus created in the main markets have been studied in detail. 4 Democratic governments inherited the negative effects of this network, which can be measured in terms of loss of economic efficiency, high consumer costs, costs associated with tax breaks, and the costs of direct public subsidies. An unofficial estimate has placed the costs of the regulatory state at $4.2 billion per year on average. 5 This estimate refers to the financial sector, hydrocarbons, medical services, the fishing industry, export returns, tobacco production, air transportation, railways and ground transportation, ports, and public companies. The burden on the economic system imposed by the network of regulations has varied with time. During the 1930s, regulations were aimed at controlling the supply and foreign sale of raw materials and agricultural and livestock products in order to match fluctuations in international markets with the needs and problems of production. In addition to import substitution industrialization, the government imposed controls on foreign exchange, foreign trade, and the transportation system, and it introduced a complex system of government credit and tariff concessions. Toward the 1960s, the emphasis shifted to regulating the production cycle of regional raw materials and controlling foreign and domestic trade. The number of public control authorities multiplied, which had serious consequences in terms of restrictions on competition, price distortions, tariff and nontariff barriers, segmentation of the capital market, and increased tax pressures. Quietly proposed in the structural reform laws of 1989—specifically through the suspension of subsidies and promotional schemes—the deregulation strategy b e c a m e b o l d e r f r o m 1991 o n w a r d , as part of the Convertibility Plan. By then, the second phase of the state reform was being fully implemented, and the results of the combination of structural reforms and monetary stability were evident. 6 The first step in the deregulation strategy was taken near the end of 1990 with the deregulation of the fuel market. The main goals were to promote domestic markets for the production, refining, and commercialization of oil derivatives and to open the sector to international markets. The new hydrocarbon policy advanced gradually and was finalized with the passage of Decrees 1.055/89, 1.212/89, and 1.589/89. 7 With this first phase completed—which had a high symbolic value for

Argentina

5 9

the internal and external markets—the deregulation strategy proceeded with a significantly broader scope. The first evidence of the widening of the deregulatory strategy was demonstrated by the repeal of Law 20.680—the Law of Supplies—a key instrument in price intervention policy. In November 1991, Decree 2.284/91 provided the core component of the deregulation policy. There was intense controversy surrounding the authority of the executive to enact the proposed deregulations through the use of extraordinary powers and without a specific legal framework. Yet, the new law, which originated in the executive branch but had the unequivocal rank of a bill, received the solid support of the public. 8 The preamble of Decree 2.284/91 expresses the purpose of the deregulation policy: It is imperative to adopt certain measures and eliminate others, with the goal of facilitating internal and external trade, and thus deregulating various markets. . . . The persistence of restrictions that limit competition or that impede the development of foreign trade artificially distorts the relative prices of goods and services traded exclusively in the domestic market and goods traded in foreign markets.

Under the new deregulatory philosophy, regulations and legal monopolies obstruct competition, diminish market transparency, and affect negatively price stability and the international competitiveness of the economy. The central goal of the deregulation laws was to complement the shock treatment policy through measures that promote competition between nontradable goods and services, restraining price increases and lowering business costs. 9 In line with this basic premise, the deregulatory policy first addressed the internal market. The repeal of the controversial Law of Supplies—a traditional tool of successive stabilizing policies based on price controls—was aimed at dissolving the monopoly held by the fresh produce markets. Decentralizing wholesale markets was seen as a way to improve competition. Simultaneously, regulations on schedules and authorizations chiefly tied to the functioning of retail markets were made more flexible, and the deregulation of specific professional activities moved forward, with strong repercussions on domestic market costs. 10 Parallelly, the new rules did away with a complicated network of restrictions, controls, permits, authorizations, and procedures that affected export and import procedures for goods and services. It also dissolved bodies that regulated agricultural and livestock activities, taxes and contributions, promotion schemes, and tax exemptions for capital-intensive activities.11 With respect to financial markets, fixed margins for stockbrokers were eliminated, procedures for initial offerings of stocks and financial instruments were made easier, and, at the same time, the authority of the Comisión Nacional de Valores (National Securities Board) was reinforced.

60

Latin American Case Studies

Subsequent deregulatory measures focused on complementary aspects, such as insurance, freight and passenger transportation, professional services, fishing, shipping, pharmaceutical products, and various raw material markets. The deregulation policy was accompanied by fiscal reforms designed to remove major obstacles to economic activity. The government eliminated taxes on bank withdrawals, financial services, export duties, stamps, fuels, tires, and a wide range of activities subject to provincial taxes. The government concentrated on the value-added tax and taxes on assets and profits and tried to simplify an obviously inefficient tax scheme. Although the fiscal reform has been slow and difficult to implement, the accomplishments made since 1991 have translated into substantial results. These, in turn, reinforce the goals of the deregulatory policy.

Institutional and Economic Implications To deregulate necessarily means to re-regulate, that is, to regulate against current regulations. The technique is complex, and Decree 2.284/91 is a good example of the type of legislative strategy used in the structural reform attempted in Argentina and in most Latin American countries. This decree repealed laws, whether partially or in blocks, invalidated the delegation of legislative powers, abolished promotional or protectionist rules, and widened the sphere of administrative discretion to include the removal of preexisting regulations. The new bill applied to the domestic market, to international trade, to regulatory agencies for public services, and, above all else, to capital markets. 12 There were two main goals associated with the new policy. First, a transitory act was put into play, designed to modify short-term trends in prices, guarantee a convergence with international inflation levels, and promote improvement in the real exchange rate without using the traditional tool of altering the convertibility bases. In an atmosphere of openness, deregulation succeeded in acting as a compensation mechanism for the impact of international competition on the domestic economy and business cost structures. Second, a structural act was carried out, aimed at removing obstacles to the full functioning of markets and at substantially improving the global and sectoral competitiveness of the national economy. With respect to the first point, deregulatory laws were able to increase competition among nontradable goods and services, as mentioned above. Some of the preferred areas of action include the liberalization of wholesale markets, the flexibilization of labor relations and working conditions, the eradication of privileges and barriers in professional services, and the suppression of national preference clauses in public contracts. Deregulation of foreign trade was equally decisive. The dissolution of a large number of

Argentina

61

regulatory bodies for the production and sale of regional products ensured dominance of the new model. The long series of decrees and administrative resolutions are evidence of the broadest deregulatory process ever carried out in the country. One of the basic goals of the deregulatory strategy was, without a doubt, to lessen bull market pressures on the prices of certain nontradable goods and services, especially important in the composition of the basket of basic consumer goods. As Eduardo Sguiglia and Ricardo Delgado indicate, the deregulatory policy tended to increase the real exchange rate through a fall in the nominal price of internationally nontradable goods and services. 13 The deregulation of agricultural markets (viticultural sectors, mate, dairy products, sugar), the eradication of monopolistic markets, the creation of new wholesale markets, the termination of labor restrictions, and the elimination of rigidity and privileges in the professional services market were part of this labor philosophy. Simultaneously, deregulation affected the structure of regulatory bodies that governed a large portion of regional production. The elimination of twelve taxes and mandatory contributions was another axis of the reform. Many of these taxes originally had been implemented with specific areas in mind but were made obsolete by structural reform. 14 It would be premature to try to determine the global impact of the deregulatory process. J. C. Cassagne is right on target when he says that Decree 2.284/91 constitutes a brand-new phenomenon of the national deregulation policy because, after the consolidation of interventionism in the 1930s, the state had never fully revised the subsequent laws which established restrictions on trade, industry, and liberal professions. The state also had failed to formalize the repeal, practically in block, of a series of regulations that were not harmonious with the "Subsidy State" model. 15

Thought of as a neutral policy aimed at avoiding the creation of new protection or privilege zones, deregulation proposed structural modifications to the domestic market that guarantee international competitiveness, with the overall goal of achieving economic integration. Logically, there are no immediate results. This is explained not only by the nature of deregulatory policies, but also by the relative disorder produced by the highly segmented character of official policy. Seen as a whole, the deregulation policy was directed at sectoral objectives, which caused uneven progress in attaining the prefixed goals. 16 The questions surrounding the constitutionality of the instruments employed in the initial deregulation policy were important. The delegation of legislative authority has been criticized by a substantial number of legal experts 17 and is even being discussed by those who adopted positions favorable 18 to either the government's or the Supreme Court of Justice's

62

Latin American Case Studies

interpretation. 19 The delegation of legislative authority was accepted with caution and based mainly on an appreciation of the exceptional circumstances that existed during the implementation of the emergency laws of 1989. The level of judicial conflict has not been as significant as had been expected, due primarily to the emergency rules, passed at the beginning of 1989 and subsequently ratified under the Consolidation of Liabilities and Social Pension Laws, which preempted actions against the state. Weaknesses in the instruments originally employed in the deregulatory policy, such as the lack of a coherent and comprehensive legislative elaboration of the policy, created structural obstacles. However, it is more important to underscore the effects that such problems had in those areas that were especially significant because they served as models of what the reform process hoped to achieve. In terms of foreign trade, the series of measures implemented through Decrees 2.284/91 and 817/92 has had a relatively significant impact. These measures included the elimination of interventionist quotas, the reduction of government levies and duties, and the decrease in shipping expenditures and procedures. In the petrochemical industry, revenues from exports improved a noteworthy 4 percent during 1991, the first year of deregulation. This was due exclusively to the elimination of the "statistic tax" and taxes paid to the National Fund for Merchant Marines. In the cold storage industry, revenues increased 10 percent as a consequence of the export tax refund and the elimination of taxes on gas oil. During the same year, exports of seamless steel tubes benefited from a reduction in the taxable component of its international price by some 33 percent. Agricultural exports also experienced some positive effects, with estimates between 5 and 8 percent for wheat, corn, and soybeans. In the transportation industry, provincial and interprovincial restrictions, and controls, permits, and concessions associated with trade were widely deregulated through Decrees 1.494/92 and 2.484/91. The flexibilization of international contracting policy between May 1991 and 1993 led to a decline in domestic transportation prices by around 2 percent for farm products and citrus fruits and by 4 percent for dairy products. Prices for international transportation between Argentina and Brazil fell on average by 20 percent between July 1991 and May 1993 and by a significant 35 percent for frozen cargo. Transportation prices to Uruguay fell by 6 percent over the same time period. The general deregulation of maritime transportation, passed in Decree 817/92, resulted in, for example, a decline of 29 percent in transportation costs for iron products from Brazil. And intercity passenger transportation grew 24 percent, which caused a 6 percent drop in fares. 20 One of the sectors that felt the strongest impact was the traditionally weak capital market sector. The strategy adopted by Decree 2.284/91 included measures aimed at assuring greater transparency in the market,

Argentina

63

modifying the requirements for information on companies issuing stocks, freeing up broker commissions, and modifying the general regulations surrounding public offerings of financial instruments and stocks. General deregulation was complemented by a series of government measures. Between 1991 and 1992, according to data from the Comision Nacional de Valores, authorized subscriptions increased from 24.5 to 199.2 million pesos as the amount of authorized negotiable instruments increased from 523.0 million to 1.907 billion pesos. Although capital flows responded to the specific conditions of emerging markets between 1991 and 1992, studies on the impact of deregulation indicate that it also had a positive impact. This is so because deregulation gave rise to the conditions that allowed the market to operate with levels of transparency previously unheard of in the market.21 The effects of deregulation on agribusiness have been significant. It is, in fact, one of the main target areas of the reform strategy. Specific measures resulted in the dissolution of regulatory bodies for production and trade, such as the National Grain Board, the National Meat Board, the National Forestry Institute, the Fishing Mandatory Market, the National Horse Institute, the Argentine Corporation of Meat Products, the General Farm Market of Liniers, the Regulatory Commission for the Production and Sale of Mate, the National Trust for Mate, and the National Department for Sugar. In addition, quotas were abolished for the planting, harvesting, production, and sale of sugarcane, sugar, mate, and vineyards, grapes, and wine. Completing the list of substantial reforms were a series of tax reforms (i.e., the elimination of taxes, fees, export taxes, "statistical rates," and fund contributions); the lowering of tariffs on imports; the reductions in taxes on primary goods and other products; and the flexibilization of customs, bank, and government procedures. A recent study detailed the positive impact the reforms had on this important sector of the national economy.22 From the point of view of sectoral competition, and in spite of serious difficulties in determining the results, the first years of deregulation were favorable, most of all, to the industrial subsector. This is evidenced by growth in investment, by stability and even reductions in primary good prices, by a fall in the interest rate, by a gradual recovery of credit availability, and by increased profit margins, both net and gross. These were gradual reforms aimed at achieving widespread improvements in the competitiveness of this sector in light of favorable changes in the international situation, such as those that first appeared at the end of 1995. In addition to the change in the level of competitiveness in agribusiness were the changes stemming from improvements in the overall infrastructure, domestic and international trade regulations, and credit mechanisms. Changes in certain international parameters also contributed to this optimization of external conditions. The conclusion of the Uruguay Round

64

Latin American Case Studies

of the General Agreement on Tariffs and Trade—which neutralized the negative effects of protectionism—the gradual modification of the Common Agricultural Policy of the European Commission, the signing of the North Atlantic Free Trade Agreement and its eventual effects on a South American free trade association and, in particular, the consolidation and enlargement of Mercosur must be counted as part of the overall strategy aimed at uniting state reform with active policies on privatization, deregulation, and a general opening of the domestic and international markets. All in all, advances have been uneven, and in certain key fields, time will be needed to evaluate medium- and long-term effects. This is true, for example, in those areas where decisions are made by provincial leaders. One of the main obstacles is the resistance of regional economies to assume bold strategies in these areas. Since existing policy requires that the initial impulse be developed and completed through efficient implementation policies within the provinces, advances have been made slowly and only to a certain extent. In fact, provincial authorities have constitutional authority over the areas of economic activity that are the subject of deregulation.

The New Problems of Control In its more modern sense, regulation requires that the classic features of generality, objectivity, and impersonalization relating to legislation are complemented by a permanent flexibility and adaptation to the concrete problems of regulation. This explains the regulatory functions of the bodies and agencies created to develop the general guidelines proposed by the new rules of privatization and deregulation. Concurrently, it requires a different notion of control, which cannot be covered by the idea of a general jurisdictional function, as understood in the classic sense. Actually, more than negative or repressive sanctions—applied from general rules to a particular case—the new regulatory framework of the postprivatization and postderegulatory state calls for positive sanctions, the end goal of which is to promote changes desired by the legislator. The traditional judicial function is no longer sufficient. Due to its own nature, the judicial system cannot dictate general or regulatory rules: it must limit itself to judge concrete cases with rules that, due to their sanctioning character, impose strict principles of interpretation and do not allow analogies. When the agencies impose sanctions, they do so in a way that is instrumental to the general mandate of system consolidation and not simply as a court of original jurisdiction within the general sanctioning mechanism. Therefore, the use of regulatory, jurisdictional, and penalizing authority by the new administrative regulation and control agencies cannot be understood outside of the core goals of the regulatory framework. The agencies' function is to comply with the key principles proposed by the leg-

Argentina

65

islator, which respond to the organizational needs of a new network of privatized services. The new administrative agencies cannot be limited solely to supervising private management. They are the main actors in a new era of customer-provider relationships and are fully authorized to participate in all of the areas that the new situation presents. Due to their functional independence and financial autonomy, they are able to, above all else, execute their regulatory and control skills over all of the actors in the new system. Nevertheless, to consider the new agencies exclusively as organs controlling market activity—competition between the licensees of privatized services—can be a mistake. This is so, first, because they also oversee the actions and omissions of government authorities. The new state can use its new authority only if it sees itself as an active and passive subject of the transformation. This requires that the emergency phase be overcome and that the state, once again, be subject to the rule of law. The new arbitrational function of the public authorities covers contractual clauses that are binding both for the private sector and, particularly, the public sector. The ultimate justification of its existence is the need to guarantee the general objectives of the system. A detailed record of alleged noncompliance makes sense only if it serves the purpose of contributing to a general evaluation of new services. Such an evaluation should consider strategic elements that reflect the system as a whole. One of the greatest limitations of the idea of control—as studied by the "emergency" school and reinforced during the most difficult stages of the stabilization adjustment—is the distance between the "controller" and the outcomes of public policies and programs. The classic conception emphasizes procedures above all else. The "how" of public decisions is controlled but not the "what." The reasons for the decision are not, in general, submitted to rigorous control. The contents, merit, and timeliness of a decision are, from this viewpoint, issues outside the authority of administrative or judicial control and, furthermore, belong to a wide area of administrative and even political discretion. Unless clear arbitrary behavior exists, decisions are examined on the merits of their formal or material validity, through a procedural mechanism of legitimization. Therefore, the original objectives—effectively limiting the discretion of power—of traditional mechanisms, such as the division of power, are subsumed because the technical or political dimensions of a decision escape the authority of these traditional regulatory instruments. In this context, the issue of control requires major redefining. Argentine judicial traditions present serious limitations that begin with the very idea of control. The idea of jurisdictional control by the administration as presented in theories of the liberal state is one thing, and evaluative control associated with the strategies of an interventionist state is quite another. Although the principle of legality is assumed by both, jurisdictional control is external. This type of control also rests on a hypothesis of exceptionality,

66

Latin American Case Studies

in virtue of which the courts intervene under the presumption of a transgression against a current law or of a threat or violation of the legitimate interests or rights of the administrators. Justice does not operate under abstract questions; it acts only as a reaction by the legal authorities in the event of a hypothesis legally identified as a transgression against the law. Once an incidence generally identified as contrary to the law has occurred, reparation must be made, implemented by the respective jurisdictional authority. By nature, it is a posteriori and absolute control, achieved once the administrative acts subject to control are carried out. The state of emergency did not operate in a social vacuum. It primarily existed within a social climate of growing expectations, related to the need to control the social consequences of the inflationary crisis. This required that the need for control satisfy a double set of demands: on the one hand, respect for due process, and on the other, the demand for public participation. This demand was expressed principally by the constant pressure of public opinion concerned about the consequences of institutions and public policies designed to handle an emergency. There was, of course, only a weak and distant reference to the rights at stake. The traditional paradigm of jurisdictional control based on a presumption of the legitimacy of state action was displaced by a new paradigm. This new paradigm is based not only on the fact that the acts of the administration adjust to fit the mold of a preexisting legal framework, but also on a general urgent need for efficiency. Such urgency was based on a complex relationship between benefits and costs. The new parameters of control appear diffuse and inaccessible to the citizens and social groups affected, and they therefore constitute one of the main obstacles to consolidation of the reform. The fragmentation of control has produced visible consequences of judicial instability. The control function was transferred from the microjudicial (cases) and micropolitical arena to the macropolitical sphere of symbolic representation. The "need" and "urgency" decrees, the presidential veto, and the abusive use of majority rule in the parliamentary body are expressions of a tendency by political powers to use the primitive mechanism of sending alleged "signals" to the market and society. The political authorities tend to search for symbolic legitimization, which is clearly extrajudiciary. Judicial activism and excessive decisionmaking compete for the domination of the new areas of administrative control, having the general effect of overburdening the political system. The situation that existed when the most difficult stages of the reform were being carried out demanded a margin of administrative discretion. Without this margin, the reform most likely would have been impossible. Nevertheless, with the privatization program practically completed and the reform in the process of being fully consolidated, administrative discretion is no longer sustainable. What in 1989 would have been considered a sign

Argentina

67

of having strong convictions or of being able to make radical decisions is seen today as a remnant of a tendency to practice unnecessary decisionmaking, incompatible with the demands for judicial stability and predictability in mature markets. The demand for independent, autonomous, and objective action by the judiciary reaches even to the control mechanisms of the administration itself. The demands for clear regulatory guidelines and for an enforcement agency capable of monitoring the appropriate provision of services constitute, in effect, a guarantee for both the providers and the users. Both are guided by almost identical motives in setting limits on the maximum amount of allowable political and administrative discretion. Regulatory guidelines must be used to establish norms that will govern relations between the state and firms that provide public services, as well as between these firms and their customers. Simultaneously, the guidelines must ensure that information and control mechanisms exist. This is particularly important when dealing with natural monopolies to guarantee full competition in those sectors where it is possible in order to protect customers and establish clear mechanisms for determining rates. From this perspective, the demands associated with controlling the administration are threefold: first, the traditional way of controlling adherence to the law, through both legal and administrative tools; second, procedural control, to create equilibrium in decisionmaking and policy implementation between the actors of the administration and the demands inspired by debate; and third, controlling efficiency levels through the use of a combination of technical, economic, and social parameters and, most important, through the evaluation of public opinion. The current notion of accountability attempts to precisely capture the set of demands that arises from the idea of control. This leads to the situation that emerges from the complex relationship established by civil society and the market during a state of emergency. It is understood that internal and external control reach out to include not only the original premise of the reform, but also the decisionmaking procedure and the outcomes of public policies. Presently, in the postprivatization era, original demands for stabilization have given way to new and different demands. The "social agenda" is highly relevant in a country that is experiencing profound changes and where the debate on the new state is still being developed. Between 1983 and 1989, Argentina rebuilt its institutions and the fundamental laws of democracy. Between 1989 and 1994, the country restructured its economy and neutralized the factors that had caused deadlock. Now a new horizon has emerged, one that reveals a complete redefinition of the relationship between what is public and what is private and one wherein the question of the state is of central importance. It also presents a new agenda that prioritizes the definition of legal guidelines and public control mechanisms, one

68

Latin American Case Studies

capable of averting the risks of a new relationship—an explicit product of the reform—among public authorities, individual initiative, and the market. From this new perspective, control requires public understanding and transparency in base analyses. A reduction in legal controls places the specific demands for adjustment, congruency, rationalization, and proportionality between public demands and the objective and subjective demands that public policies attempt to satisfy. The new dimensions of control call for transparency and communication in the decisionmaking processes and instruments. The popularity of plebiscites and the consolidation of democracy by delegation conspire against this goal. Key public policies—such as those regarding employment, education, or health—falter in the face of insurmountable obstacles that prohibit their progress from being understood and accepted precisely by those sectors to which they are directed. Regardless of the significance of the results, from a strictly economic point of view, the lack of accountability in the way the results are achieved, paradoxically, increases public resistance. Deregulation, re-regulation, and control exhibit basic common linkages. Carrying them out in unison requires acceptance of the fact that the current framework is very different from that which dominated during the first stages of the reform. The new crisis, above all else, forces a new phase in the reforms, in which the issue of control receives top priority. A recent World Bank document underscores that "the Mexican crisis crystallized the urgency of moving to a second phase in the reform process and clarified its agenda. Rebuilding the state and reducing poverty and inequalities are critical for the consolidation of the reforms that have already been advanced as well as for future growth." 23 At the time of this stage of reforms, "Its main objective is the restoration of stability and the rebuilding of international confidence. The plan also calls for aggressive moves on infrastructure privatization, decentralization, reforms in the legal and judicial system and improvement in the effectiveness of social programs. 24 According to this point of view, the authors' analysis continues, in contrast with most of the policies undertaken in the last few years, which were addressed at correcting gross inefficiencies and macroeconomic disequilibria, the new reforms will have to deal with more subtle issues, including the strengthening of institutions, the reform of civil administration and the modernization of the judiciary. . . . [Therefore,] it will no longer be the case that changes will be "evenly" distributed among members of society, as was the case, for example, with tight monetary policy to reduce inflation. In what follows, specific groups will win at the cost of others. The implementation of these changes will be costly in political terms, and much more complicated than previous ones. 25

The methods to be adopted need to have a medium- and long-term approach, one that is much bolder and less reactionary than in the first

Argentina

69

stages of stabilization. Future efforts must be aimed at strengthening competition and market transparency through a deeper and more coherent deregulatory process. This means greater controls, effective protection of competition, supports for regulatory agencies, guarantees of information and participation by society, and the consolidation of mediation, arbitration, conflict, and controversy-resolution mechanisms. In the international arena, achieving continuity in the reforms will require the continuation of policy harmonization within Mercosur, the elimination of asymmetries, and the development of uniform rules. This denotes a serious challenge: the process of trade liberalization must be complemented by reforms in the areas of services, insurance, financial and capital markets, patents and intellectual property rights, foreign investments, and joint business procedures and in general, by the reduction of nontariff barriers that seriously impede progress toward deeper integration—in particular, in technology, phytosanitation, bromatology, and transportation regulation. The future agenda for deregulation presents the challenge of achieving progress on three mutually reinforcing fronts. The first includes those demands posed by economic development through major reforms that promote competition, labor demands, and labor and capital yields. The second involves the demands of control and guarantees of market transparency. The third entails the conditions for institutional development capable of stabilizing the changes. In this respect, attaining greater levels of social accountability has become an unavoidable priority among a complex list of pending questions on institutional development in the countries of the region. Keeping these three aspects in mind as Argentina constructs its competition policy will allow the state to build upon its gains in economic development. Argentina has entered a sanguine period in terms of both domestic and international confidence in its economy. The success of its economic liberalization program should now give way to a political liberalization program allowing for democratic challenges to the state. As the Chilean case study that follows will attest, competition policies will meet with longterm success only in the context of an open and stable democracy that no longer relies on "emergency measures" to institute reforms.

Notes 1. For a more in-depth discussion on the new frontiers of administration theory in the context of substantial changes in the idea of what is public, see J. E. Lane, The Public Sector: Concept, Models, and Approaches (London: Sage, 1993), esp. chap. 1. 2. W i t h r e s p e c t to t h i s p o i n t , s e e J. C. C a s s a g n e , La Intervención Administrativa (Buenos Aires: Abeledo-Perrot, 1994), pp. 130ff. 3. Department of Privatizations, Ministry of the Economy and Public Works and Services, "Informe sobre Privatizaciones," Buenos Aires, 1993.

70

Latin American Case Studies

4. See, P. Gerchunoff and G. Canovas, "Privatizaciones en un Contexto de Emergencia Económica," Desarrollo Económico, 136 (1995): 483. 5. For a global assessment, see Fundación de Investigaciones Económicos Latinoamericanas (FIEL), Los Costos del Estado Regulador (Buenos Aires: Ediciones Manantial, 1989); and E. Sguiglia and R. Delgado, "Desregulación y Competitividad: Evaluación de la Experiencia Argentina," Boletín Informativo Techint, 276 (1993): 17ff. 6. FIEL, Los Costos, pp. 10-11. 7. E. Sguiglia and R. Delgado, "Efectos de la Desregulación sobre la Competitividad de la Producción Argentina," in E. S. de Obschatko, E. Sguiglia, and R. Delgado, Efectos de la Desregulación sobre la Competitividad de la Producción Argentina (Buenos Aires: Fundación Arcor/GEL, 1994), p. 160. 8. Cassagne, La Intervención Administrativa, p. 139. 9. Among those who have opposed the extent of the delegation of legislative authority, the f o l l o w i n g should be mentioned: M. A. E k m e k d j i a n , "La Inconstitucionalidad de los Llamados Reglamentos de Necesidad y Urgencia," La Ley (1989): 1296; and G. Badeni, "Los Decretos de Necesidad y Urgencia," El Derecho, 138 (1990): 930. 10. In support, see Cassagne, La Intervención. The Supreme Court has established its official thesis on the economic energy in La Ley (1991): 141 ff. A. Bianchi also discusses a true economic "emergency" in his work "El Estado de Sitio Económico," Revista del Colegio de Abogados de Buenos Aires, 1 (1990). 11. The leading case concerning the use of executive powers to dictate urgency and emergency decrees has been the Peralta case, which was ruled on December 27, 1990. For a more in-depth view on the jurisprudence of the Argentine court system, see A. R. Delia Via, Constitución Económica e Interpretación Reciente: Fallos de la Corte en Materia Económica (Buenos Aires: Editorial Estudio, n.d.), and G. L. Negretto, El Problema de la Emergencia en el Sistema Constitucional (Buenos Aires: Ed. Abaco de Rodolfo Depalma, 1994). For a position essentially favorable to that of the courts, see W. D. Rogers and P. WrightCarozza, La Corte Suprema de Justicia y la Seguridad Jurídica (Buenos Aires: Ed. Abaco de Rodolfo Depalma, 1995). 12. Cassagne, La Intervención Administrativa, 167. 13. For a detailed study of the comparative costs of buying and selling in the Buenos Aires stock market and public financial instruments in the open capital market, see Sguiglia and Delgado, "Efectos de la Desregulación," tables 3 and 4, which contain statistics reflecting the positive effects of the reform. 14. Obschatko, Sguiglia, and Delgado, Efectos de la Desregulación, pp. 45ff. 15. Cassagne, La Intervención Administrativa. 16. See C. Edeley, Administrative Law: Rethinking Judicial Control of Bureaucracy (New Haven, CT: Yale University Press, 1990), p. xi. 17. J. I. Barraza and F. H. Schafrik, El Control de la Administración Pública (Buenos Aires: Abeledo-Perrot, 1995), pp. 65ff. 18. For an analysis of this topic, see A. J. Porras Nadales, Representación y Democracia Avanzada (Madrid: Centro de Estudios Constitucionales, 1994), chap. 11. 19. Ibid., p. 101. 20. For a discussion of modern regulation theory and its application in the area of structuring control mechanisms, see especially C.-A. Colliard and G. Timsit, eds., Les Autorites Administratives Independentes (Paris: Presses Universitaires de France, 1988), chaps. 1-5. See also J. Mitchell, Public Authorities and Public Policies: The Business of Government (New York: Praeger, 1992, chaps. 1-3; and F.

Argentina

71

Mas, Gestion Prive Pour Services Publics: Manager l'Administration (Sarcelles: InterEditions, 1990), chap. 5. 21. Shahid Javed Burki and Sebastian Edwards, Latin America after Mexico: Quickening the Pace (Washington, DC: World Bank, 1996), p. 1. 22. Ibid., p. 1. 23. Ibid., p. 2. 24. Ibid., pp. 4 - 5 . 25. Ibid., pp. 18-19.

5 Competition Through Liberalization: The Case of Chile Nicolás Majluf & Ricardo Raineri

The Chilean economy is known today for the application of a free market model characterized mainly by the increasing participation of the private sector, the privatization of important state-owned firms, the liberalization of foreign trade (imports and exports), the promotion of foreign investment in Chile and Chilean investment abroad, the reform of social security, and the structural change of important industrial sectors (most noticeable, power and electricity, and telecommunications). The fundamental thrust behind this transformation is the promotion of competition through the active participation of the private sector in the economy, with the government retaining only a subsidiary role. This profound change of the relative participation of the private sector in the economy has required a thorough modernization of regulatory institutions. This chapter reviews the main policy decisions oriented at promoting competition and briefly describes the differential characteristics of regulation in the most important industrial sectors in the country. Also, commentary is put forth about important pending dilemmas that are being confronted by regulators today.

The Changing Participation of the Government in the Economy The free market policies were the economic response given by the military government to the deep political crisis of 1973. In that year, the government reached the highest historical participation in the economy, under the leadership of Salvador Allende (see Figure 5.1). But a rapid analysis of the involvement of the government in the economy shows that Chile had gone from a very open country in the early 1800s to a government-run economy in 1973. The main lesson from this process is the recognition of the

73

74

Latin American Case Studies

Figure 5.1

Government Expenditures as Percentage of GDP, 1930-1975

45% 40% 35% 30% 25% 20% 15% 10%

5% 0%

1930 1935 1940 1945 1950 1955 1960 1965 1970 1975

enormous impact that political, ideological, and world events have had over many years on the transformation of the Chilean economy, the key circumstances of which will now be briefly addressed. In the early 1800s, the political change implied by the independence of Chile from Spain, which switched the management of the economy from the Spanish rulers to the local authorities, meant a major liberalization of international trade and the stimulation of the development of a stronger private sector. Later, the boom brought by mining activities, mainly nitrate, generated a surplus in the government that led to a further liberalization of the economy. This trend began to be reversed with the major upheavals caused by the two world wars and the Great Depression. These events made the Chilean government worried about its excessive reliance on international markets, and it thus started an effort to become more self-sufficient in the provision of goods and services. This task was assumed by the government in ever-increasing proportions. The ideologies in vogue in the first half of the twentieth century enhanced this trend toward increasing government participation in the economy. John Maynard Keynes proposed an active role for the government in terms of a vigorous fiscal policy (changes in taxes and expenditures) to stimulate the economic activity, an important objective during the

Chile

75

depression. Karl Marx was a radical economist who proclaimed the state ownership of production resources, the state planning of the economy, and the participation of the working class in the government. His ideas, which were clearly opposite to those of the free market economy and the laissezfaire society, became increasingly attractive to major parts of the population in developing countries after the successful implantation of a Communist regime, first in Russia and later on in Eastern Europe and Cuba. Another important event that promoted government participation in Latin America was the industrialization policy proposed by the Comisión Económica para América Latina y el Caribe in the mid-1950s, which favored import substitution and government investment in heavy industries and the protection of local manufacturing. The ideological lead of this policy belongs to Raúl Prebisch. In Chile, this process reached massive proportions in the 1970-1973 period under Allende, with the nationalization of foreign firms and the intervention of economic activities triggered by the political change favored by the Socialist government. In 1973, with the military coup, a major effort to reverse this long trend of government intervention in the economy was started. The military government set for itself an agenda of deep reforms in the social, economic, and political system prevailing in Chile. From an ideological point of view, the center of gravity moved from the government to private activities. The "subsidiary principle" stated that the government would undertake only those activities that private individuals were not willing to pursue. The changes introduced during the military regime were geared at liberalizing the economy and opening up both its domestic and international markets to competition, welcoming foreign investment, and promoting the export of Chilean goods, with competition seen as the catalyst that would lead to higher levels of efficiency. But this road toward transformation was not an easy one to travel. The deep 1982 economic crisis, which was a traumatic event after almost ten years of military government, generated uncertainty and disorientation in policymakers. After a couple of years of trial and error with new economic policies, the crisis was pivotal in sparking the necessary changes in regulation and the conduction of the economy that are still in place today. The political transition from a military to a democratic government, in a peaceful and open election held in December 1989, has brought some further changes in the definition of the role of the government. Particularly important is the added emphasis on social issues and the regulatory role of the government. Also, the speed and extent of the privatization process have been drastically reduced.

76

Latin American Case Studies

The Subsidiary Government: Changing the Role of the Government During the Military

Regime

Under the subsidiary principle, the private sector is given the role of being the major engine of growth in the economy, and the market is seen as the main mechanism that allows for smooth and efficient resource allocation. The government is seen as playing a subsidiary role in supporting the private sector when a market malfunction interferes. That is, the government is seen as caring for macroeconomic balances, the provision of public goods (where provision is not the same as production), market distortions, and equal access to opportunities. In this new role, the government is defined as a "subsidiary government." Many are the arguments to justify this fundamental change in the role of the government. First among them stands the idea that in an environment with a strict respect for property rights, individuals looking after their own self-interest will increase the overall efficiency of the economy. Also present is the idea that the enhancement of the market will lead to the dispersion of political power and economic property, to economic decentralization, and to the creation of new skills and capabilities in the labor force. In Chile, this was seen as a necessary development to counteract the political power, corruption, and economic inefficiency of an oversized government. A smaller government would reduce the abuse that emerges from public employees and would provide a greater decentralization to political and economic decisions. Under a subsidiary government, the idea is to transfer the production of goods and services to the private sector, retaining in the government a normative and supervisory role. The government should leave all the areas the private sector can operate efficiently, transferring production activities previously under the umbrella of the government to control by private individuals. Thus, a well-functioning new economic system would require a largescale privatization program. At the end of Chile's military regime in 1989, the government had therefore vacated many areas of the economy, being replaced by the private sector. The total number of public firms under government control went from 596 in 1973 to 45 in 1989, simultaneously reducing the percentage of gross domestic product (GDP) accounted by government firms from 39 percent in 1973 to 15.9 percent in 1989.1 The Process of Privatization The privatization process of the Chilean economy can be divided into two periods punctuated by the 1982-1983 crisis: the 1974 to 1981 period and the 1984 to 1990 period. The first period of privatization was geared

Chile

77

toward the normalization of the property confiscated under Allende's government. About 30 percent of the 1,300 farms in the hands of the government at that time were restituted to the original landlords, with the rest being reassigned to new owners. Also, more than 250 firms confiscated by the government were returned to the old owners. After this initial cleanup, the government went on to privatize the financial system and other firms owned by the Corporación de Fomento de la Producción (CORFO). 2 At the end of this first period of privatization, the government maintained the control of important public firms in many sectors of the economy, mainly, utilities like electricity, telecommunications, and water supply and sewage; the large copper industry; the large coal industry; oil refinement and other natural resources; transportation; and farm and forestry services. As a result, public firm participation in GDP fell from 39 percent in 1973 to 24.1 percent in 1981.3 This first stage of the privatization process was criticized as lacking transparency and openness and for the poor selection of the buyers. It has been argued that these weaknesses contributed to the creation of a high degree of property concentration. 4 The privatization process was partly reversed as a consequence of the 1982-1983 crisis. To avoid a financial crash, the government rescued sixteen financial institutions and many other firms, many of them recently privatized, thus reversing what had been done. In 1984, when the economy started to come back from the crisis, the government began the second round of privatization. At first, the main objectives were the normalization of the ownership of the firms taken over by the government during the crisis and the provision of fresh resources to the public sector. However, starting in 1985, the government went beyond its original plan. For the first time, the privatization of public utilities was put on the agenda, as a first step in a very ambitious plan encompassing many objectives: • • • • • • •

The elimination of the fiscal deficits originated in the mismanagement of public firms The provision of resources for the public sector The long-term efficiency of firms The expansion and modernization of the firms The private property diffusion to workers and small investors The deepening and strengthening of the capital market The increase of the investment opportunities available for private pension funds

This second stage of privatization was also criticized on several points, specifically, the lack of transparency of the whole process, the absence of an appropriate regulatory regime, the deficient procedure used to sell firms,

78

Latin American Case Studies

and the effect this stage itself had on the degree of private property concentration. Nonetheless, the process has been considered successful overall. The Long Road to

Modernization

Modernization is not an easy process; it is a long and difficult transformation that requires concentrated attention to details and produces hardship and suffering to many individuals. Modernization is an all-encompassing process of change. The role of the government is to start this change through the appropriate modification of the institutional system, so as to provide the right signals and incentives to all economic actors. Modernization requires a change of institutions, but it also requires alteration to entrenched behavioral patterns. Both are very difficult endeavors. Institutions resist change; people get anxious with change. Sometimes the process of introducing changes in bureaucracies is like the tide: receding but always returning. Therefore, for modernization to happen, it has to be a process that introduces fundamental changes to many different institutions simultaneously and one that maintains the drivers of this process for a long period of time. If there is one overriding lesson in this long march toward an open economy, it is the importance of not being deluded by the economic success of one or a few number of years. What makes a difference is not a successful experience, but the ability to sustain that experience through many years. Often, the excuse given for the interruption of a favorable economic trend is the impact of an uncontrollable external shock. But this is a poor explanation. External shocks are a part of life. The fundamentals of an economy cannot be dependent on the absence of them. The 1982-1983 crisis taught Chile that the key to lasting success is having in place adequate government policies and regulatory systems able to maintain the basic macroeconomic equilibrium that leads to a sustainable economic growth. But equally important is to provide the proper set of signals and incentives to guide the action of independent economic actors pursuing their own well-being. Otherwise, there is always the danger of a major crisis looming on the horizon, usually triggered by an uncontrollable external shock, but ultimately rooted in the use of inconsistent economic policies. The fact that the 1995 Mexican crisis barely affected the Chilean economy is a hopeful sign that the hard lessons of 1982-1983 have been learned. The government's responsibility is to prevent the derailing of the economy through proper regulation (which is not synonymous with heavy regulation). In Chile, the 1982 crisis was a revealing experience that, after a period of economic disorientation, finally put the country on a trajectory of more stable development that was still going strong as of 1995.

Chile

79

The Liberalization of the Economy Toward a Market Economy The liberalization of Chile's economy 5 was a tumultuous stop-and-go process that included two deep recessions peaking in 1975 (with a 12.9 percent drop in GDP) and in 1982 (with a 14.1 percent drop in GDP). Throughout this period, many profound structural changes were introduced simultaneously. For over a decade, the economic performance was below the Latin American average (with a meager 1.3 percent annual growth for 1973-1983), a trend that did not start to accelerate until 1984. (GDP growth in 1995 was 8.5 percent.) Among the fundamental economic reforms introduced in this period, several economic and sectoral reforms stand out, all of which are discussed below. The Main Economic Reforms Leading to the Liberalization of the Chilean Economy Strict respect of property rights. From the very beginning, the military regime recognized property rights as a key foundation for the proper operation of a market economy. The argument presented to justify the centrality of property rights states that, on balance, private ownership is beneficial to people individually, to the society collectively, and to values such as efficiency, economic progress, and political liberty. Furthermore, moral arguments were raised, stating that private ownership is a natural, even an inalienable, moral right people are entitled to; and as with any other natural right, it is the duty of the government and the law to protect it.6 Deregulation of prices. At the time of the coup, more than 3,000 commodity and service prices were set by Dirección de Industria y Comercio, a government agency in charge of assigning most prices.7 These widespread price controls were supported with trade restrictions and credit rationing. However, they were not enough to stop the emergence of an informal economy and the birth of massive trading in the black markets that lead to a chronic undersupply in the formal markets. A month after the military coup, on October 15, it was decreed that just thirty-three prices would be under the control of the government and for eighteen additional prices, the government should be notified of adjustments. By the late 1970s, all price controls were lifted, except the regulation of natural monopolies.8 The change toward lower and uniform trade tariffs: The liberalization of trade. The decision to converge toward lower and more uniform trade

80

Latin American Case Studies

tariffs was clear from the very beginning, but the process of opening up the country to international trade was done gradually to allow for the proper adjustment of economic agents. Between 1973 and 1979, the trade tariffs were reduced from a maximum of 750 percent to 10 percent (except for cars). After the 1982-1983 economic crisis, and for a brief period of time, trade tariffs were temporarily increased. The result of this policy was a substantial increase of foreign trade as a percentage of GDP (total exports plus total imports), which jumped from 18 percent in 1973 to 32 percent in 1974, showing an upward trend from there on to reach 52 percent in 1994 (see Figure 5.2). The pattern of trade also showed a significant change. On the one hand, the major increase in imports came from Asian countries, such as Taiwan, Japan, and Korea, going from 14 percent in the 1970-1972 period to 28 percent in the 1979-1981 period. On the other hand, the major increase in exports went to Latin American countries, from 12 percent in 1970-1972 to 23 percent in 1979-1981. In this period, European countries reduced their participation in Chilean foreign trade, both in imports and exports. The adjustment of the exchange rate and the liberalization of foreign exchange markets. The six-tiered and grossly distorted exchange rate system implemented under Allende's government was rolled back to the Figure 5.2

Foreign Trade as Percentage of GDP, 1960-1994

Chile

81

three-tiered system existing in the early 1960s in Chile, very early in the military regime. Simultaneously, the local currency was greatly devalued against the U.S. dollar. Later on, between 1973 and 1982, many different mechanisms were used to adjust the exchange rate. It was only in the late 1980s that the system that is still in place today was implemented. Briefly described, the long-term exchange rate is managed by the Central Bank, and daily fluctuations of the currency are left to the market as long as they are within a previously defined range. Also, foreign currency can be freely traded in a parallel market, thus helping to improve the functioning of foreign trade operations. The exchange rate level was used at the beginning of the military government as a stabilization instrument to reduce a monthly inflation rate of over 10 percent. The many changes in the policy can be explained precisely by the strategies introduced to fight inflation. After the 1982 crisis, and with a fine-tuning approach toward the monetary policy, the exchange rate level was used to stimulate the country's exports, maintaining a high real exchange rate. This has been decreasing consistently since 1990 (a 20 percent drop between 1990 and 1994). Deregulation of foreign investment. Since very early in the period of military government, Chile has been wide open to direct foreign investment, which is still presently regulated by a 1974 law, Decreto Ley 600. This law introduced a nondiscriminatory principle, allowing foreign investors free access to all the areas of the economy where there is no threat to national security and the right to transfer their profits abroad with quick access to the exchange market, without any restriction on the amount transferred but requiring a minimum of three years of permanence of the capital invested. Among the most innovative instruments used by the government to solve the external debt problem after the 1982-1983 debt crisis was an aggressive debt-to-equity conversion program. 9 The result was that external debt as a percentage of GDP decreased from 98 percent in 1984 to 57 percent in 1989; and debt services as a percentage of country exports decreased from almost 56 percent in 1984 to almost 24 percent in 1989.10 The capital flows are maintained under close surveillance by Central Bank authorities. The policy today is to favor the free flow of capital oriented toward long-term investments and to discourage the flow of shortterm capital oriented toward purely financial transactions. Deregulation of financial markets and foreign capital flows. The deregulation of the domestic financial market was begun in 1974 with the liberalization of interest rates and the opening up of the sector to competi-

82

Latin American Case Studies

tion by nonbank financial institutions (financieras). Also, the Central Bank relaxed the debt/capital ratio to 20:1, increasing participation of commercial banks in the credit market. Thus, by 1982, the fraction of domestic credit accounted for by the public sector decreased to 65 percent.11 The liberalization of foreign capital flows favored inflows, maintaining important restrictions in outflows. Changes to facilitate the inflow of foreign capital were steadily introduced by the Central Bank, substantially increasing the participation of private banks in the total external debt. This trend came to a complete halt with the 1982 economic crisis, precipitated by the dry-up of foreign capital inflows. The government intervened in the banking system to avoid its collapse. Many reasons have been given to explain the 1982 crisis, such as improper opening of capital and current accounts; excess of consumption; excessive lending to Latin American countries due to a lax insurance policy in the lenders' base countries;12 and the abuse of the national commercial banks on an implicit deposit insurance provided by the Central Bank, when it rescued a failing commercial bank in 1977. The implicit insurance provided by the Central Bank exacerbated the traditional moral hazard problem associated with deposit insurance and facilitated the increase in foreign borrowing and the practice of risky lending. After this experience, the regulation of the banking system was completely changed. The new regulation enacted in 1986 gave much more power to oversee the operation of banks to the regulating body (i.e., Superintendencia de Bancos e Instituciones Financieras), restricted government insurance only to demand deposits, put a cap of 2 percent of a bank's capital for lending to related corporations, and implemented more stringent rules for the use of internal information. The globalization of the Chilean economy. The globalization of the Chilean economy is mainly reflected in the substantial increase of foreign trade and the large flow of foreign investment in Chile and Chilean investment abroad. Recall from Figure 5.2 that total trade reached 52 percent of GDP by 1994, which was larger than Germany's percentage and that of the United States, more than double the amount of Mexican trade, and quadruple the amount of Argentine trade. Foreign investment is channeled into Chile via many different mechanisms. But the primary means is the aforementioned Decreto Ley 600, which allowed a sustained increase of foreign investment from an average of $202 million per year in the 1974-1984 decade to $ 2.5 billion in 1994. Moreover, the special debt conversion program and American depository receipts have been important sources of foreign capital. With respect to Chilean investment abroad, it became significant in 1991, amounting to $6.6 billion between January 1991 and June 1995.13

Chile

83

Most of this investment is in neighboring countries (51 percent in Argentina, 17 percent in Peru, and 9 percent in Bolivia). As part of this integration of the Chilean economy into the world economy, the country is actively seeking participation in many different trading blocs, while at the same time preserving uniform and low trade barriers with the rest of the world. Central Bank independence. One of the most important reforms implemented after the recession was the independence from the government granted to the Central Bank. This was the result of the interest in reducing the capability of the government to manipulate monetary policy as a means to face political pressures that could compromise the control of inflation. Following the German Bundesbank charter, the Chilean law makes a clear statement with respect to what the Central Bank can and cannot do, giving it a clear mandate for price stabilization. This was done to minimize the risk of the Central Bank being "captured" by interested parties in the government and the private sector, which provides ample independence for this most important policymaking and regulatory body. Deregulation of the labor market. The basic transformation in the labor market allowed for much more flexibility in the hiring and firing of workers, which, in turn, substantially reduced adjustment costs for employers. The traditional labor legislation promoted powerful sectoral and national labor unions through mandatory affiliation, costly dismissal of workers, and mandatory wage increases based on past inflation rates. Other factors adding to labor costs were a relatively high minimum wage, a law preventing firing except under the most extreme circumstances ("ley de inamovilidad"), some profit-sharing mechanisms, and the benefit packages that represented a noncash compensation amounting to 40 percent of wages. 14 One major reform to labor legislation came in 1979 with a very large liberalization of many of the above-mentioned constraints, which relaxed firing rules and reduced nonwage labor costs. Also, the relative power of unions was curtailed by increasing the degrees of freedom in the bargaining process between employers and employees, lifting mandatory affiliation, restricting labor negotiations to the level of the firm, and permitting more than one union per firm. However, the new labor law introduced a major macroeconomic distortion by setting a wage bargaining floor equal to the previous period wage plus the total inflation of the previous period. This wage floor was eliminated in December 1982 right after the economic crisis, which forced wage reductions in all sectors of the economy. The other key reform to labor legislation was introduced in 1980 with the change of the pension fund system from a social security tax to a compulsory savings mechanism in individual accounts managed by private

84

Latin American

Case

Studies

institutions specially created for this purpose called "Administradoras de Fondos de Pensiones" (AFPs), or Pension Fund Management Corporations. This reform implied a reduction in labor cost because the compulsory savings rate was lower than the previous social security tax. Tax policy. The basic changes in the tax policy consisted of (1) the change from the old sales tax to a value-added tax; (2) the unification of the tax rate paid by all firms; (3) the consolidation of all personal incomes; and (4) the indexation of all incomes and expenses to apply taxes on real earnings of firms and individuals. In the mid-1980s, important tax incentives were introduced to promote private savings and investments. Most important among them was that the profit tax paid by a firm on the money distributed to owners could be considered as a tax credit toward the owners' personal tax income. Sectoral Transformations of the Chilean Economy and New Regulation

Requirements

Regulation in Chile is sector specific. This section briefly presents the most important sectoral transformations in Chile and comments on the main characteristics underlying their regulation. The sectors addressed are those that have attracted the most attention. Social security. In 1980, the government introduced a major reform to the social security system.15 The old pay-as-you-go system was replaced by a mandatory private pension fund managed by AFPs, the main activities of which include, in addition to the overall supervision of the fund, the investment of resources, the delivery of benefits, and the provision of information services. The reform has boosted Chile's domestic savings rate to 27 percent of gross domestic product. The pension funds have grown steadily; and in 1994, they reached a market value equal to 27 percent of GDP, or around $20 billion—42 percent of this being invested in public debt and the rest in private stocks and bonds. The average annual return since the beginning of this new system in 1981 has been 13 percent in real terms. The activities of AFPs are regulated by Decreto Ley 3500 of 1980 and by a special board (Superintendencia de AFPs). The two key issues addressed in this regulation are the need to maintain a clear public accountability of firms managing the pension funds and the limits imposed on the risks of the financial investments made with the people's money. To facilitate public accountability, Chilean law separates the actual fund from the firms managing those funds (the administradoras), so as to protect the money saved by the general public from any difficulties that can arise in the AFPs. These firms are also restricted to participate in any business outside the management of the pension fund. Finally, the AFPs are

Chile

85

subject to a minimum capital requirement related to the size of the fund they manage and to a reserve requirement to protect the public's money from poor performance of their investment policy. Investment policy is regulated by setting limits on the different categories of financial instruments that can be bought by pension funds. These limits have changed over time. At the beginning, when the system was new, public money could be invested only in papers issued by the government. Gradually, once confidence grew about the stability of the new system, riskier investments were permitted, particularly regarding the shares of publicly traded firms and papers issued by foreign agencies. In 1995, pension funds could invest up to 37 percent in shares of Chilean private firms and 9 percent in shares of foreign firms. Concentration in this sector is high, because three AFPs manage more than 50 percent of total savings. This should come as no surprise, as there are important economies of scale that are changing the industry structure, increasing concentration through mergers of the administradoras and the consequent pooling of the funds they manage. There are not explicit restrictions to concentration, but they are subjected to constraints in the antitrust law that applies to all firms in Chile. The supervision of the AFPs demands a highly technical and sophisticated regulatory board, capable of staying on top of the complexities inherent in the sophistication of financial instruments and the globalization of capital markets. Due to the novel nature of the experience in the early 1980s, the success of the system was heavily dependent on the ability of the regulator to maintain both a strong guide and a flexible hand. The AFPs and the regulating board had to learn together the proper management of the new system. Telecommunications. The Chilean telecommunications industry has been going through a deep restructuring since 1985, triggered by the privatization of the three government-owned firms controlling most of the market, the rapid technological progress, and the substantial investment in all areas of the industry. Over the 1990-1994 period, the telecommunications sector grew at 9.3 percent annually, a rate second only to that of the energy (electricity, water, and gas) sector.16 To prepare this industry for competition in all areas, the government changed the regulatory environment in 1982 with the publication Ley General de Telecomunicaciones 18,168 (Telecommunications Law), which opened the sector to anyone obtaining a concession from the regulatory authority, the Subsecretaría de Telecomunicaciones (the Undersecretary of Telecommunications). A major milestone in this process was the 1994 opening of the long-distance telecommunication services to full competition through the implementation of multicarriers. By 1995, almost ten firms were competing for a share of the market, although three of them

86

Latin American Case Studies

concentrated over 80 percent of national and international long-distance calls. The main winner in all this has been the final consumer, who has seen a substantial improvement in the extent and quality of services provided and a real reduction of rates. The telephone bill for local telephone calls went down 33 percent from 1989 to 1994,17 and long-distance bills showed even larger reductions.18 Important topics addressed by government regulation are the creation of technical standards, the administration of the electrical radio spectrum, the analysis of concessions to operate in the national telecommunications industry, and the setting of price caps for noncompetitive services. In particular, local telephone service rates are determined every five years by the government using the rate of return of an "efficient provider." But with the increase in competition for local telephone services coming from new entrants in the market, i.e., personal communication systems and cable television providers, the eventual end of rate regulation even in this area is expected. Concessions for local and long-distance telephone services are nonexclusive, while the cellular phone industry is restricted to two firms per area of concession. Concessions for personal communication services were granted during 1996. The regulating experience in this sector has not been an easy one. The main problem was determining whether firms participating in local telephony should have the right to offer long-distance services. The argument was that vertical integration could dampen competition in the industry and should thus be prohibited. The different firms participating in the industry confronted one another by all legal means to protect what they considered their legitimate interest, which, in their opinion, was not duly protected in the standing law on telecommunications. It was only after a five-year legal battle that the government was able to define the rules for competition in the long-distance sector, which finally led to the successful implementation of the multicarrier system. With some constraints, vertical integration in the telecommunications industry is now permitted in Chile. The lesson here is that opening a sector to full competition requires a careful layout of the rules regulating the participation of all interested parties, more so when the sector is being deeply transformed by technological changes. Some observers in Chile argue that the original telecommunications law was not well defined, but the problems were detected only after privatization, because it was at that time, when the firms were under different management, that the dormant conflicts of interest erupted. Their conclusion was that the litigation of the sector could have been avoided with better regulation. Energy. Electricity consumption has grown since 1985 at an annual average of 7 percent, 19 fueled mainly by the rapid growth experienced by the

Chile

87

country. The radical transformation of the energy sector was also sparked by the beginning of the privatization of the large corporations in the hands of the government, by the mid-1980s. The sector most profoundly affected by changes is that comprising power and electricity, but the transformation of the oil and, more recently, of the gas sector is also significant. Power and electricity. To open this sector for competition and the participation of private firms in the industry, the 1982 General Electric Services Law, which regulates the sector, established three separate areas: power generation, transmission, and regional distribution of electricity. This law allows for open competition in generation, open access to existent transmission lines, free entry to firms interested in the installation of new transmission lines, free prices for large energy consumers, and regulated prices for small consumers. Another key feature of the law is the use of marginal cost pricing, introduced as a practice in the mid-1970s to promote efficiency in public utilities. Generators trade their energy in three different markets. First, there is a producers' market where generators exchange energy to fulfill their contracts with third parties. Second, there is a free market formed by large energy consumers who can freely bargain the price with energy producers or energy distributors. Third, there is a regulated market for small consumers who buy energy from the energy distribution firm holding concession for that area. The Comisión Nacional de Energía (National Energy Commission) sets the prices at which generators transfer their energy to local distribution firms and the prices paid by the small final consumers, which cannot be negotiated. To manage the transfer of energy and to solve conflicts of interest among generators, the law established the Centro de Despacho Económico de Carga (CEDEC), which is a board formed by all significant generators without government participation. This is a form of self-regulation by the private sector. Investments in the energy sector are freely decided by interested firms, but an indicative development plan has been proposed by the Comisión Nacional de Energía that is not compulsory but nevertheless carries much weight in private decisions. The sector is highly concentrated. ENDESA, Chile's largest generating firm, accounts for 42 percent of total power in the country's largest interconnected system and owns the main transmission lines in the country. Notwithstanding, there is little doubt about the competitive nature among generators, although there have been important disputes due to charges for transmission. They stem from the exclusive ownership of transmission lines by ENDESA, which is vertically integrated. The success of these policies has attracted the large investments required to supply the fast-growing energy demands of the country, with

88

Latin American Case Studies

pension funds being the main contributors.20 In fact, more than 60 percent of their investment in shares is concentrated in the power and electricity sector, amounting to almost $5 billion. Oil. Chile is a net importer of oil. Domestic production accounted for no more than 15 percent of total consumption in 1993.21 That same year, oil imports represented 10 percent of total imports. The oil industry is still mainly in the hands of the government. Oil fields and all refining plants are owned by the government through ENAP (or Empresa Nacional de Petroleo, a subsidiary of CORFO). Distribution to final consumers is reserved for private companies, and competition prevails. As a way to increase competition and to maintain the efficiency of ENAP, private imports of refined and nonrefined oil products are freely allowed, establishing a cap to what ENAP can charge for refined oil in Chile. In 1994, oil products in Chile were priced almost 50 percent higher than in the United States, but this is still in the low range compared to other Central and South American countries. This indicates that the premium charged in Chile is linked mainly to taxes, transportation costs, and the absence of scale economies, even though the existence of monopoly rents cannot be discarded. 22 Gas. Following a world trend in the adoption of natural gas as a substitute for other fuels, the Chilean economy faces the opportunity to import natural gas from Argentina. This requires building a gas pipeline across the Andes Mountains. To allow private participation and competition in this industry, the regulatory regime has been updated to recognize transportation and distribution of gas as separate activities. The key features of the regulatory regime are open access to the gas pipeline and nonexclusive concessions for local distribution of gas to the final consumer. With the incorporation of natural gas in the central zone of the country, electricity prices are expected to decrease by 15 percent, while at the same time this cleaner fuel will help to reduce the high levels of air pollution in Santiago, the capital city of Chile. The government has granted concessions to build the gas pipeline to two powerful consortia of national and international firms. At least one pipeline was slated to be operational by the end of 1997. Electrical oil companies are members of these two consortia, showing that there are no constraints on horizontal integration in the energy sector. Mining. Mining is the industry with the highest contribution to country exports and has attracted most of foreign investment in Chile since 1980. CODELCO, the largest copper mining firm in the world, is owned by the government and generates 45 percent of the copper produced by the coun-

Chile

89

try. Private participation in copper production is expected to increase to 65 percent by the year 2000, though CODELCO will increase its total production by 30 percent. There is an ongoing debate among the different political actors regarding the advantages of privatizing CODELCO. Those in favor of the privatization argue that CODELCO has lacked efficiency and competitiveness; those opposing it claim that the firm is investing to maintain its share of total world production, and it is increasing its productivity and gaining efficiency, becoming one of the most profitable and competitive copper producers in the world. To promote higher levels of efficiency and competitiveness and to further develop the mining industry, the government guarantees a strict respect for property rights and mining concessions, in addition to the incentives granted to attract foreign investment.23 Regulation and supervision is under the Mining Ministry and COCHILCO (Comisión Chilena del Cobve), which acts as a special auditor and technical adviser of the government in all those areas related to copper and its subproducts, particularly in the evaluation of investment projects in the industry.

The Effort Toward Modernization in Other Sectors of the Economy Many other changes are entailed in this long and difficult process of modernization in Chile. Almost no area of the country has been left untouched. Today, for example, top priority is given to the modernization of the government itself, and many worthwhile projects are under way, though the efforts are still in their infancy. Also, the need for a larger investment in infrastructure, through the participation of private investment in the construction and management of roads and port facilities, has been a high-priority item. In other cases, particularly in health and education, the transformations introduced are profound and have been going on for well over a decade; nonetheless, both areas are urgently in need of still-deeper reforms. High on the political agenda of 1995 was the modernization of the water supply and sewage sector, this being an area of divisive controversy between those favoring a larger participation of the private sector and those opposing it. The regulation of natural resources, mainly fishing and native forests, has also seen important transformations.

Conclusion: Some Basic Principles of Chilean Regulation The main form of regulation in Chile is "regulation through the market." This has meant a tremendous change in the role of the government. As a first step, most of the efforts have been geared at liberalizing the economy

90

Latin American Case Studies

and promoting competition in all markets. Examples of the changes introduced are deregulation of prices, liberalization of trade, promotion of foreign investment, and the globalization of the economy. No doubt, there is a deep process of modernization in Chile that is affecting all sectors of the economy. Changes in the pension fund system and in the electricity and telecommunications sectors are the most pervasive. In particular, social security reform ignited a host of transformations in the financial sector, increasing savings in the economy and providing new investment opportunities. But modernization is an all-encompassing process requiring a radical transformation of all sectors in the economy, even though they may advance at different speeds. This process of liberalization is so strong that there are little or no constraints on horizontal and vertical integration or on cross holdings of firms participating in the same industry. The only restraint comes from the antitrust law and the growing political concern for the increasing concentration of ownership by a limited number of powerful economic groups.24 This deep transformation of the Chilean economy has implied a profound change in the role of the government. Particularly, the regulatory role of the government has been fundamentally altered. Many subjects that were the main focus of attention have lost interest; for example, price regulation in the long-distance telecommunications sector has been dropped, and the same has happened for power generation. Other subjects have increased in importance, like the granting of concessions for developing infrastructure, mine exploitation, and mobile telecommunications. Furthermore, the government has included among its responsibilities as regulator the definition of guidelines to promote an efficient development in an economic sector; for example, the investment plan in the energy sector. Finally, some regulatory functions have been transferred to the private sector for self-regulation; this is the case of CEDEC in the power and electricity sector, which attends transfers of energy and conflicts of interest among firms. A basic principle behind the promotion of competition among public utilities is a belief in the need to restructure an entire sector in terms of specific segments with different levels of competition in each, calling for a special regulating approach in each case. For example, the energy sector distinguishes generators (with ample competition) from distributors (subject to price regulation). The same has happened in the telecommunications sector, with basic telephone services having prices fixed by the government, while the rest are open to competition (e.g., long-distance carriers, mobile communications, supplementary services, equipment). The oil and gas sectors have been segmented in a similar way. The increased complexity and technical sophistication in all sectors of the economy require the establishment of highly trained and professional regulatory authorities. They must be experts in the broad array of technical

Chile

91

matters that are involved in modern regulation and that are specific to each sector of the economy. Regulation in the electric sector is different from regulation in the telecommunications sector, and both are very different from financial-sector requirements. Another important lesson derived from the Chilean experience in regulation is the changing nature of the process over time. Regulation is not the result of the application of a law; it has to be managed. The lesson in terms of pension funds is clear in this respect: the scope of regulation changed with the growing confidence in the system, and the fine-tuning of regulation was the result of the massive flow of day-to-day interactions between government authorities and the participating firms. Also, the value of regulation may change substantially as a result of technological advances, as is the case in telecommunications. In other words, what might be a good rule for a certain period of time may become a roadblock for the progress of the sector if it is not updated on a timely basis. There are some novel challenges for Chilean regulatory agencies. First, budget constraints severely restrict their capability to attract and retain highly qualified experts and to devote the necessary amount of resources to fulfill their regulating role in an effective manner. But there is a larger threat for regulatory agencies that can mollify their zeal: they may be "captured" either by the same firms being regulated or by interested politicians who interfere with their operation. In fact, the large wage premium obtained by highly qualified professionals who work in regulated firms can induce specialists in government agencies to be more benevolent, because they look with interest at the chance of being hired by those same firms they regulate. 25 Moreover, regulatory agencies can be captured by politicians when they try to influence the decision of regulating agencies to favor their own electoral interests (e.g., by promoting a reduction of prices charged by a regulated firm, which may be a popular decision but implies a complete change in the regulating philosophy in place). 26 Therefore, the greatest challenge confronted by regulating agencies is the maintenance of their independence and technical proficiency to do their work effectively, without creating added uncertainty, introducing unwanted distortions in the structure of the industry they supervise, and unduly affecting their profitability. The idea is that they should let the market operate and not replace the market, if that can be avoided.

Notes The research on which this chapter is based was conducted in 1996. 1. See Dominique Hachette and Rolf Lüders, "La Privatización en Chile" (San Francisco, CA: Cetro Internacional para el Desanollo Económico [CINDE], 1994).

92

Latin American

Case

Studies

2. CORFO was originally conceived in 1939 as a development bank, but it went well beyond its original charter, becoming a large and diversified state conglomerate. See Raul Saez, "Las Privatizaciones en Chile," in Oscar Mufioz, ed., Despues de las Privatizaciones Hacia el Estado Regulador (Santiago, Chile: CIE PLAN, 1993). 3. See Hachette and Lüders, Privatización en Chile. 4. See F. Larrain, "El comportamiento del sector publico en un país altamente endeudado: La contrastante experiencia Chilena, 1970-1985," in F. Larrain and M. Slowsky, eds., El sector público y la crisis de la América Latina, Lecturas No. 69 (Mexico: Fondo de Cultura Económica, 1990); J. Marshall and F. Montt, "Privatization in Chile," in P. Cook and C. Kirkpatrick, eds., Privatization in Less Developed Countries (Hertfordshire, England: Harvester Wheatsheaft, 1988); and A. Foxley, Experimentos neoliberales en América Latina (Mexico: Fondo de Cultura Económica, 1988). 5. The market economy model was named "Economía Social de Mercado" in Chile, in an effort to communicate that free market forces were given special attention in terms of the social impact of this policy. 6. For a discussion about the roles that property rights play in a market economy, see Robert A. Dahl, A Preface to Economic Democracy (Berkeley: University of California Press, 1985), pp. 62-63. 7. Among those goods and services that were under price controls were the fixing of negative real interest rates for loans and deposits and the setting of prices below effective costs for most goods considered basic needs. 8. See Cristián Larroulet, ed., Soluciones Privadas a Problemas Públicos (Santiago, Chile: Instituto Libertad y Desarrollo, 1991). 9. See Juan Andrés Fontaine, "Los Mecanismos de Conversión de Deuda en Chile," Estudios Públicos, 30 (Otoño 1988): 137-157; and Juan Andrés Fontaine, "Observaciones Sobre la Experiencia Macroeconomica Chilena: 1985-1989," Estudios Públicos, 40 (Primavera 1990): 195-214. 10. Per Banco Central de Chile statistics. 11. See H. Cortés and S. de la Cuadra, "Recesión Económica, Crisis Cambiaría, y Ciclos Inflacionarios," unpublished manuscript, Pontifical Catholic University of Chile, 1984. 12. See Salvador Valdés-Prieto, "Orígenes de la crisis de deuda: ¿Nos sobreendeudamos o nos prestaron en exceso?" Estudios Públicos, 33 (Verano 1989): 135-174. 13. Of this figure, $2,389 million has been registered by the Central Bank, while the rest corresponds to informal transactions. For more details, see El Mercurio, Santiago, Chile, August 16, 1995, Section B. 14. See F. Morandé, "Developments in Chile: Some Facts and Thoughts," Working Paper No. E-14, Ilades-Georgetown University, Santiago, Chile, July 1993. 15. We thank Gert Wagner for helpful comments in this section. 16. See Oscar Guillermo Garreton, "El rol de la Sociedad y del Estado," Instituto Libertad y Desarrollo, Santiago, Chile, October 1994. 17. Ibid. 18. See El Mercurio, Santiago, Chile, May 29, 1995, Section B. 19. The majority of the growth is based on usage by the Sistema Interconectado Central, the largest interconnected electric system in the country. 20. In the 1980-1993 period, energy consumption grew 89 percent. See International Energy Annual, 1993 (Chile: Energy Information Administration, May 1995).

Chile

93

21. Ibid. 22. Ibid. 23. The incentives come from the 1982 Organic Constitutional Law on mining concessions and the 1983 Mining Code with its 1987 bylaws. 24. See Robert E. Lucas, "On the Size Distribution of Business Firms," Bell Journal of Economics (1978): 508-528. Lucas states that in wealthy economies, "bigness" is widely viewed as a menace against which government activity should, perhaps, be directed; in poor economies, "littleness" is often viewed as a sign of backwardness to be defeated by government policies. But the question is to what extent bigness is a threat to the development of competitive markets, or whether it simply corresponds to a healthy use of the strategic advantages of more efficient producers. 25. See Eduardo Bitran and Eduardo Saavedra, "Algunas reflexiones en torno al rol r e g u l a d o r y e m p r e s a r i a l del E s t a d o , " in M u ñ o z , ed., Despues de las Privatizaciones (Santiago, Chile: CIEPLAN, 1993). 26. P. Spiller, "Condicionantes para la desregulación de los servicios públicos: Una visión conceptual," in Experiencia Internacional en la Desregulación de los Servicios Eléctricos y Telecomunicaciones (Santiago: Asociación de Empresas de Servicio Publico, 1994).

6 Competition Policy in Venezuela: The Promotion of Social Change Ana Julia Jatar

For countries undergoing a process of economic liberalization, to develop a vigorous competition policy is probably one of the most important and difficult challenges. Unfortunately, the lack of a clear idea of what competition policy means for these countries and how it should be implemented has introduced some undeserved doubts about its relevance in the consolidation of a market-oriented economy.1 This chapter seeks to contribute to this discussion by arguing that implementing competition policy in liberalizing economies is a different task from the traditional enforcement of antitrust laws commonly used in most industrialized countries. Encouraging competition in economies with a long tradition of government protectionism implies the promotion of a profound social change. This essay attempts to highlight those differences. With that purpose in mind, experiences from Eastern Europe, Latin America, and especially from Venezuela are used. As an established democracy, Venezuela provides an appropriate case to consider policy recommendations in a comparative perspective, since unlike the Chilean and Argentine cases, the differences between Venezuela and the United States, for example, center more on economic policies than on formal political structures. However, as the first part of this chapter demonstrates, implementation of effective competition policies may require substantial changes in legal and political practices in addition to explicit changes in economic and commercial policy. The chapter has three sections. First, a chronology of the revision of antitrust enforcement in Latin America is presented. In the second section, the structural differences that are relevant for competition policy between countries with recently liberalized economies and those with a market tradition are evaluated. The final section offers policy implications emerging from the previous analysis.

95

96

Latin American Case Studies

Antitrust in Latin America For decades, Latin American countries followed economic policies characterized by protectionism, import substitution, price controls, state monopolistic practices, and government ownership of a wide array of industries and services. Over half a century, governments and the private sector learned how to organize themselves and behave within this set of rules that guaranteed, for entrepreneurs, the protection from foreign competition and local rivalry and, for the government, the centralized power to allocate and distribute resources through commands. Latin American countries undertook their transition toward less regulated economies mainly after the debt crisis. In the early 1980s, most countries had to react to the debt crisis by liberalizing their economies. By the early 1990s, they had all initiated structural reforms by reducing trade barriers, privatizing state-owned enterprises, deregulating the economy, and promoting competition, thereby setting the basis for the development of a market economy. But the concept of antitrust is not new in Latin America. In spite of the long tradition of competition legislation, antitrust enforcement has been very weak, and this is not surprising due to the long history of government controls and protectionism. Only in the 1990s was there a revival of antitrust interest in the region. This revival coincides with the economic reforms implemented to reduce government direct control and to build a market economy. Argentina passed an antitrust law in 1919 that had not been actively enforced in decades. In July 1992, after the liberalization program initiated by President Carlos Menem began to take shape, the Argentine Congress took new interest in competition legislation and began reviewing a new law that was finally passed in 1995. Although Brazil has had an antitrust law since 1962, the agency in charge of the investigations, the Economic Administrative Council, initiated few investigations until 1991, when a new law came into effect. Colombia's antitrust code, as well, dates to the 1960s and was not actively e n f o r c e d until 1992, when the law was reformed and the administrative body responsible for promoting competition and consumer protection was restructured and given new powers to enforce the law. Chile passed its first antitrust law in 1959. The law created an Anti-Monopolies Commission, which functions as a tribunal for antitrust matters and has exclusive power to apply the antitrust law. The Mexican Congress approved new antitrust legislation in December 1992. The law created an independent body, the Federal Competition Commission, to implement the law. The commission is within the jurisdiction of the Ministry of Commerce and Industrial Development, and the five commissioners are appointed by the president for a ten-year term. In 1989, Venezuela abandoned its traditional interventionist economic

Venezuela

97

policy in favor of an outward-looking free market strategy. In December 1991, as part of the reform program, the Venezuelan Congress approved the Law to Promote and Protect Free Competition (also known as the ProCompetition Law), which created the first regulatory legislation on competition issues in the country. The same law created the agency with the responsibility to enforce it: the Superintendency for the Promotion and Protection of Free Competition (or the Pro-Competition Agency), which began to operate in May 1991. To understand the role of this new wave of competition policy in these countries, some of the specific characteristics and structural preconditions of liberalizing economies must be taken into account. To promote competition in societies with a long tradition of market values and a competitive structure is one thing; to do it in environments where monopolies were created with the consent and the incentive of the state is a different story.

Table 6.1

Competition Laws in Liberalizing Economies Country Argentina Brazil Chile Colombia Jamaica Mexico Peru Venezuela Czech/Slovak Republic Hungary Poland Russia

Year 1919, 1946, 1980, 1993 1962, 1986, 1992 1959,1973 1963,1992 1993 1993 1991 1991 1991 1990 1990 1991

Source: C o m p e t i t i o n a g e n c i e s in d i f f e r e n t c o u n t r i e s and the U.S. F e d e r a l Trade Commission in Washington, D.C.

The Historical Background in Venezuela Economic

Context

From the early 1960s to 1989, Venezuela undertook an inward-looking strategy with high barriers to international trade and a wide variety of protectionist policies for the local producer. This economic strategy was backed, and complemented, by a tailor-made legal framework built by a paternalistic state that was the owner of a rather large oil rent. 2 During those decades, the state expanded its direct control in practically every aspect of the economic activity: output prices, interest rates, multiple

98

Latin American Case Studies

exchange rate and foreign exchange budgets for inputs. It was impossible for any firm to undertake any strategic decision without having to face some kind of government authorization. By 1989, due to a poorly managed decrease in oil revenues, 3 Venezuela was facing dramatic external and fiscal crises. The newly elected government decided to reorient the economic strategy and to build a market-based economic system. This effort was drastically stopped in 1993 with impeachment of the president of Venezuela, Carlos Andres Perez, and the election of a new president, Rafael Caldera, who had promised to stop the reforms and return to the old system. And so he did until April 1996, when after three years of economic chaos, a new adjustment program was announced. When the ill-fated liberalization process began in 1989, economic reforms were adopted to liberalize trade, foreign exchange markets, prices, and interest rates—and also to privatize large state monopolies and to deregulate different sectors of the economy. The import substitution strategy usually generates fundamental restrictions to competition. More specifically in the case of Venezuela, the combination of quantitative import restrictions, price controls, and a perverse foreign exchange policy was responsible for the high concentration ratios in the economy and the lack of competition. Trade restrictions in Venezuela seldom relied on tariffs and more on implicit or explicit quantitative restrictions. The system was characterized by high tariffs and complicated tariff-exemption regimes that acted as an import quota, as companies would not import if they had to pay full tariffs. Before the 1989 trade reform, nontariff barriers were widely used as a mechanism to protect domestic industries. Only 55 percent of all tariff items could be imported without a license, 11 percent were prohibited, 29 percent required licenses, and 5 percent required a health permit. In many instances, import licenses were provided only to domestic producers of the same good so as to guarantee their survival. This implied that even when imports took place, they did not represent a competitive threat to domestic producers. After getting a license and because tariffs were so high, the importer applied for an exemption to reduce the tariff to a more reasonable level. In addition to these requirements, the importer had to apply to an agency of the Finance Ministry, the Office of the Differential Rate Regime (RECADI), to get the foreign exchange it needed at one of the "preferential" rates. 4 The exchange rate policy of the 1980s imposed serious distortions on the productive sector. At one point, there were four different exchange rates: one for the foreign debt, another for essential imports, the third for most commercial transactions, and a fourth for the free market, which by 1989 only applied for 5 percent of all imports. Importers had to apply on a

Venezuela

99

case-by-case basis to RECADI, and there were no clear criteria for the process of approval. Also, foreign exchange budgets were based on the previous year's sales and on historic import levels. With such discretionary power concentrated in RECADI, the import costs of any product were fundamentally affected by the exchange rate applied to that specific product by RECADI, in addition to other restraints to trade, such as import licenses, tariffs, and price controls. This system not only had an impact on resource allocation. It also had serious implications from a competition policy perspective. First, to issue an import license, the Development Ministry required a "letter of no objection" from the local producers' association to ensure that the product could not be supplied domestically. Second, RECADI required that firms not submit their foreign exchange budget requests individually, but in a concerted manner with competitors through their trade associations. Furthermore, budgets were based on historic import levels, preventing firms from changing their respective market shares through competition. By 1987, there were forty-three categories of products and services for which producers needed government approval to raise prices. 5 Given the collusion of potential competitors, society increasingly demanded price controls to prevent abuses of market power. Consumer protection was synonymous with price controls, and the superintendency for consumer protection was designed to enforce the price control system. By encouraging collusion among potential competitors, price controls limited competition. It is important to note, however, that during the period of price controls, competitors showed their discounts on products and better services. Others were more strategic, employing such measures as product diversification and vertical integration with the objective of gaining control over vital resources and distribution channels. In consequence, Venezuelan firms by 1989 were highly diversified and vertically integrated. Most business groups operated as big conglomerates in a wide range of activities. With economic liberalization, these conglomerates tended to concentrate their operations in fewer products where they could be competitive. The process of economic liberalization was accompanied by substantial reforms in the legal structure to provide an adequate regulatory framework for a market economy. The approval and enforcement of a competition law was part of this effort. Legal

Background

Accompanying the economic reforms, legal changes were introduced in Venezuela to give a more stable framework to the new market-oriented economic strategy. To accomplish this, three sets of laws were enacted: the Pro-Competition Law, the Anti-Dumping Law, and the new Consumer Protection Law.

100

Latin American

Case Studies

The Anti-Dumping Law was passed to limit unfair foreign competition. The Consumer Protection Law actually limited the government's ability to control prices while granting other forms of consumer protection. The ProCompetition Law guaranteed that after the government retired direct control over prices, companies would not engage in monopolist behavior. Venezuela has a long history of tight state control over economic activities, supported by constitutional and legal provisions. The Venezuelan Constitution gives the state an important active role in the economy: The economic regime of the Republic shall be based on principles of social justice that will ensure to all citizens a dignified and useful existence. The State shall promote economic development and the diversification of production, in order to create new sources of wealth, to increase the income level of the population and to strengthen the economic sovereignty of the country.6

The above suggests that the drafters of the Venezuelan Constitution viewed the state as a benevolent force with an important role in the reallocation of resources and in the pursuit of social equality. The Venezuelan Constitution calls for a mixed-economy system wherein the government leads the economic process that decides which alternatives are to be opened for the private sector. The prevailing idea behind the economic provisions in the Constitution is government intervention under democratic rules rather than individual economic rights. At the same time, however, individual economic guarantees and the freedom to engage in any economic activity are granted in the constitutional text. Economic freedom can be limited only by laws enacted by Congress for reasons of "security, public health, and social interest." 7 It is in the name of social interest that most of the anticompetitive regulations have been passed. These economic guarantees have been formally recognized by different Venezuelan constitutions ever since the country became an independent republic in 1830. Nevertheless, those guarantees have also been effectively suspended since 1939,8 with a brief exception between the years 1991 and 1994. By suspending the economic guarantees, the government has been able to legislate over the economic activity by decree. In other words, it has provided the executive branch with legal grounds to regulate the economy without congressional approval.9 The decrees enacted by the executive branch in situations where economic guarantees have been suspended have the same rank as the laws passed by Congress. The concept of "law" has three sources according to the Venezuelan Constitution: (1) laws as acts enacted by Congress; (2) laws as acts enacted by the administration under the authorization of Congress; and (3) laws enacted by the administration under the suspension of constitutional rights. Of the three sources mentioned above, only congressional law is the regular

Venezuela

101

and democratic mechanism to determine the scope of government regulation over the economy. The acts enacted by the administration, called "law-decrees," are supposed to be exceptional, temporary, and used only under circumstances of emergency. Under this framework, Venezuelan governments have continuously found grounds to justify economic emergencies and to thus legislate through decrees since 1939. As a result, economic regulation in Venezuela has been heavily based on administrative discretion. Also, since 1961, four out of eight presidents have enjoyed "emergency powers" granted by the Congress in order to legislate in economic matters. This has generated in Venezuela a highly volatile legal environment with paternalistic characteristics, where the government has been able to directly regulate almost every aspect of the economy.

Characteristics of Liberalizing Economies Relevant to Competition Policy: Why "Rent-Land" and "Competition-Land" Are Different Motivation of the Antitrust Enforcement The motivations for antitrust laws in Latin American countries are different from those that characterize more industrialized economies. Among other things, the reasons for developing antitrust laws have different origins. In the United States, for example, the Sherman Act was dictated in July 1890 with the objective of impeding the development of trusts during the second half of the eighteenth century. The economy was evolving, due to the Industrial Revolution, from a traditional structure, highly atomized and competitive, into a modern economic system, technologically more complicated with much larger production units. The possibility that these structures would exercise market power became a policy issue. In this context, a healthy industrial concentration process was desirable. Nevertheless, perverse evolution into structures that could exercise market power had to be avoided through public regulation. The Sherman Act was the response to this demand. While public policy in the United States was oriented to prevent the formation of monopolies, the economic policy followed by Latin American countries led to a significant industrial concentration with monopolistic structures protected by the state. The presence of these monopolies and their exercise of market power induced price control policies to limit that power. In this context, promoting competition implies confronting entrenched monopolies created by the previous economic strategy and, at the same time, eliminating price controls used to limit their power. Whereas the first represents a major political challenge, the second requires the con-

Latin American Case Studies

1 02

fidence of the public in the effectiveness of competition to substitute price controls. For many years, the Mexican economy operated in an environment of substantial protection and strong state participation. As a consequence, opportunistic behavior emerged in many sectors, often with the cooperation of the authorities. . . . Protection reduced firms' competitive abilities and harmed consumers. Regulations were inadequate and they created artificial barriers to entry for new competitors and resulted in a sometimes ambiguous legal framework, a factor which contributed to the formation of monopolies. 1 0

Market Structures: Big Companies in Small

Economies

Import substitution industrialization in a small economy generates significant restrictions to competition, since almost by definition only a few efficiently sized firms can survive given the magnitude of the local market. Latin American countries, after following inward-looking strategies for decades, show highly concentrated markets (see Table 6.2). Table 6.2

Market Concentration in Latin America

Country

Year

Concentration Ratio of Four Largest Firms

Argentina Brazil Colombia Chile Mexico Venezuela

1984 1980 1984 1980 1972 1991

43% 51% 62% 50% 73% 64%

Source: Ana Julia Jatar, "Implementing Competition Policy in Recently Liberalized Economies: The Case of Venezuela," Annual publication (New York: Fordam Institute, 1994).

This characteristic has important implications for antitrust enforcement. First, the probability of cartelized behavior is particularly high under these circumstances, thus surveillance and prosecution of horizontal agreements among competitors represent a high priority for competition agencies. Similarly, dominant firms may exert market control after prices are liberalized by the government. This is particularly true in nontradables and in sectors where potential foreign competition is hampered by high barriers to entry in distribution. There are also implications for merger control. Since premerger concentration ratios are already too high, standards from bigger, more industrialized economies should be used with caution. In the United States, the

Venezuela

103

merger guidelines issued by the Federal Trade Commission and the Department of Justice establish the criterion that a postmerger HirschmanHerfindhal concentration index above 1800 will usually result in an injunction unless other factors suggest that the exercise of market power in the relevant market is unlikely. Germany also has a strict merger control protocol: dominant position is presumed in markets with one dominant firm control (CI) 33 percent, three firms (C3) 50 percent, or five firms (C5) 67 percent. These international standards seem too high to be applied in liberalizing economies. See, for example, the concentration ratios for Venezuela in Table 6.3; no merger could be authorized in any of the sectors if these parameters were used. For a competition agency under these circumstances, the evaluation of the degree of "effective competition" and of the existence—or nonexistence—of barriers to entry are extremely important tests.

Table 6.3

Industrial Concentration for Selected Sectors in Venezuela, 1990 Industrial Sector Steel Tobacco Refrigerators Chocolates Ice cream Batteries Paints Automobiles Banking Textiles

C4.(i) a Cr.(3) Cr.(2) Cr.(2) Cr.(2) Cr. (2) Cr.(2) Cr.(4) Cr.(4) Cr.(4) Cr. (4)

= 100 percent = 84 percent = 91 percent = 91 percent = 90 percent = 98 percent = 73 percent = 80 percent = 42 percent = 47 percent

Source: Encuestal Industrial (Caracas: Oficina Central de Estadísticas e Informática en Venezuela [OCEI], 1995). Note: a. Market share of i number of the biggest companies in the sector.

There are examples of concentrated structures in a wide variety of sectors where interesting mixtures of business dynamics and government controls evolved over years of protectionism. The agricultural sector in Venezuela is a great example of one of them, for a combination of public policy to protect agricultural producers and control consumer prices resulted in an interesting structure and price negotiation dynamic of this sector, where market mechanisms were totally absent for years. Thus, one of the first areas where conflicts started to appear regarding the newly approved Pro-Competition Law was the agricultural sector. The conflict was the result of a market structure characterized by a bilateral monopoly between a highly concentrated processing industry and the highly organized producer associations that used to negotiate with the government over prices,

104

Latin American Case Studies

import quotas, tariff exemptions, and other policy elements. The economic reforms caused the elimination of many of these policy instruments, while the Pro-Competition Law prohibited price agreements. This structure implied that there were no market-determined prices for major crops, but the new regulatory framework required these prices to be generated. The bilateral monopoly had to be broken but in such a way as to take into account the concentrated character of the processing industry and the large number of producers. The solution was to allow producer associations representing no more than 15 percent of the relevant market to agree and negotiate prices in a concerted manner.11 Also, processors were ordered to offer purchase contracts to producers with a publicly announced price (in order to limit discrimination). These contracts had to be made available at the time of planting. This implicit forward-market approach transferred the price risk to processors who could better deal with it. Significant political opposition to this scheme appeared, especially from the national-level leadership of the producer associations. Highly Protected Norttradable Sector Traditionally, the financial service sector has been highly protected from competition forces, either external or internal, as has also been the case with transportation, telecommunications, and retail services. Little competition must be expected from trade liberalization in these sectors. Therefore, an important portion of the cases opened by competition agencies are bound to be in the service sector. The Venezuelan case clearly proves this (see Table 6.4). Table 6.4

Venezuelan Agencies: Percentage of Cases by Sector Sector Trade and services Agricultural Industrial

Source: Pro-Competition Agency, 1992-1993 Agency, 1993).

% 70 13 17 Annual Report (Venezuela: Pro-Competition

Vertical Integration: A Competitive Strategy Followed by Firms Before

Liberalization

During the period of price controls, competitors attended to their rivalries in different ways. Some employed tactical measures, such as price discounts on products or heightened services. Other approaches were more

Venezuela

105

strategic, like product diversification and vertical integration to achieve control over resources and distribution outlets. As a consequence of this, Venezuelan firms, like most firms in recently liberalized economies, became highly diversified and vertically integrated, and most business groups formed big conglomerates operating in a wide variety of markets. 12 After the economic liberalization, these conglomerates tended to reduce their lines of business in order to focus their operations on a few product fields in which they could be competitive. As we will see later, this process complicates the competition agencies' evaluation of the efficiency implications of mergers and acquisitions in an already concentrated environment. Vertical integration into distribution channels by domestic producers limits the ability of importers to reach the consumer and thus reduces effective foreign competition in many markets. Furthermore, vertical integration can become a high barrier to entry for foreign competitors and can delay the impact on consumers of open international trade. There are various examples in Latin America of this delay. In Chile, for example, it has been found that differences between retail and tariff-inclusive prices for a wide variety of products range between 33 percent and 139 percent. 1 3 In Venezuela, a similar situation was found with such products as fish, cheese, sugar, refrigerators, and automobiles. Price Controls Hampered Efficient Resource Allocation and Were Often Used as an Instrument for Social Policy The lack of interest in potential entry at a given price meant that the highly concentrated domestic producers had significant market power. This prompted the government to adopt price controls as a means to limit the exercise of that power.14 To administer price controls, governments found it expedient to negotiate prices on an industry-by-industry basis. Negotiations were carried out with trade associations, where the different potential competitors would meet to agree on price proposals to be negotiated with the government. Hence, collusion and price agreements were not only legal, but were in fact encouraged by the regulatory framework. Governments created monopolies with their trade policy and, at the same time, attempted to control these monopolies through price policy. In Venezuela, the instrument used was maximum retail pricing. According to such policy, all goods had to be stamped by producers while margins for the distribution system were set by discounting different percentages (according to the negotiating power of the wholesaler or retailer) from the price stamped on the package. Besides its impact on market structure, this long history of price controls has left an important list of behaviors and attitudes that both firms and

106

Latin American Case Studies

consumers will have to make big efforts to leave behind. For example, some Venezuelan competitors defend the argument that publishing identical price lists should not be considered a cartelized behavior since these only act as a "reference"; thus companies can compete through either discounts or better service. On the other hand, consumers prefer price controls in order to limit the freedom of companies to increase prices. These preconditions have consequences for liberalizing economies. For many, liberalizing the economy is the same as increasing the power of monopolies. Hence, new competition agencies in these countries are under high political pressure to act against price increases, something they are not empowered or designed to do. Furthermore, when prices do increase for reasons such as inflation, policies oriented to promote competition are immediately blamed. In Venezuela, when the government returned to price controls in January 1994, there was wide public support for the measure since, according to many, excessive free competition had pushed prices up. This last statement proves that competition policy in liberalizing countries involves a considerable effort to inform and reeducate society about how the market system works. Collusion

Was Not Prohibited but Promoted by the State

For many years, Latin American governments were able to significantly affect many aspects of entrepreneurial discretion. Different mechanisms were designed in order to control prices, imports, foreign exchange allocations, and investments to expand production or to enter new markets. The implementation of these policies, besides increasing government discretion over market-based transactions, gave government officials enormous economic power. Depending on their ability to access decisionmakers, firms could either enjoy high monopolistic rents or incur heavy losses. To avoid this risk, companies had the incentive to organize themselves through trade associations. In order to ease the enforcement of controls, the government promoted group, rather than case-by-case, negotiations in order to set prices, allocate foreign exchange budgets, and distribute import quotas. Consequently, trade associations mushroomed in the countries,15 with the objective of bringing competitors together and facilitating concerted practices. Therefore, agreements among competitors, prohibited according to the new competition laws, have been the rule of business in Latin America. Collusive practices are a consequence of the implementation of a highly interventionist policy, where protectionism gives monopoly power to firms, the government reacts with price controls, and the whole system is negotiated through cooperative arrangements among potentially competing firms. Since firms do not feel they are doing anything wrong when they negotiate prices or market shares, the enforcement of pro-competition legisla-

Venezuela

107

tion requires important promotion and educational efforts in order to make punitive actions understood and accepted. In fact, the first firms to be prosecuted feel persecuted by the pro-competition agencies. Managers feel that, after all, they are just acting like everybody else.16 Latin American countries bear great similarities with former Communist countries on these issues. Collusion habits have been mentioned by many Eastern European analysts, as indicated by the following: "The introduction of competition requires the dissolution of traditional collusive practices. Managers must learn to compete or new managers must take their places."17 Changes in conduct and attitudes must be considered a major goal in competition policy. As such, the general public has to be convinced about the benefits of the legislation, while punitive actions should also be undertaken with the purpose of effectively changing behavior. In other words, the actions initiated by a competition agency require an important communicational effort; opinions and decisions must be given to the public with a clear analysis of the relevant issues. If these efforts are not taken seriously and the emphasis is placed on punitive actions, the agency runs the risk of mistakenly positioning itself as an inquisitive tribunal and therefore possibly losing political support. Another issue has to do with exaggerated expectations by the political system and by public opinion about what can be reasonably expected from competition policy. In particular, inflation is usually confused with monopoly pricing, and pressures concentrate on the agency to punish companies for raising prices. Moreover, efforts made by more efficient firms to maintain competitive prices can be considered by competitors as "predatory pricing."18 The Legal and Institutional Framework Was Designed for a Rent-Seeking Society: The New Legal Order has to Fight Its Prevalence over the Older Decades of paternalism in Latin America contributed to the erection of an institutional and legal structure that is in clear conflict with competition standards. Thus, for the institution responsible for promoting competition in a recently liberalized economy, deregulating the economy and opposing past and present governmental actions that may collide with competition principles become major issues. In fact, they very quickly become the issues absorbing most of the time and effort of the newly created agency. For example, according to the 1992-1993 annual report of the Venezuelan Pro-Competition Agency, more than 60 percent of its time in those years was devoted to analyzing and proposing reforms to current regulations that were in clear conflict with the country's Pro-Competition Law.19 This function as a deregulatory and competition advocate body is not

1 08

Latin American Case Studies

common to all traditional market-oriented economies; therefore, one seldom finds explicit mention of these roles and needs in regulations inspired by legal initiatives of the the United States or Europe. Nevertheless, for recently liberalized economies, it is the most important function, since traditional antitrust enforcement cannot be accomplished if these issues are not taken seriously. Deregulation and competition advocacy should be explicitly established in antitrust regulations as essential elements of competition policy. In fact, the most dramatic weakness of the Venezuelan ProCompetition Law is that the Pro-Competition Agency has no effective advocacy powers to stop government actions, especially new regulations, that have the objective of restricting competition. 20 This lack of effective advocacy power is even more critical when the newly created agency has to confront important lobbying efforts from sectors that constantly fight to continue protectionism. As another example, the Comisión Federal de Competencia (Federal Competition Commission) of Mexico states in its 1993-1994 annual report: U n l e s s the regulatory authorities coordinate their actions with those of the c o m p e t i t i o n authorities, the latter's efforts will not y i e l d the e x p e c t e d results. It is very important that regulatory authorities abstain from issuing rulings, orders or other types of provisions that restrict the entry of n e w competitors or create e x c l u s i v e advantages for a selected group. In the future it will be increasingly important to incorporate competition criteria in the regulatory authorities' conduct, and in the c o n c e s s i o n and permitgranting process. 2 1

This commission has participated in the discussion of several laws and has formally given opinion on different government decisions regarding the regulation of the communications sector, the decentralization of ports, the instrumentation of import and export quotas, the use of trademarks, and concessions to operate railroads, among other debates. The diversity of issues for which a competition agency has to actively advocate imposes high demands on the technical capabilities and the time of its professionals. The situation in Hungary, to take yet a final example, seems to be similar: "Experience shows that the [Competition] Office is anything but a 'sleeping partner' in preparing legislation. The principle of competition which we represent is still looked upon as a sensitive issue which the state bodies wish to avoid." 22

Competition Advocacy: The Case of Venezuela The Pharmaceutical

Sector

In Venezuela, part of the initial advocacy work of the Pro-Competition Agency was to promote the change of regulations that restricted competition in the pharmaceutical sector. The professional association of pharma-

Venezuela

109

cists was instrumental in creating barriers to entry to retail activities. These barriers included administrative obstacles and red tape blocking the establishment of new pharmacies, limitations on the minimum distance between individual pharmacies (250 meters), and restrictions regarding the sale of nonprescription drugs and the allowed number of after-hours operation per week. The Pro-Competition Agency successfully proposed a change in the bylaws. The association of pharmacists reacted by appealing to the Supreme Court over the legality of the new regulations and by calling for a boycott of all pharmacies and pharmacists who would take advantage of the expanded opportunities by opening new stores, selling nonprescription drugs in nonpharmaceutical stores, and staying open after-hours. The Crisis of Institutions and

Competition

The transition process to a liberalized economy is more severe for institutions and firms that were directly set up to create cooperation among potential competitors. Such is the case of the Venezuelan Distributor of Sugar company, commonly known as the DVA. 23 The DVA was created to monopolize the distribution of sugar and to share the rents between producers and processors. This was the paradigm of cooperation and understanding between producers and agribusiness, which was often heralded to be followed by others. In fact, after the economic liberalization, when conflicts began to appear among atomized producers and processors in the negotiations of cereals, the DVA was often mentioned as an example to be emulated. As a result of the concern raised among retailers and consumers, the Pro-Competition Agency initiated a preliminary investigation of the DVA in early 1992. The main line of defense followed by the executive of the DVA was that the distribution network built up by the company over the years was an "efficient" distribution system that afforded important savings to both producers and consumers and granted a "uniform price across the national market." The Pro-Competition Agency concluded that if the DVA was indeed an efficient structure, it would not need to maintain itself by restricting the opportunities of its members. Hence, the agency forced the DVA to eliminate the obligation of sugar mills to consign their products to the DVA and its ability to fix prices. Since this action was taken, new wholesalers have appeared and the DVA has confronted a crisis, since its members no longer see the need for the existence of the organization. Conflicts with Other Existing Legal Structures The legal f r a m e w o r k that was created in Venezuela to support state dirigisme can be changed only by new laws and bylaws or by judicial decisions, which may support deregulation on a case-by-case basis. In both sit-

110

Latín American

Case Studies

uations, the process is likely to take years, given the wide variety of legal instruments that contain outright restrictions to competition and barriers to entry. Some examples of this in Venezuela are the Agricultural Marketing Law, the Banking Law, the Insurance Law, the Capital Markets Law, the Pharmaceutical Profession Law, and all professional collegiation laws. According to the 1975 Venezuelan Capital Markets Law, for instance, the members of the country's stock exchange must agree on a fixed commission, which must be subject to approval by the Venezuelan Securities and Exchange Commission (SEC). The law also places a limit on the number of exchanges allowed to operate in Venezuela: one exchange per city. The law states that stock exchanges in Venezuela must consist of limited liability companies on a one-share/one-seat basis, so that their members are the only ones authorized to take part in the market. Overall, this regulatory framework provides a shielded monopoly position to both the stock exchange and brokers. In the last quarter of 1992, the Pro-Competition Agency showed concern about the concerted price-fixing practice among brokers, which was in open contradiction with the Pro-Competition Law, and raised this issue with its regulatory body, the SEC. The SEC decided in favor of the agency's criteria and revoked any former regulatory action that could constitute a restriction on independent pricing by stockbrokers. This was an important precedent in the agency's role as a competition advocate. Different

Ethics

To orchestrate policies that stimulate competition in Latin America is not a short-term project. To change a rentist society into one based on competition consists of more than just applying antimonopoly legislation. To promote competition implies, among other things, the guarantee from the state that all economic actors enjoy the same opportunities and conditions. In order to accomplish this in most Latin American countries, substantial changes in the fundamental ethical values of society are required. In this case, to make competition policy is to promote social change. According to the Aristotelian conception of the state, ethics and politics are intimately linked. Ethics consist of a system of values, as do the conceptions of good and bad, with which the set of socially acceptable rules is defined. The role of the state is to orchestrate the good, defined by the ethics, and manage the social coexistence according to the accepted rules. In countries with a long tradition of state protectionism, ethics is one of the greatest limitations impeding the promotion of competition as a type of state regulation. In these countries, a very peculiar ethical code prevails that makes it difficult to sustain competition and recognize as just those government actions related to it. Among others, two sociopolitical condi-

Venezuela

111

tions have designed patterns of behavior that collide with a system of competition, equality, and economic liberty. First, most large businesses in Venezuela continue to be family owned. In addition, the members of these families generally marry among themselves, creating an intricate socioeconomic weave. After years of intermarriages and of business diversification, there are more boards of directors than directors. Thus, club reunions and birthday parties serve as a time to discuss business strategies, and board meetings serve as a time to discuss family matters. This is why such Latin American expressions as "Gentlemen's agreements have to be respected" and "You never fight with your family" have a particular impact on business behavior. In the words of Amitai Etzioni: Where social bonds are very powerful, encompassing, and tight, economic competition is likely to be restrained, if not suppressed. For example, members of a close knit family find it difficult to charge one another for services rendered, and to engage in economic transactions and competition. This is one reason why market economies tend to be limited, if not absent, in small, highly communal, tribal societies. 24

Second, the existence of a rentist state has imposed on the private sector the necessity for organizing and mobilizing politically so that it can be first in line to benefit from rent distribution. In order to be successful in doing so, it was necessary to achieve the political power to use the government to increase the profits at the expense of the public, in comparison with others with less political power. In this way, a particular ethical code was based not on the equality of all economic actors in front of the state but, rather, on the rights of certain groups vis-à-vis the state and of those powerful groups above the rest. Thus, the state legislated for the benefit of some: only cotton producers could import cotton, only reporters could write in newspapers, only one stock exchange was permitted in each city, only trade associations could negotiate prices, and so on. These influential groups penetrated the state to satisfy their private interests. In this context, it should not be surprising that competition policy has given rise to suspicious comments in different sectors. For some businesspeople, competition policy is the result of the "socialist ideas of those who hate the rich." For some trade associations that historically benefited from lobbyist activities during long years of state intervention, competition policy is "for the benefit of the big monopolies." For local producers facing competition from imported goods, "the agents of competition policy are the pawns of multinational interests." The defense of the atomized public interest is a suspicious activity in societies that have traditionally been motorized by private interests. That is why, in Latin American societies, the public interest is an abstract concept only understood as the sum of private

112

Latin American Case Studies

interests; but in the process of social modernization, the ethical principles of society become more universal. Latin America has initiated that process.

Policy Recommendations Based on all of the preceding arguments, I recommend that countries with liberalizing economies take into consideration the following issues when implementing competition policy. 1. Competition rules must be simple and straightforward. They must include a general prohibition for horizontal agreements among competitors, where price cartels must be prohibited per se. This implies that only proof of the conduct should be necessary without requiring analysis of the negative impact on competition. 2. The prohibited conducts should establish clear differences between agreements among competitors who are trying to restrict competition and vertical restraints (among buyers and sellers or unilateral actions) that are usually made for efficiency reasons. Such is the case of exclusive dealings, franchises, and some types of tying agreements for products or services. In the Mexican law on competition, for example, this differentiation is clearly made, as it separates "absolute" prohibitions (e.g., the horizontal anticompetitive behaviors mentioned above) from the "relative" prohibitions that deal with vertical restrictions.25 These distinctions permit competition policymakers to concentrate their efforts on clear cases of cartelized behavior and to avoid indecision in cases where the anticompetitive effects are difficult to evaluate. 3. Regardless of this second recommendation, decisive competition enforcement must be used when dominant firms are hampering potential foreign competition by engaging in vertical practices to exert tight control of distribution channels. 4. In merger controls, standards from more industrialized countries should be used with caution, but strong enforcement must be imposed in cases where firms use mergers as a strategy to continue growing without competition pressures. 5. High priority should be assigned to nontradable sectors and quasinontradable products such as perishables and those with low price/volume ratios (e.g., paints, beverages), since potential foreign competition will have little, if any, impact on local firm behavior. 6. The competition agency must be empowered to perform with energy and efficiency its role as a competition advocate and as a deregulatory body. The law must clearly state the agency's competence to challenge decisions emanating from other government agencies that are in conflict with competition principles. This function is so important as to require the seventh recommendation.

Venezuela

113

7. The competition agency must enjoy total independence from other entities of the executive power in order to be able to appeal to the Supreme Court when necessary. This independence of the enforcement authority is important to reduce political and interest group pressure. 8. It is crucial to provide the competition policy agency with an adequate institutional structure. In this respect, experience suggests that the deciding body should be a commission or a committee rather than an individual. This has the following advantages: first, it is more difficult to influence the decision of three or four individuals than that of a single decisionmaker; second, since the decisions of the agency are usually made against powerful and influential groups, attacks from these sectors are easier to manage if there is a collegiate body instead of an individual as the focus of the attack. 9. Governments have been deregulating the economy and eliminating rent-related activities. The opening of local companies to foreign trade is promoting important structural changes on big family-owned businesses. Nevertheless, important policy efforts must also be made to encourage family-owned companies to be opened to the public. If in former Communist countries the trend is "to go private," then in Latin America it should be "to go public." 10. Due to the lack of jurisprudence and legal tradition in competition matters in most Latin American countries, it is better for specialized institutions to establish administrative procedures for case decisions than to rely on the judiciary or the regular court system. 11. Finally, making the transition from a rent-seeking to a competitive society is a long-term project. An important part of competition policy is to inform and to explain to the business community and to the public at large the benefits of competition. Even in a mature democracy such as Venezuela's, the regulatory agency must be protected as much as possible from susceptibility to lobbying and corruption by creating a commission independent from executive power and electoral politics, simplifying competition regulations, and making the enforcement of those regulations predictable and transparent. While various actors may initially view these policies as discriminatory, making the process public and open will create a stable environment for investment and will garner the public support necessary for effective implementation of the policies. The Mexican case examined in the following chapter further exemplifies the importance of fostering this degree of transparency in the implementation of competition policies. In a state-run patronage system such as Mexico's, corruption has become so endemic that it is widely considered a necessary expense of doing business in Mexico. Foreign companies investing in Mexico often budget for the mordidas, or bribes, to make the wheels turn smoothly. Obviously, to create truly competitive markets that encour-

114

Latin American Case Studies

age new investors to enter, such practices must be replaced by open, predictable policies that create an environment of stability and confidence.

Notes 1. R. Shyam Khemani and Mark A. Dutz, The Instruments of Competition Policy and Their Relevance for Economic Development (Washington, DC: World Bank, 1994). 2. Oil tax revenues mounted during the early 1980s to U.S.$1,800 per capita. This compares with total gross domestic product per capita of U.S.$3,000. 3. The collapse in oil prices and rising production costs made tax revenues decline to U.S.$300 per capita from U.S.$1,800 earlier in the same decade. 4. A market-determined free rate also existed with a premium of 100 to 200 percent over the highest official rate. 5. Among others, these categories included bread, milk, cooking oil, corn flour, coffee, toothpaste, soft drinks, pasta, ice, beer, hotel room laundry services, parking services, tomato sauce, theaters, medicines, and toilet paper. 6. Venezuelan Constitution, Art 95. 7. The complete text of Article 96 of the Venezuelan Constitution states: "Everyone may freely engage in any lucrative activity, with no other limitations than those provided in this Constitution and those established by law for reasons of safety, health or social interest. The law shall enact norms to impede using undue price increases and in general, abusive maneuvers directed toward obstructing or restricting economic liberty." 8. For 1939 marks the year when President Lopez Contreras, on the threshold of World War II, decided to suspend these guarantees. See Allan R. Brewer Carias, Evolución del regimen legal de la economía, 1939-1979 (Caracas: Editorial Jurídica Venezolana, 1980) p. 9. 9. Governments have not been timid in using this power. Between 1939 and 1945, forty decrees were enacted to regulate the economy. Between 1945 and 1948, the Revolutionary Junta passed a total of thirty-seven decrees on economic matters. In the democratic period initiated in 1958 to date, there has been an explosion of decrees; 109 decrees to regulate the economy were passed between 1974 and 1979. 10. Comisión Federal de Competencia, Annual Report, 1993-1994 (Mexico: Comisión Federal de Competencia, 1994), p. 14. 11. Some new discussions are currently taking place between the Ministry of Agriculture and the Pro-Competition Agency to increase this percentage. There is an important threat that the Pro-Competition Law might be changed in order to exclude the agricultural sector, due to heavy political pressure orchestrated by the national-level producer organizations. 12. Antonio Frances and Lorenzo Davalos, eds., La corporación en 4 dimensiones (Caracas: Ediciones Instituto de Estudios Superiores de Administración [IESA], 1992). 13. M. Dutz and S. Suthiwart-Narueput, "Competition Issues Beyond Trade Liberalization: Distribution and Domestic Market Access" (Washington, DC: World Bank, 1994, mimeographed). 14. Despite price controls, inflation rose to 42 percent in 1987. See Moisés Nairn, Paper Tigers and Minotaurs: The Politics of Venezuelan Reforms (Washington, DC: Carnegie Endowment for International Peace, 1993). 15. There are over 500 trade associations for large- and medium-sized manu-

Venezuela

115

facturers and commercial businesses. On average, one company belongs to four of them. The mission of these organizations is to provide companies with access to relevant government agencies. These associations are currently facing the problem of finding a new role within the recent liberalized system; an important number of them will have to disappear. See Ana Julia Jatar, Rivalry, Competition, and Public Policy (Caracas: Instituto de Estudios Superiores de Administración, 1993). 16. During the preliminary investigations on the first price-fixing case, a manager commented: "We never violate agreements with our competitors, but of course not all of us are the same. There are some companies who are run by people who have never respected a gentlemen's pact." 17. S. Estrin and M. Cave, eds., Competition and Competition Policy: A Comparative Analysis of Central and Eastern Europe (London: Pinter, 1993). 18. Predatory pricing is conceptualized as a firm reducing prices below costs in order to eliminate competitors. 19. Arguments about which regulations prevail over others are decided only by the Venezuelan Supreme Court. 20. As has been wisely stated in the new Argentine law on competition. 21. Comisión Federal de Competencia, Annual Report. 22. F. Vissi, "Hungary's Experience of Competition Policy," in Estrin and Cave, eds., Competition and Competition Policy, p. 23. 23. According to Presidential Decree 977, dated June 1975, every sugar refinery had to give 100 percent of its production on consignment to a single organization, the DVA, a distribution monopoly, for its further distribution and sale in the Venezuelan market. This single distributor was founded in 1956, and its shareholders comprised eighteen sugar refineries, both state owned and private. The DVA performed most wholesale functions within the distribution channel, including transportation, financing, and collecting. Forty percent of the net price went to refineries and 60 percent to sugar producers. 24. Amitai Etzioni, The Moral Dimension (New York: Free Press, 1988), p. 211. 25. Secretaría de Comercio y Fomento Industrial, Ley Federal de Competencia Económica, Diario Oficial de la Federación, December 24, 1992.

7 The Lessons of Mexico's Antitrust Initiative A. E. Rodriguez

Mexico's ruling party has controlled the presidency and, until very recently, the legislature since its creation in 1929. To support party legitimacy and maintain stability in the country, the Institutionalized Revolutionary Party (PRI) has developed an elaborate system of state patronage, funded largely by the state-owned oil industry. Indeed, since the Mexican Revolution (1910-1917), Mexico has been one of the most stable countries in Latin America. However, the system of institutional patronage, in which the PRI had the power to hand out government contracts such as those for labor, construction, and utilities, also encouraged deep-rooted corruption and bribery that became a part of quotidian experience in Mexico, permeating everything from business deals to law enforcement. Most Mexicans consider the mordida a part of everyday life, paying small bribes to get into nightclubs, out of traffic tickets, and through the trámites created by an overwhelming state-supported bureaucracy. However, following the precipitation of the debt crisis in 1982, Mexico was forced to pursue a dramatic austerity program to recover investor confidence and repay its debts. Under the leadership of technocrat President Miguel de la Madrid (1982-1988) followed by the presidencies of Harvardtrained economist Carlos Salinas (1988-1994) and Yale-trained economist Ernesto Zedillo (1994-present), Mexico has privatized numerous industries and, particularly with the implementation of the North American Free Trade Agreement (NAFTA), lifted trade barriers and actively encouraged direct foreign investment. While there have been serious problems of nepotism in the sales of state-owned industries and continued accusations of corruption in government agencies, Mexico is clearly moving toward a more open system, both politically and economically. As part of this effort, the Mexican government has attempted to model competition policies after those adopted in the United States and the European Economic Community. Given the success of these two regions in promoting competition and the importance of encouraging investor confi117

118

Latin American

Case Studies

dence in Mexico, these models made sense. In 1993, Mexico passed the Federal Law of Economic Competition (LEC), 1 which created the Federal Competition Commission (FCC), an agency charged with enforcing competition laws, including the investigation and prosecution of potentially illegal mergers and horizontal and vertical constraints. 2 Despite any direct and indirect benefits conferred, conventional "Western" antitrust—the principal objective of which is to deter monopolistic practices—may not be the appropriate instrument to address the most significant competitive challenges facing economies in transition: the prevalence of rent-seeking behavior 3 and the influence of protectionist forces. 4 Instead, undertaking the nontraditional strategy of challenging rent-seeking anticompetitive pressures, rather than pursuing a conventional enforcement agenda, a competition program benefits the liberalization. In fact, if the agency responsible for the program fails to shift its priorities to face the more pressing dangers posed by domestic protectionist groups, the agency's activities may work against the liberalization process. 5 In this essay, I argue that traditional antitrust policy is unsuited to successfully challenge the competitive problems that emerge due to the persistent and p e r v a s i v e i n f l u e n c e of r e n t - s e e k i n g b e h a v i o r in transition economies. 6 I examine the Mexican experience and find guarded support for the claim. As there is no reason why the analytical framework provided here should not illustrate the situation in other countries that share a historical evolution similar to Mexico's, the general conclusion that emerges is that antitrust in transition and reforming economies is a policy that may best be left for the long run. This chapter is organized as follows. The first section provides an explanation of the role of competition policy within the broader set of Mexico's recent reforms. The next section contains a discussion on the i m p o r t s u b s t i t u t i o n i n d u s t r i a l i z a t i o n (ISI) m o d e l ' s d i s t i n c t role in Mexico's economic development and its competitive consequences. The institutional baggage accumulated during the years in which the ISI was the reigning economic paradigm has not been completely discarded. The third section recounts the conventional understanding of antitrust policy and its objectives as adopted by many r e f o r m i n g e c o n o m i e s and as reflected by the FCC's enforcement, direction, and policy. Section four explains how emphasizing enforcement rather than advocacy will only result in nontariff barriers being substituted for antitrust policy and thus provides a theoretical rationale to the unwitting shifting of priorities. I provide some information that appears to support the contention that the F C C may have shifted resources f r o m conventional e n f o r c e m e n t to emphasize competition advocacy, as the model would predict. In the last section, I conclude and cull some of the lessons to be drawn for other reforming economies. 7

Mexico

119

The Role of Antitrust W i t h i n the Liberalization Process

The core objective of Mexico's recent broad economic reforms was to transform itself by lessening the state's historical influence in the economy. The major accomplishment of the traditional ISI economic model, which relied heavily on the intimate collaboration between the government and the private sector, was to embed any number of competitive distortions. In its first annual report, the Federal Competition Commission noted: For many years, the Mexican economy operated in an environment of substantial protection and strong state participation. As a consequence, opportunistic behavior emerged in many sectors, often with the cooperation of the authorities. The belief was that protection and regulation would produce a strong industrial sector responsive to society's needs. But on many occasions results were other than those intended. Protection reduced firms' competitive abilities and harmed consumers. Regulations were inadequate as they created artificial barriers to the entry of new competitors, and resulted in a sometimes ambiguous legal framework, a factor which contributed to the formation of monopolies. 8

The success of Mexico's plan rested heavily on privatization to increase the transactions costs of obtaining government subsidies and government protection from competition. 9 Mexico's antitrust reform was but one of a number of planned economic reforms that were consistent with the broad set of guidelines known as "the Washington Consensus" 10 and supported by a number of prestigious scholars, practitioners, and other organisms.11 The FCC, which views as its mission "to protect the process of competition in the Mexican market and enhance economic efficiency," 12 developed within this broader agenda a clear understanding of the implications of distortions inherited from years of state intervention. "The Mexican economy has inherited a substantial number of business activities where competition has been needlessly curbed. This may have a negative effect on efficiency and equity for many years to come." 13 But despite its awareness of the potential threats to competition and to the liberalization process posed by protected groups, the commission may have been initially unprepared to address the particular competitive challenges of the transition. This was a consequence of several related reasons. Lacking any real sense of the political forces arrayed both in support of as well as against the competition initiative, the commission may have been naturally cautious. The FCC was also given little time to organize and train its staff and arrange necessary logistics. In fact, the law was passed in December 1992, and the FCC opened for business in June 1993.14 It is also possible that the conventional antitrust model adopted from the West did

120

Latin American Case Studies

not reflect any of the more immediate transition problems facing Mexico. Although the other factors mentioned above are of great importance in gauging the actions and future effectiveness of the commission, here I will undertake an examination of only the last point: the limitations brought about by reliance on the Western model of antitrust. Mexico's LEC shares a similar core of objectives with antitrust legislation in the United States, the European Union (EU), and most other Western antitrust systems. 1 5 Drawing on the collective experience of Western nations, Mexican competition policy consists of two broad areas: enforcement of laws proscribing monopolistic practices and competition advocacy. 1 6 As is typical in most Western programs, the competition agency's competition advocacy program took a secondary role to the FCC's other functions. When developing competition law and elaborating its policy, the FCC solicited the input of experts, practitioners, and commentators, which provided guidance on the proper scope and content of legislation and enforcement practices. 1 7 With little experience on whether transition problems warranted any additional considerations beyond the conventional antitrust methodology, the underlying assumption underscoring many of these recommendations appeared to be that antitrust was easily transferable. 18 The task of recognizing the unique competitive problems of the transition and the incorporation of domestic or idiosyncratic elements into the agency's competition policy was left largely to domestic experts and to the competition agencies themselves. 1 9 The "creolization" of antitrust, as Ana Julia Jatar of Venezuela's Pro-Competition Agency once dubbed this task, resulted in significant adjustments in legislation and practices. As a result of this learning, early antitrust export recipients such as Venezuela and Russia have recently moved to revise competition legislation. 2 0 Others, as has Mexico, appear to have chosen to retain the basic legislation and to redirect policy to confront significant domestic problems. 21 Such a shift may not be easy. The U.S. 1995 Economic Report of the President, for instance, which provides forceful support for the idea that competition policy can be harnessed to increase the benefits of trade liberalization, 22 also raises one of the most visible limitations of such an initiative: "antitrust laws in some countries do not cover government-owned firms, and anti-trust laws seldom apply to other government activities." 23 It offers no means of surmounting the problem. To be sure, the LEC contains provisions stating that all "economic agents" (defined to include local, state, and federal government agencies) fall within the law's jurisdiction. 24 And although the FCC has taken action against government agencies, as we will see later, it is not clear that the commission enjoys the political support and willingness of the nation's leaders to continuously challenge government actions. 25

Mexico

121

Mexico's Economic Legacy For a good portion of its recent history, Mexico based its industrial policy not on market principles or on free competition but, rather, on policies that justified more intense state control over the economy. Although the import substitution industrialization model became the prevailing approach from the 1950s to the late 1970s, earlier periods reflected equally burdensome, anticompetitive, government-sponsored policies. 26 Over the years, the inward-looking ISI and predecessor policies did little to foster an efficient industrial sector but, instead, adversely affected its structure, conduct, and performance. Throughout the ISI period, imports were restricted through numerous mechanisms, including tariffs, permits, import licenses, export subsidies, export drawbacks, foreign exchange controls, and the institution of "official prices" as a basis for setting tariffs. 27 Official tariff policy contained features including the active collaboration between the secretary of finance and domestic competitors in setting tariffs. 28 These instruments of trade policy either severely restricted or altogether eliminated the disciplining effect of imports and negatively influenced both the structure and performance of domestic firms. 29 Not surprisingly, the expectation of continued government protection, rather than the encouragement of domestic firms to enhance their international competitiveness, forged an increasingly noncompetitive and highly inefficient industrial sector. Prices of both intermediate and final goods were frequently regulated and often explicitly set by the government. Industrial policies regulating market entry and even expansions of productive capacity were instituted. Price controls stimulated active cooperation among domestic producers and resulted in industry-wide efficiency levels established by the performance of the most inefficient producer. Similarly, other types of market regulation imputed their own perverse effects on structure. On the one hand, these policies resulted in high barriers to entry that discouraged potential entrants. Alternatively, even entrants that were able to navigate bureaucratic hurdles were not assured of entry into the market. Production permits still depended largely on development policy priorities of the current government. The resulting arbitrariness due to the lack of a clear and consistent system of granting permits fostered intense corruption and rent-seeking behavior. 30 Accordingly, while government permits often were bundled with favorable credit terms and foreign exchange concessions, at other times they were meant to diminish investment in selected geographic and industrial sectors. This resulted in artificial increases in concentration in various activities across sectors and regions. Some exports were deliberately discouraged by requiring export permits, while, simultaneously, other products were granted export credits and

122

Latin American Case Studies

foreign exchange credits for imports of raw materials and capital goods, as well as favorable credit terms. 31 In addition, this infrastructure of contradictory incentives was frequently altered, often providing exporters with no more than a couple of weeks to establish their export plans. The distortionary effect of sectoral subsidies also affected the performance of Mexican industry. Arbitrary movements in relative prices would affect substitutes or greatly disadvantage one sector over another. In this manner, certain sectors grew at the expense of others, concentrating domestic production in the process. 32 Another influential element in the Mexican industrial scenario was the direct participation of the state in the economy through parastatals, or government enterprises. 3 3 The state's enterprises typically maintained the exclusive right to domestically manufacture certain products and often limited imports of competing products. These policies resulted in highly concentrated industries, which, in turn, resulted in substantial inefficiencies: supracompetitive prices, misallocated resources, and costly production due to reliance on inefficient technology. Exchange rate policies also adversely affected the performance of the industrial sector. There was very little of a simple nature with respect to the exchange rate. A multitiered exchange rate structure subject to repeated, unpredictable, and arbitrary changes was the norm. Government agencies administered the granting of preferred exchange rates for imports of raw materials without clearly established, predefined criteria. To reduce the transaction costs of handling thousands of requests, these government agencies encouraged cartelization by recommending that required budgets of applicants be jointly filed through manufacturing associations. By the early 1980s, the Mexican government appeared to have realized the limitations and constraints of the ISI model and determined that the best path to achieve an optimal allocation of resources would be through the dynamics of competitive markets. To achieve this objective, in the mid1980s, the government resorted to an aggressive price liberalization policy, the elimination of currency controls, a reduction or elimination of tariff barriers, and a vigorous privatization and deregulation program. Necessary steps were taken to curb inflationary pressures and inflationary expectations. Import competition was used as a key instrument to control price increases in tradable products. 3 4 The government pegged the foreign exchange rate to the U.S. dollar, liberalized trade, and promoted foreign investment, which resulted in a surge of imports and foreign money. These inflows soon created such a demand for the peso that it became overvalued. Faced with a growing domestic market and an appreciating real exchange rate, entrepreneurs had no incentive to sell abroad. The peso's overvaluation stimulated imports to the point that the trade deficit soon became a critical destabilizing factor. The influx of cheaper and often better-quality imports resulted in a rapid consolidation of domestic producers

Mexico

123

as the higher-cost and more inefficient firms disappeared. The remaining producers, however, found themselves at a competitive disadvantage as the flow of cheap imports continued. Not surprisingly, in search of a way to alleviate competitive pressures, domestic producers lobbied the government incessantly for a devaluation and other relief measures. 35 The government resisted such pressures for a number of reasons, including the perception by Mexican officials that a devaluation would kill the chances of the U.S. ratification of NAFTA, which had been under severe scrutiny in the Congress. 36 By 1994, devaluation became less of an option in light of the possibility that the PRI's candidate would lose an election for the first time in sixty-five years. 37 However, in December 1994, the government was forced to devalue the peso, and the liberalization process suffered its dramatic setback. The Anticompetitive

Consequences of the ISI Model

The constraints imposed by the ISI model necessarily required explicit and persistent relationships between the state and its client groups. 38 The state favored collaboration with a reduced set of interest groups because this minimized the direct costs to the state of administering specific program directives. State-client relationships were also mutually convenient arrangements for sharing the adjustment between actual and expected conditions in order to reduce the costs of adjustment for both parties. 39 Naturally, trade associations, regional interests, labor unions, and other such groups became the official voice for any producer that wished to benefit from state largesse. Thus, these groups gained significant influence and prominence because of their valuable function to both the state and domestic producers. On the one hand, they reduced the number of participants present in price setting and similar negotiations with the state; on the other, they provided an effective medium for furthering their members' interests. 40 Long-term relationships between the state and interest groups, and those among interest group members themselves, built significant transactor-specific human capital, the purpose of which was to provide stability by insuring against opportunism and holdups. Over time, significant quasi rents resulted from this collaboration as firms invested in plant, capital, product mix, product quality, and other aspects of competition. These investments embodied the expectations and information derived from the strength and durability of specific relations. Assured of continued protection from foreign or domestic competition, the industrial structure reflected an inefficient cost structure, high concentration, and a smaller minimum efficient scale and scope due to the smaller size of the domestic (and only) market. Naturally, the value of the plant depended on the continuation of the relationship between the interest

124

Latin American Case Studies

groups and the state, which itself depended on the economic model the state had adopted. Thus, the fortunes of a large portion of the productive infrastructure were tied to the political-economic model of the ancien regime.41 A proportion of total capital commitments made under the old "rules of the game" will persist after the liberalization as fixed yet-to-be-amortized investments. The sudden opening of the economy and the removal or reduction of old rent-distributing mechanisms lowered the value of these investments. Aspects of these investments—minimum efficient scale, scope, technology, management structures, and others—were idiosyncratic to the conditions of the preliberalization regime and predicated on the assumption of continued protection and a regulated economy. The value of these portions of invested capital could not be readily transferred to the new liberalized regime and hence become a sunk cost. As is the case with specific capital, the value of the capital is directly tied to the intended use. Postliberalization, as the relationship between the state and the private sector was altered, the value of most of this capital tended to dissipate. Owners of this capital recognized that the value of their assets was directly dependent on returning to the previous protected regime or one that closely resembled it. In this sense, the memory embodied in the capital influences the present-day performance of producers. 42 Intent on preserving the value of this sunk capital or preventing its slow erosion, firms solicit "temporary" protection or other forms of preferential treatment from the government. This protection of preferential treatment often takes the form of nontariff barriers. Postliberalization, then, domestic producers have the following nonexclusive choices: they may seek rents, either from the government or by organizing a cartel; or they may reinvest and replace obsolete capital. An important element in choosing to seek nontariff barriers, rather than to replace their capital, is the continued existence of the old industry and other interest groups. To the extent that the specific capital—for example, goodwill—cultivated by years of collaboration has not fully dissipated, the costs of seeking preferential treatment will be lower. It is distinctly possible, therefore, that this latter avenue may be the less costly alternative available to the domestic industry. The presence of sunk capital has not been a deterrent to successful transition elsewhere. The United States, for example, successfully reformed its telecommunications and natural gas industries, both of which had considerable amounts of specific capital reflecting old and protected rules of the game. Indeed, analytically, the situation in the United States was very similar to the one in Mexico. However, the difference between the two situations lies in the relative influence of that portion of capital that is still profitable. As with all capital, the value of the nonspecific portion of capital

Mexico

125

depends largely on the expectation of its future profitability. With better accessibility to new technology and the possibility of increases in productivity, any improvements in the value of this capital are tied to the fortunes of the new regime and the prospects of future growth. Thus, on balance, the decision on whether to seek state concessions or to replace obsolete capital turns on the likelihood that a firm, or the industry's net value, is higher under the new regime. The expectation of growth bolsters the relative influence of the nonspecific capital components, while the expectation of an economic downturn increases the importance of sunk costs and drives the decision to seek rents rather than to compete. Another important and interrelated dimension of this scenario is the presence of specific human capital. To the extent that this preliberalization generation of managers—with its archaic management habits and other traits—is entrenched and unwilling to relinquish control or perhaps unable to find adequate managers due to the unavailability of trained professionals, its interests will be tied to the continuity of the old rules. Put differently, the human capital of these managers is sunk vis-à-vis the new regime. To the extent that old managers exert their influence and prevent management changes, their highest value—and, therefore, their incentive—is to seek preferential treatment rather than face the new competitive arena. The older management establishment still embodies much of the specific capital retained from the prereform days when the private sector worked closely with the state regulatory institutions. As this specific human capital dissipates, the relative costs of seeking preferential treatment may increase. Only when the value of human and nonhuman sunk capital has declined sufficiently will the prospects of change improve. As described above, the once-fashionable ISI model has inherent capitalized inefficiencies. To the extent that this capital has not been fully depreciated even if it is possibly completely devalued, there remains a strong incentive for capital owners to prevent any further dissipation of their rents through the resurrection of state protections. 43

Competition Policy: A Primer Antitrust's underlying organizing principle, based directly on economists' understanding of the optimizing properties of competitive markets, is intuitively and theoretically simple. 44 Competition ensures that the prices paid by consumers are equivalent to the marginal costs of producing individual goods and services. By improving the quality and furthering the flow of goods and services, a competitive market economy seeks to benefit consumers. Markets present buyers with a choice of goods and services from independently acting suppliers. Naturally, if buyers had but one choice, firms could price supracompetitively. In other words, with no competitors

126

Latin American

Case Studies

to restrain it, a sole producer could restrict output and raise prices above cost. From this perspective, the role of competition policy is simply to deter business transactions and practices that undermine the competitive process. Through a few highly general provisions prohibiting certain forms of private commercial conduct, 45 the antitrust laws lay out a framework for promoting economic goals by limiting allocative inefficiency in the economy. 46 "Market power" refers to the ability of a supplier or a group of suppliers acting together to exert a lasting influence on the market price of a specific good or service. The dominance concept may encompass market power but may differ in an important way. A large enterprise may be considered dominant if it can restrict or foreclose the commercial opportunities of smaller rivals or trading partners, even if doing so has no effect on the exercise of market power. 47 Horizontal Restraints Agreements among rivals to restrict output and raise prices (i.e., the formation of a cartel) flagrantly violates competition. 48 And although there are numerous kinds of horizontal restraints or agreements, most are regarded as injurious and undesirable in market economies. Horizontal price-fixing, for example, is nearly always unconditionally prohibited, and violations frequently attract severe civil and criminal penalties. Explicit collusion is often deterred by imposing ex post facto penalties for conduct. In contrast, other horizontal agreements, such as joint ventures and agreements to develop product quality standards, enhance competition and efficiency and are often exempt from antitrust prosecution. 49 A number of competition laws recognize the competitive benefits of these arrangements and exempt them from antitrust scrutiny. Paradoxically, the rationale for industry cartels flows from the model of competition. Just as a single firm (a monopolist) can increase its total revenues by restricting output and raising prices, competitors have incentives to form a cartel in order to emulate the monopoly structure. Acting as one, firms gain market power to control price in order to reap monopoly profits. As a result, consumers are deprived of two major benefits of a competitive market: lower prices and increased output. Mergers and Acquisitions Firms grow either through internal growth or by merging. However, firms should not be allowed to accomplish through merger what the anti-trust laws prohibit through bans on price-fixing and other proscribed anticom-

Mexico

127

petitive practices. Mergers occur because of the perception by a group that a target firm may be undervalued. A higher value may result due to either potential efficiencies, increased market power, or both. There are three broad categories of mergers: horizontal, vertical, and conglomerate. A horizontal merger involves two or more firms in the same line of economic activity in a given market. Vertical mergers are those in which the merging parties are engaged in upstream and downstream markets. And conglomerate mergers are consolidations of firms in unrelated businesses. Obviously, horizontal mergers, which present competitive overlaps in product lines and may result in increased market power due to a lessening of competition, are generally of greater concern to competition authorities. Ideally, merger enforcement should reach transactions that significantly concentrate a market and raise the likelihood that the firm will exercise unilateral market power or facilitate oligopolistic pricing. Nonetheless, it is generally difficult, especially ex ante, to determine whether consolidations lead to a more efficient allocation of resources or whether they may result in a net increase in market power. In fact, despite its longevity and copious commentary on the matter, the debate over whether mergers generally promote efficiency or greater market power remains largely unsettled. Consequently, regardless of the merger policy, efficiencies should always be a consideration. In most countries, including several developing countries, antitrust legislation today contains provisions that grant oversight of mergers to the antitrust agency. In addition, specific premerger screening provisions grant agencies the ability to review mergers before they are consummated. Vertical

Agreements

Another dimension of competition law contains proscriptions of business practices between upstream producers and their distributors that may result in anticompetitive prices for consumers. But although competition authorities have historically been concerned with vertical restraints because these were believed to result in enhanced market power, recent research has shown that vertical agreements, rather than restricting competition, in reality enable firms to overcome market failures or allow upstream and downstream trading partners to limit the scope of inefficient potential strategic behavior. As a result, vertical restraints have lately become less of a competitive concern for competition authorities. Examples of vertical agreements are vertical foreclosure (excluding existing competitors or preventing new entry), dealer restrictions and other vertical restraints such as refusals on the part of firms to buy from particular upstream suppliers or to sell to particular downstream suppliers, resale price maintenance (where suppliers mandate consumer prices), exclusive

128

Latin American Case Studies

dealing (agreements limiting a retailer to the purchase of products of a single manufacturer), and certain forms of nonprice vertical contracts (e.g., limitations on a retailer's geographic scope). The likelihood of strategic behavior between upstream and downstream parties to an agreement emerges because of difficulties in writing and enforcing complete and fully contingent contracts. 50 Under these circumstances, vertical restraints may reduce the likelihood of strategic behavior and are generally pro-competitive. Due to the presence of nontrivial transaction costs, manufacturers are generally unable to integrate into the retail sector. Therefore, a manufacturer must deal with independent distributors and retailers to sell its product. Unless restrained, distributors or retailers may take action that adversely affects the manufacturer's attempt to maximize profits. Distributors and retailers may behave opportunistically, considering only short-run profits. Accordingly, manufacturers often rely on vertical restraints to control the downstream behavior of their distributors to preclude, or at least to reduce, such opportunism. However, due to considerations other than strict concerns with market power, the concept of dominance has figured prominently among antitrust agencies, especially in economies in transition to a market. The concept of dominance is similar to the U.S. fragmentation goal. Abuse of a dominant position, as commonly understood, generally includes any conduct that injures consumers or competitors, even if it is the type of conduct that would be lawful if done by a firm without a dominant position. In a number of plausible enforcement scenarios, antitrust authorities in the EU can challenge perceived abuses of dominant positions against competitors. Again, under incorrect circumstances, rather than benefit competition, such challenges may reduce legitimate pro-competitive efficiencies. 51 Since vertical restraints may either promote or reduce economic efficiency, evaluation of a vertical practice cannot be adequately assessed under a per se standard. Typically, most competition authorities rely on a rule of reason approach, which consists of an inquiry into the net welfare benefits of the vertical practice. However, to the degree that anticompetitive restraints originate with large firms, a dominance-based approach in the scrutiny of vertical restraints may enhance entry in a transition economy.

Competition Advocacy Antitrust analysis typically evaluates how restraints on competition lead to reductions in consumer welfare. This type of analysis is also used by competition agencies in the study of governmental barriers to trade. In this sense, the competition agency acts as a competition advocate within government. And although this competition advocate role remains, at least in

Mexico

129

principle, a major function of Western competition agencies, its influence has been relegated largely to an advisory role.

Political Economy of Competition Policy Liberalizing and deregulating an economy affect market structure. Firms are freed of artificial restrictions, established through government fiat, that limited market entry (and exit) and prevented firms from operating under a regime characterized by the cost structure of the most efficient producer. In addition, the potentially higher demand of a larger market benefits firms in a number of other ways, including specialization in production, scale effects, and increased competition. Dynamic effects should result. Free trade should make the economy more innovative and flexible.52 However, despite the recognized benefits of trade liberalization, redirecting public policy toward deregulating markets and subjecting them to increased domestic and foreign competition may not induce favorable reactions from all economic sectors. With lowered tariffs and few restrictions, firms face new sources of competition that challenge profitability. This is the case particularly when monopoly rents are due to government-erected barriers. Whenever any reforms attempt to reduce tariffs or other trade barriers, various forces begin to work to inhibit or circumvent such a step. Elimination of tariffs does not result in automatically free trade because governments will face pressures to protect their industries and workers through alternative instruments and protection. In fact, countless ways exist in which government can interfere with the flow of trade even after having reduced tariffs. The ability of governments to frustrate trade liberalization through the imposition and negotiation of quotas, through filing of dumping and countervailing duty petitions and through health and safety regulations regarding imports is well documented. Almost any state intervention creates the opportunity for a rent, and government-sanctioned barriers to entry can arise for numerous reasons. Government procurement practices either through explicit "buy national" policies or through carefully drawn or nontransparent product specifications can favor domestic over foreign producers. Health, safety, and environmental standards, zoning requirements, licensing, inspection procedures, and other product regulations can also operate as protectionist barriers.53 In short, most overt forms of protection that reform eliminates can be replaced with a host of more subtle but effective measures. The consequences are twofold. First, once the reform process is completed, historical incentives and mechanisms shift but do not disappear. Governments will continue to provide avenues to appease protectionist

130

Latin American Case Studies

forces. This reduces many of the prospective benefits of reform and does not necessarily leave the country any better off than before. Second, the role for a competition agency faced with a private sector that prefers to solicit and pursue preferential treatment rather than compete is evident. Unless there is a clear understanding of this process, the benefits of liberalization may be elusive. In fact, if a competition agency fails to recognize these incentives and proceeds with traditional antitrust enforcement, the agency may, as shown by the model presented below, create greater incentives for groups to seek rents.

A Model A close examination of the interaction between trade barriers and antitrust policies attacking horizontal cartelization reveals the fundamental problem confronting competition agencies. By relying on mechanisms derived from the historical close interaction between market participants and government institutions, producer interest groups choose whether to obtain anticompetitive rents from either cartelization or from seeking favors from the state. Interest groups will choose the combination of collusion and government protection that maximizes expected rents. Rent-maximizing interest groups will make decisions to devote resources between attempted cartelization and government influence based on the relative costs and benefits of the two activities. The following result emerges: increased traditional antitrust enforcement activity is less likely than its advocates proclaim to return prices to competitive levels, and it may, in fact, raise prices further. In analyzing the effect of increasing the level of antitrust policy, consider a variant of the standard model of consumer behavior. Assume that a producer interest group maximizes its utility subject to a resource constraint, a limit of the level of effort it is willing to devote to rent-seeking and cartelization behavior. Assume, as well, that the level of private benefits is an increasing function of only the level of supracompetitive prices. It is then possible to analyze the imposition of antitrust as a raising of the price of cartelization. Because the interest group's utility is increasing at the price level, the level of benefits obtained by the interest group increases the amount of both the rent-seeking and the cartelization effort the group undertakes. Figure 7.1 displays "isoquant" curves (IQy, IQ2, and IQ3), which represent sets of the amount of effort devoted to the two strategies: lobbying the state ( e B ) or organizing a cartel ( e c ) . Every point on any one curve yields the same levels of benefit from higher prices to the interest group. Since more of either benefit is preferred to less, the curves are downward sloping, and curves that are farther away from the origin must correspond to more preferred combinations. The "budget lines" f o l l o w equations of the form

Mexico Figure 7.1

r

131

Isoquant Curves of Effort Devoted to the Strategies of Lobbying the State or Organizing a Cartel

- PBeB + Pcec> where e B and e c represent the total resources that the group will allocate to these activities, pB is the unit price of lobbying the government for the erection of trade barriers, and pc is the unit price of organizing, monitoring, and enforcing a cartel. For any given level of resources r, the group will attempt to reach the highest isoquant. Thus, a group will choose its level of activity at the point where the budget line is tangent to the isoquant. C o n s i d e r f o r the m o m e n t an interest group c h o o s i n g to e x p e n d resources such that it is on budget line BLj. With this constraint, it will choose X on curve IQj where the price increase is maximized. If an antitrust agency is established, pc, the unit price of cartelization efforts, rises, and this shifts the group's budget line to BL2. The group then shifts its combination of efforts to point y on curve IQ2. Obviously, economies of scale and scope in political influence may cause different firms to face different relative prices for particular resources. However, as the costs of cartelization rise relative to rent seeking, at the margin, the interest group may seek more rents through government protection. The establishment of

132

Latin American Case Studies

an antitrust regime may cause an increase in other forms of government protection. If the starting of an antitrust agency only makes it more difficult to cartelize, the special interest group is worse off than before. As shown, lobbying the government for protection may be substitutable for organizing cartels. While the stated intent of increasing antitrust activity is to encourage market competition, in reality, utility-maximizing interest groups will shift resources into seeking monopolization through government protection that shields them from competition. This shifting of resources may have other social costs beyond deadweight-loss triangles and socially inefficient rent seeking. 54 While monopolists have the same incentives as competitive firms to minimize costs by producing efficiently with the appropriate technology and factor mix, firms operating under nontariff barriers may not. In this sense, increasing cartel enforcement may cause inefficiencies that are worse than the allocative losses that antitrust legislation is designed to defend against. The previous analysis assumes that antitrust will be effective in raising the costs of cartelization. By establishing an antitrust agency, these proposals may also establish yet another target for rent seeking by interest groups. 5 5 This can be analyzed as a fall in the price of the rent-seeking effort. 5 6 Referring again to Figure 7.1, such a fall will shift the interest group's budget line from BL2 to BL3. The interest group would then maximize its expected benefits on the isoquant IQ3 at point Z. If the price of rent seeking falls, interest groups will seek even further protection at the margin. Indeed, benefits to the interest group and prices may be higher with both the increased price of private cartelization and the reduced price of rent seeking if IQ3 is to the right of IQj.51 The establishment of an antitrust regime may actually advantage targeted special interest groups that act anticompetitively. The theory just presented, although simple, accounts for a number of postreform experiences and has important implications. At first, interest groups will react to the relative shift in prices by increasing their efforts devoted to solicitation of nontariff barriers. Subsequently, also responding to the relative price shift, the competition agency recognizes that society gains more from having the agency challenge (and prevent) wealth-diminishing rent-seeking attempts and may choose to redirect its policy accordingly. However, as it faces increased resistance to these efforts, the agency may decide on a more restrained path. Under a worst-case scenario, the agency (by choice) may be rendered inconsequential. Conversely, if it decides to engage in battling interest groups, it may nevertheless be rendered equally inconsequential. We turn to this latter conclusion next.

Implications of the Theory What will happen if Mexico's FCC vigorously challenges rent-seeking attempts? Under the model, there will first be a slow erosion of the FCC's

Mexico

133

jurisdiction via legal exemptions, in much the same way as a substantial portion of U.S. economic activity is exempt from antitrust oversight. Second, countries will experience "NTB-creep," the slow encroachment of nontariff barriers, regulations, and similar legislation designed to subvert the intent of the reform. In fact, the LEC contains provisions that recognize such encroachment on liberalization. Article 7, sections I and II, recognize the executive's authority to impose price controls and the Ministry of Commerce and Industrial Development's right to "arrange and coordinate with producers and distributors" to adequately manage the resolution. These incipient problems can be avoided. One option is to seek mechanisms that will reduce the susceptibility of the agency to domestic pressure groups. This can be accomplished by international collaboration with other antitrust agencies. Collaboration among antitrust agencies increases credibility and provides more visibility both vis-à-vis potential targets and with respect to intragovernment groups. The recent (and increasing) collaboration between the FCC and the U.S. Federal Trade Commission is a good example of this. These efforts were driven initially by NAFTA requirements but have lately developed into coherent working relationships. 58 An additional alternative for the competition agency is to officially reformulate policy, de-emphasize conventional enforcement, and actively oppose special interest groups that pressure the government for preferential treatment. Antitrust agencies typically analyze how restraints on competition lead to reductions in consumer welfare. This same type of analysis can be equally useful to clarify for the government the effects of nontariff barriers that it is being asked to adopt or impose. In this sense, the competition agency may be uniquely qualified as a competition advocate within government. 59 Although the FCC regularly intervenes in privatization efforts, it might be appropriate for it to expand its role to provide comment on governmental legislative and regulatory action. However, it is important to realize that not all legislation and regulation is inherently anticompetitive, protectionist, or driven by special interest influence. In fact, some interest group regulation may be pro-competitive. A competent competition advocacy role must determine whether a particular regulation is, in fact, anticompetitive and whether it is the result of interest group pressure. 60 Challenging lobbying efforts by producer interest groups may infringe or limit traditional constitutional rights to petition one's government and freedom of speech. Conversely, such actions may jeopardize a targeted agency's mission and prevent it from effectively discharging its functions. Given governments' distaste for interagency squabbling, it is likely that this type of competition advocacy might not be politically popular. Hence, even though interest group targeted competition advocacy as a policy alternative is a promising and attractive option from a technical efficiency perspective, it may not be politically viable. In any event, antitrust agencies should continue to enforce relatively

134

Latin American Case Studies

specific per se laws against horizontal price-fixing and other nonambiguous forms of anticompetitive behavior. As the model suggests, vigorous scrutiny of potential horizontal cartels will encourage potentially anticompetitive rent seeking that the antitrust agency has a role to criticize. It should relish that obligation. Thus, by limiting itself to a narrow and unambiguous enforcement agenda, the antitrust agency lessens the odds of lowering the price of influencing government.

Is the Commission Emphasizing Advocacy? It is difficult to determine with any degree of confidence the direction of the FCC's competition policy. Given its reluctance to make its resolutions public, there is very little information to parse. 61 One is left, therefore, with material culled from newspapers and similar print media from which one can draw (at best) only weak inferences. An examination of the allocation of FCC man-hours assigned to the various statutorily defined tasks combined with information gathered in conversations with past and current commission officials may allow us to gauge whether the FCC has chosen to emphasize advocacy functions. In its first year, the FCC carried out merger oversight and investigation of nonmerger practices as stipulated in the law.62 Over this same period, merger oversight accounted for 28 percent of official activity. By contrast, competition advocacy took a more visible presence and an increasingly more influential one. Table 7.1 provides some sense of the relative allocation of the FCC's efforts. Obviously, due to the grossness of the data and the crude nature of the calculation method, the numbers are only meant to be suggestive.63 To be sure, it is hard to determine the extent and influence of the

Table 7.1

F C C Activities, 1993-1994

Activity Mergers Public bids Ex officio investigations Private suits Legal opinions Totals

No. of Cases

Time Allocated (in Days) 3

% of Total Time

%of Cases

46 34 6 17 14 117

1660 1163 717 1829 676 6045

28 19 12 30 11 100

39 29 5 15 12 100

Source: Federal Competition Commission's Annual Report, 1993-94 (Mexico: FCC, 1994). Note-, a. Total number of days accounts for all days, including weekends and intervening holidays, starting from the day the agency was notified of the case to the day the case was completed.

Mexico

135

commission's competition advocacy function, especially when there are other agencies advocating competition and when the commission's exercise of its enforcement functions is also a form of competition advocacy. In fact, the detection of anticompetitive conduct and barriers, a form of advocacy, is one of the central priorities of any competition agency. Its broad authority to investigate and its ability to monitor commercial conduct render a competition agency well suited—possibly the best suited—to provide expert and well-informed analysis on competitive issues. Obviously, the problem of eliminating structures that facilitate legal rent seeking and that of proscribing illegal anticompetitive behavior is often indistinct. Table 7.1 suggests that the FCC tended to focus more on its traditional competitive advocacy obligations than it did on merger review. It devoted 11 percent of its time to providing legal opinions, 19 percent providing its opinion on the competitive impacts on privatization bids, 12 percent on ex officio investigations, and 30 percent on private suits. However, since there is no clear baseline against which to compare the commission's allocation of its resources, little can be inferred. As more information becomes available, more meaningful analysis will be possible. Nonetheless, competition advocacy, to the extent that it refers primarily to antitrust challenges to state-sanctioned anticompetitive barriers, appears to have provided immense publicity and quantifiable results for the agency. Indeed, on occasions when the FCC brought to bear its expertise and the explicit charge of enforcing competition laws against policy-generated barriers to entry, growth, and exit, it was extremely successful. The FCC's decision to weigh in on the side of foreign competitors' interest in penetrating the Mexican long-distance telephone communications market was hailed as an important victory not only for the credibility of the reforms, but for the independence and reputation of the commission. 64 Similarly, its victorious challenge of PEMEX's—the national oil company—control of service station concessions as an anticompetitive practice provided rapid and noticeable results.65 If these few advocacy interventions were so successful, why does the FCC not pursue more of them? Perhaps it is because it is well known that the state—at any level—is the largest purveyor of nontariff barriers, regulations, and other often anticompetitive legislation that result in barriers to entry, growth, and exit. After all, the commission can, in theory, pursue state-sanctioned anticompetitive practices. Its president not only has observer status in the cabinet, but Articles 3 and 4 of the LEC specifically grant the commission the ability to challenge the federal, state, or municipal public administration unless expressly exempt. Perhaps the commission's short-term timidity reflects concern over the institutional effectiveness of the agency in the long run. 66 Here, if anywhere, discretion may still be the better part of valor.

136

Latin American Case Studies

Conclusion The historical collaboration between government and industry groups is likely to return postliberalization in a more subtle but equally onerous manner. The FCC is well aware of the competitive challenge this raises. Yet, despite this understanding, the commission is obliged by its law to continue with its emphasis on merger review and enforcement functions. And although it is unclear whether the commission is actively challenging interest group influence, officially redirecting its priorities to "first advocate, then enforce" may be more productive. This proposition rests on recognizing the ease with which interest groups historically have successfully petitioned public authorities to raise government-sanctioned barriers to entry, exit, and growth in response to reductions in tariffs, imposition of antitrust regimes, and other components of liberalization programs. As a general point, the gain to interest groups of establishing cartels or private price-fixing schemes is often vastly outweighed by the simple solicitation of preferential treatment from the state. As such, the emphasis placed on traditional Western antitrust enforcement may not be adequate in developing countries, and antitrust enforcers may wish to reconsider and devote resources to their competition advocacy programs. Will antitrust succeed in developing countries? It is too soon to tell; in its traditional form, it may not. Most, if not all, of these countries lack a historical, natural constituency willing and capable of supporting a successful antitrust agenda. To a large extent, the top-down imposition of antitrust may diminish its political support and influence if it is believed to merely constitute a technocratic instrument. One fears that as the influence of proliberalization technocrats fades, so will the fortunes of the antitrust agencies. A modest understanding of these issues would help the political and public relations prospects of antitrust in reforming economies. In the meantime, competition agencies could further their cause by placing their resources where they command the best results: seeking and challenging rent-seeking attempts. To do otherwise may allow unintended negative consequences for pro-market reforms. The Mexican case once again highlights the importance of maintaining open and straightforward policies and points to the potential benefits of maintaining the regulatory agencies in a parastatal organization that is less susceptible to the tides of party politics. In many ways, Mexico has reached a propitious moment for competition policy as the country moves toward pluralism in both the economic and political realms. It remains to be seen if these changes in formal economic and political structure will have a significant impact upon popular practices, but given the history of state participation in anticompetitive practices, state-centered reforms may prove a more sensible place to start than U.S.-style, private-sector antitrust enforcement.

Mexico

137

T h e C o l o m b i a n case, w h i c h f o l l o w s , bears a striking resemblance to the M e x i c a n case, and the similarities merit consideration for the purpose of d e v e l o p i n g regionally appropriate competition policies. Both countries e n j o y e d notable success with their protectionist industrial growth policies. Further, M e x i c o and C o l o m b i a have both enjoyed important natural c o m modities: oil and c o f f e e , respectively. However, the central role of the state in promoting both the industrial and c o m m o d i t i e s sectors has fostered significant amounts o f state-centered corruption, which has been exacerbated by the presence o f powerful drug traffickers in both countries. Examining the C o l o m b i a n c a s e in m o r e detail w i l l provide greater insight into the future o f competition policies in both countries and will perhaps offer s o m e possibilities for M e x i c o .

Notes 1. Ley Orgánica del Artículo 28 Constitucional en Materia de Monopolios, Diario Oficial de la Federación (hereafter DO), August 31, 1934, amended by decree of December 27, 1979, DO, January 8, 1980, and repealed and replaced by Ley Federal de Competencia Económica, DO, December 24, 1992. The basic concept of antitrust is not new in Mexico. The Federal Competition Commission's Annual Report, 1993-94 (hereafter FCC Annual Report) (Mexico: FCC, 1994), pp. 9-10, notes that monopolies were constitutionally prohibited in Mexico as early as 1857. The 1857 constitutional prohibition preceded the first competition laws of Canada (which enacted a law in 1890) and the United States (which enacted its first statute in 1990); Mexico enacted an antimonopoly law in 1934. Article 28 of the Mexican Constitution expressly prohibited monopolies, protection, or privileges for industry and tax exemptions. However, early antimonopoly legislation served to a d v a n c e neither competition nor competitive markets. Rather, as George M. Armstrong Jr., in Law and Market Society in Mexico (New York: Praeger, 1989), p. 105, notes, the Law on Monopolies of 1934 revealed a poor understanding of the factors that influence private investment. Instead of implementing a program of free competition based on Article 28, which established broad principles for protection of free and unrestricted competition, the government used antitrust legislation as a basis for price controls and as a foundation for protectionism. The 1934 law also authorized governmental subsidies for industry, declaring that such grants were not privileges or tax exemptions that are prohibited by the Constitution. Competitive principles were largely sacrificed in favor of what was considered more compelling economic policies and the requirements of Mexican economic development. As a result, early antitrust and related legislation proved of little consequence in furthering competition. 2. The FCC is organized as an independent agency within the executive branch f u n c t i o n a l l y attached to the Department of C o m m e r c e (Secretaría de Comercio y Fomento Industrial [SECOFI]). The president of the Republic appoints a panel of five commissioners, including the president of the FCC. Each commissioner is appointed for a period of ten years. See Ley Federal de Competencia Económica. 3. Rents are rewards to unproductive activities within the political process. When special interest groups "rent seek," they seek to benefit from public largesse,

138

Latin American

Case Studies

either through direct expenditures or, indirectly, through protection from competition. The term "rent seeking" was introduced by Anne O. Krueger, in "The Political Economy of the Rent-Seeking Society," American Economic Review, 64 (1974): 291. See also James Buchanan, R. D. Tollison, and Gordon Tullock, Toward a Theory of the Rent-Seeking Society (College Station: Texas A&M University, 1980); and R. D. Tollison, "Rent Seeking: A Survey," Kyklos, 35 (1982): 575. For an attempt to group related theories from many fields in economics, see David C. Colander, ed., Neoclassical Political Economy: The Analysis of Rent-Seeking and DUP Activities (Cambridge, MA: Ballinger, 1984), which surveys the literature and collects papers by several of the original contributors to the theory; R. E. McCormick, "The Strategic Use of Regulation," in The Political Economy of Regulation: Private Interests in the Regulatory Process, Trade Commission Law and Economics Conference (Washington, DC: Federal Trade Commission, 1984); and Charles K. Rowley and Robert D. Tollison, "Rent-Seeking and Trade Protection," in H. Hauser, ed., Protectionism and Structural Adjustment (Grusch: Verlagrugger, 1986). 4. William Glade, "Privatization in Rent-Seeking Societies," World Development, 17 (1989): 675, claims that the fundamental issue that defines the success of the reform is the degree to which rent-seeking behavior is encouraged or discouraged by privatizations. Glade correctly observes that economic readjustments have squeezed out a good many sources of economic rent and implies that rent-seeking groups' influence has consequently been reduced; he then concludes that after the reforms, the source of rents disappears. But for his conclusion, Glade's argument is not inconsistent with my thesis: to the extent that the traditional sources of rent have been eliminated, the usual mechanisms may be disrupted and the influence of groups may diminish. However, this diminished influence is only temporary. As opportunities reemerge, these groups will reconstitute or emerge anew. Indeed, Anne Krueger's analysis of the shifting fortunes of competing interest groups is applicable here; see Anne O. Krueger, "Virtuous and Vicious Circles in Economic Development," American Economic Review, 83 (1993): 351. In fact, Glade himself, in a prescient comment, supports the view, albeit indirectly, that opportunism and strategic behavior do not disappear, but only shift. He writes, "In Mexico, the bi-level effort to eradicate rent-seeking behavior has, along with macroeconomic conditions, apparently fed social discontent and upset the old political equilibrium. No longer does the government possess such a plentiful arsenal of means for conciliating the multiple contending interests, though already there are signs that some in both government and the ruling party think that liberalization has gone too far and that conditions may warrant restoring some of the means of rentconferring intervention" (p. 681). Social unrest, opposition to privatization efforts, attempts to reverse macroeconomic policies, and other similar efforts are interest group activities. Joan M. Nelson, in "Poverty, Equity, and the Politics of Adjustment," in Stephan Haggard and Robert R. Kaufman, eds., The Politics of Economic Adjustment (Princeton, NJ: Princeton University Press, 1992), comments on how the urban working class and middle class may be able to influence public policy through strikes or votes (pp. 221-222). 5. The recently signed Uruguay Round of the General Agreement on Tariffs and Trade (GATT) bespeaks this common understanding. And it is precisely because of the reductions in tariffs and other formal trade measures that domestic barriers to competition have come under increasing scrutiny. Since GATT rules do not cover restrictive practices by private parties, there is particular interest in the role of competition policy authorities in fostering market access in these cases. 6. See also Spencer Weber Waller and Rafael Muente, "Competition Law for

Mexico

139

Developing Countries: A Proposal for an Antitrust Regime in Peru," Case Western Reserve Journal of International Law, 21 (1989): 159, wherein the authors observe that a system of competition laws would have to be tailored to the needs of each particular economy in order to be effective. 7. The analysis and conclusions presented here are mine and do not necessarily represent the views of the Federal Trade Commission. Eva Almirantearena, Robin King, Karen Mills, Joe Mulholland, Stefano Sciolli, Adriaan Ten Kate, and Lawrence Wu made numerous helpful comments. I am also grateful for the contributions of workshop participants at Unidad de Apoyo Económico (UDAPE) in Tegucigalpa and at the Autorita Garante della Concorrenza in Rome. 8. FCC Annual Report, p. 14. 9. For a general overview of the reform process as well as the "setback" of December 1995, see Moisés Nairn, "Mexico's Larger Story," Foreign Policy, 2 (1995): 21; see also Nora Lustig, Mexico: The Remaking of an Economy (Washington, DC: Brookings Institution, 1992); and Guillermo Marrero and Douglas J. Rennert, "The Long and Winding Road: An Overview of Legislative Reform on Mexico's Road to a Global Economy," Southwestern Journal of Law and Trade in the Americas, 1 (Fall 1994): 77, in which the authors discuss reforms and new legislation in the areas of foreign investment, intellectual property, and rural landownership. 10. Ostensibly, the principal objective of the consensus was to bring about macroeconomic prudence, outward orientation, and domestic liberalization. See John Williamson, ed., Latin American Adjustment: How Much Has Happened? (Washington, DC: Institute for International Economics, 1990). 11. For example, see Robert D. Anderson and S. Dev Khosla, Competition Policy as a Dimension of Economic Policy: A Comparative Perspective (Ottawa, Canada: Bureau of Competition Policy, Bureau of Industry, 1994); Roger Boner, "Institutional Aspects of Antitrust in Transition Economies," in Claudia R. Frischtak, ed., Regulatory Policy and Reform in Industrializing Countries (Washington, DC: World Bank, 1995); R. Shyam Khemani and Mark A. Dutz, "The Instruments of Competition Policy and Their Relevance for Economic Development," draft (Washington, DC: World Bank, May 1994); R. Shyam Khemani, "The Administration of Competition Law and Policy in Transition Economies: The Case of Russia," paper presented at the annual conference of the Southern Economic Association, Orlando, Florida, 1994; William E. Kovacic and Robert S. Thorpe, "Antitrust Law for a Transition Economy," Legal Times, 41 (1993); William E. Kovacic and Robert S. Thorpe, "Antitrust and the Evolution of a Market Economy in Mongolia," paper presented at the 1995 Allied Social Sciences Association (hereafter ASSA) meetings, Washington, DC; Russell Pittman, "Some Critical Provisions in the Antimonopoly Laws of Central and Eastern Europe," International Lawyer, 26 (1992): 485; Russell Pittman, "Merger Law in Central and Eastern Europe," American University Journal of International Law and Policy, 1 (1992): 649; F. M. Scherer, Competition Policies for an Integrated World Economy (Washington, DC: Brookings Institution, 1994); R. D. Willig, "Anti-Monopoly Policies and Institutions," in Christopher Clague and Gordon C. Rausser, eds., The Emergence of Market Economies in Eastern Europe (Cambridge, MA: Blackwell, 1992); Clive S. Gray, "Antitrust as a Component of Policy Reform: What Relevance for Economic Development?" in Dwight H. Perkins and Michael Raemer, eds., Reforming Economic Systems in Developing Countries (Cambridge, MA: Harvard University Press, 1991); and Clive S. Gray and Anthony A. Davis, "Competition Policy in Developing Countries Pursuing Structural Adjustment," Antitrust Bulletin, 425 (1993).

140

Latin American Case Studies

12. OECD Trade Committee Study of the Coverage (and Limitations) of Competition Laws and Policies: Mexico ( P a r i s : O r g a n i z a t i o n f o r E c o n o m i c Cooperation and Development [OECD], February 9, 1995), p. 3. 13. FCC Annual Report, p. 15. 14. Two of the F C C ' s first staff members, an economist and an attorney, were trained during the spring of 1993 at the Federal Trade Commission in Washington, D.C. Although, they were both highly educated and experienced in their respective fields, on the eve of their departure to open shop in Mexico, both felt that they could have benefited substantially from more training time. In the fall of 1995, both professionals were working elsewhere. 15. Some jurisdictions have additional objectives. For the European Union, for instance, the rules on competition are an instrument for economic integrations: "It was envisaged from the outset that they [competition rules] should provide a means to ensure that regulatory barriers be eliminated in the process of creating a common market and should not be replaced by private behavior which would have the effect of isolating and dividing national markets from one another" (OECD, The Objectives of Competition Policy, D A F F E / C L P [ 9 2 ] 1 / E E C , distributed M a y 14, 1992, p. 3). In practice, this directive has largely tended to confer little weight to any pro-competitive benefits of vertical restrictions. Clearly, such objectives are not needed in Mexico and have not been a matter for discussion. See Spencer Weber Waller, " U n d e r s t a n d i n g and Appreciating E C Competition Law," Antitrust Law Journal, 6 (1992). See also A. E. Rodriguez and M a l c o l m B. Coate, "Limits to Antitrust Policy for Reforming Economies," Houston Journal of International Law, 18 (1995), w h o observe the possible pitfalls of contradictory objectives in E U antitrust enforcement. 16. Competition policies' two main areas of consideration are the prevention of proscribed practices (which include cartel formation as well as the creation of other forms of horizontal and vertical restraints) and competition advocacy. Merger oversight is an ex ante mechanism designed to deter explicit collusion. Prevention of specific practices designed for, or which might have the effect of, reducing competition, such as price-fixing, bid rigging, and market allocation, is the most fundamental responsibility of antitrust enforcers. It is also one of the most difficult, because cartels almost always try to hide their actions. The merger oversight function constitutes review of mergers and acquisitions under the premise that market structure affects market conduct, which, in turn, affects market performance. Last, c o m p e t i t i o n a g e n c i e s , p r i m a r i l y d u e to a d v a n t a g e s in e x p e r t i s e d e v e l o p e d in enforcement, frequently challenge anticompetitive regulations and provide guidance on the competitive impacts of privatizations and similar reforms. See, in general, Ernest Gellhorn and William E. Kovacic, Antitrust Law and Economics (1994) pp. 13-14, 15-41. 17. In the spring of 1992, a team of lawyers and economists attached to the deregulation unit at SECOFI, under the direction of Boston University professor Santiago Levy, assembled a group of representatives f r o m international antitrust agencies to solicit input into what was at the time a draft of the proposed LEC. N o n e of t h e r e p r e s e n t a t i v e s of the U . S . F e d e r a l T r a d e C o m m i s s i o n , the U . S . D e p a r t m e n t of J u s t i c e , the O E C D , t h e S p a n i s h C o m p e t i t i o n T r i b u n a l , or the German Cartel Office voiced any substantive qualifications to the proposal. This is, of course, not surprising. As I noted above, there was little to object to for two reasons. First, the L E C practically mirrored the competition laws of the countries of the invited representatives. Second, the foreign antitrust experts, untrained in development economics, had little experience on the competition issues a developing

Mexico

141

country would encounter. Levy went on to become the first president of the Federal Competition Commission. However, a distinguished gathering of Latin American development specialists also weighed in with a consensus on the prospective possibilities of antitrust policy. In the fall of 1993, the Latin America 2000 Conference at the Institute of Latin American Studies of the University of Texas grouped a number of influential Latin Americanists and practitioners charged with the following: "the development of a list of critical issues that needed to be explored if Latin America's future development under this paradigm [of privatization and deregulation] were to be enhanced." With the exception of Robert M. Sherwood, Geoffrey Shepherd, and Celso Marcos de Souza, in a paper later published as "Judicial Systems and Economic Performance," Quarterly Review of Economics and Finance, 34 (summer 1994): 101—who, strictly speaking, do not address antitrust per se but, rather, the issue of judicial system performance, which has direct implications for the proper administration of antitrust policy—few in this select group recognized the possibility that conventional antitrust might have to be adapted to operate successfully in Latin America. For the most part, all present applauded the idea of conventional competition enforcement efforts as a necessary complement to the "apertura." In fact, this latter statement figured prominently among the recommendations proposed by conf e r e n c e participants. Selected papers were published in Latin America: Privatization, Property Rights, and Deregulation, a special edition of the Quarterly Review of Economics and Finance, 34 (1994). For a typical contribution recommending antitrust, see the article therein by Gordon Hansen, "Antitrust in PostPrivatization Latin America: An Analysis of the Mexican Airline Industry": "The point I emphasize is that anti-trust policies are an essential counterpart to privatization. While in the best of cases Latin American governments should have established anti-trust policies concurrent with privatization, it is imperative that policy measures be taken now" (p. 200). 18. For example, Anderson and Khosla, "Competition Policy," state that "the Canadian competition policy model is somewhat more flexible than the US policy with respect to aspects of industrial restructuring"; and, "arguably, these aspects of the Canadian model may be particularly appropriate to the needs of emerging market economies" (pp. 105-106). Janet Steiger disagrees: the then-chairman of the Federal Trade Commission described antitrust as "largely an American-made product" and one of her country's most successful exports, in "Trustbusters, Inc.," Economist, November 9, 1991, p. 84. 19. The original group of drafters of the Mexican LEC struggled to adapt largely common law concepts of antitrust into their civil law tradition. Among their results, the Mexican law uniquely accommodates within the law the distinction between rule of reason and per se rules. The LEC distinguishes between absolute monopolistic practices and relative monopolistic practices in the same manner as proscribed practices are either per se illegal or are reviewed under a rule of reason standard. See, generally, the collection of essays by Universidad Nacional Autónoma de México (UNAM), Estudios en Torno a la Ley Federal de Competencia Económica (México City: UNAM, 1994), which contains excellent pieces of commentary on the law; in particular, see Santiago Levy, "Notas Sobre La Nueva Ley Federal De Competencia Económica," and the piece by Joshua A. Newberg, published in English as "Mexico's New Economic Competition Law: Toward the Development of a Mexican Law of Antitrust," Columbia Journal of Transnational Law, 31 (1994): 587; see also Gabriel Castañeda, Santiago Levy, Gabriel Martinez, and Gustavo Merino, "Antecedentes Económicos Para Una Ley

142

Latin American Case Studies

Federal De Competencia Económica," draft, December 1992. Efforts to insulate the law from legal and other challenges appear to have succeeded. The law has recently withstood a constitutional challenge brought in a recent case where the repeal of the LEC was sought under a "Recurso de Amparo"—a constitutional mechanism that seeks to clarify the jurisdiction of the law (Amparo Número 065/94 Promovido por Banco Nacional de México Contra Actos del Congreso de la Union y Otras Autoridades). This decision, however, carries no precedential value and does not insulate the FCC from future challenges. This approach of combining EU and U.S. antitrust concepts may result in laws that contain potentially conflicting policy prescriptions. See Jack High, "Bork's Paradox: Static vs. Dynamic Efficiency," Contemporary Policy Issues, 3 (winter 1984-1985): 21. For a discussion of this argument in the context of transition economies see, Rodriguez and Coate, "Limits to Antitrust Policy for Reforming Economies" (1995). The American Bar Association, commenting on competition policies recently inaugurated in Eastern Europe and other countries, observed, "other anti-trust prohibitions and emerging patterns of enforcement give cause for concern that the law might be applied too intrusively. The abuse of dominance law could, if applied unwisely, effectively restore price control under the guise of antitrust, thus t a k i n g back the f r e e d o m and r e w a r d s that the m a r k e t g i v e s " ("Introduction and Recommendations of ABA Law Section's Special Committee on International Antitrust," Antitrust and Trade Regulation Reporter [Bureau of National Affairs] 62, no. 1551 [February 6, 1992]: 171). 20. See, for example, Paul L. Joskow, Richard Schmalensee, and Natalia Tsukanova, "Competition Policy in Russia During and After Privatization," Brookings Papers: Microeconomics, 301 (1994), which recommends changes both in Russian antitrust law and in enforcement; Khemani, "The Administration of Competition Law and Policy," which claims that the Russian law has not been vigorously applied, has been incorrectly applied, or both and recommends corrections; Ricardo Paredes, "Jurisprudence of the Antitrust Commissions in Chile," paper presented at the First Congress of the Latin American Association of Law and Economics, Mexico City, February 1995; and Ana Julia Jatar, "Competition Policies in Liberalizing Economies," paper presented at the 1995 ASS A conference at the panel titled "Competition Policies in Emerging Market Economies." According to Claudia Curiel, director for mergers of the Venezuelan Pro-Competition Agency, the Venezuelan legislature moved in May 1995 to review a proposal to reform the ProCompetition Law. Similarly, Carmen de Piérola, director of Peru's Competition Agency (Comisión de la Libre Competencia), stated in May 1995 that Peru also plans to reform its competition laws and enforcement mechanisms. 21. Ana Julia Jatar has mentioned that during her tenure, approximately 95 percent of her functions involved competition advocacy. Indeed, Jatar, who was in office from January 1992 to December 1993, recently gave a paper (see previous note) advocating a shifting of resources (for the Venezuelan case) to emphasize competition advocacy at the expense of conventional antitrust functions—echoing the conclusion here. During the debates and discussions leading up to the implementation of antitrust legislation in January 1992, Jatar was one of the most eloquent supporters of a conventional antitrust program for Venezuela. In several position papers, the Venezuelan agency has sought to revise its policy direction in favor of influencing economic policy more effectively; see, for example, the statement of Eduardo Garmendia, current superintendent of the Venezuelan Pro-Competition Agency, presented at the Regional Workshop on Managing Regulatory Policy and Regulatory Reform in Latin America: Emerging Issues, Santiago, Chile, October 5-7, 1995; and Claudia Curiel, Revision Doctrinal de las Prácticas Horizontales en

Mexico

143

la Legislación Venezolana (Venezuela: ProCompetencia, October 1995), which notes the mismatch between the prevailing economic debates at the time the Venezuelan legislation was drafted and the objectives of the antitrust initiative. 22. Economic Report of the President (Washington, DC: GPO, 1995), pp. 245-248. 23. Ibid., p. 246. There have been many other objections raised. First and foremost are the difficulties of grafting or incorporating antitrust legal concepts drawn from a common law tradition into civil law or code law based countries. Spencer Weber Waller, in "Neo-Realism and the International Harmonization of Law: Lessons from Antitrust," University of Kansas Law Review, 42 (1994): 557, argues that neither the transfer of existing national laws nor the international harmonization of competition law offers any realistic prospect for the desired outcomes. U.S. antitrust law represents a unique social and historical construct of events and themes that may not be easily grafted into a foreign legal setting. Thus, antitrust enforcement may be significantly more difficult for reforming economies. This reflects the danger of what one might call the "transferability problem." It neglects the cultural, institutional, and political obstacles to the implementation of an antitrust policy. See Peter H. Schuck and Robert E. Litan, "Regulatory Reform in the Third World: The Case of Peru," Yale Journal of Regulation, 51 (1986), which recounts the "chastening attempt" to develop a program of regulatory policy in Peru. Joshua Newberg, "Mexico's New Economic Competition Law," has raised two concerns linked to the applicability of antitrust policy in Mexico. The first concerns the novelty of antitrust issues. Mexico has no antitrust tradition comparable to the decades-long U.S. heritage, thus it possesses no coherent and relatively predictable modes of legal analysis for antitrust cases. A second concern arises from the legal conventions of civil law systems. Historically, in contrast to the common law system, civil case law retains no precedential value. Similarly, judges and administrative agencies are circumscribed from commenting on or influencing the development of legal doctrines. Several papers published in the International Review of Law and Economics, 11, no. 3 (December 1991), addressing economic analysis in civil law countries, raise concerns similar to those discussed by Newberg and Waller. The recent First Congress of the Latin American Association of Law and Economics, held in Mexico City in February 1995, addressed a number of these issues. Antitrust transferability problems and related issues generated substantial discussions. Selected papers are to appear in a future edition of the International Review of Law and Economics, 16, no. 2 (June 1996), a journal that has repeatedly provided a forum for this debate. There are a number of idiosyncratic elements that may preclude American antitrust learning from functioning as effectively in different settings as it has in the United States. A deep distrust of corporate or business power, and at times of bigness itself, is historically reflected in the antitrust laws of the United States. William S. Comanor, "Antitrust in a Political Environment," Antitrust Bulletin, 733 (1982), argues that to a large extent, two sets of interests—the fear of corporate power and the search for corporate legitimacy—provide the critical support for U.S. antitrust laws. Of course, the decentralization of decisionmaking, the dispersion of power, and a higher standard of business ethics, as legitimate social objectives, may lay equal claim to guiding policy. See Robert Pitofsky, "The Political Content of Antitrust," Corporate Practice Commentator, 22 (1980): 1. 24. Ley Federal de Competencia Económica, Art 3. 25. The theoretical argument underlying this assertion is found in James Q. Wilson and Patricia Rachal, "Can the Government Regulate Itself?" Public Interest, 46 (1977): 3, who claim that even within the same level of government, an agency

144

Latin American

Case Studies

will have great difficulty in attaining its goal, if, to do so, it must change the behavior of another agency. In the case of antitrust as practiced in the United States, B. D. Wood and J. E. Anderson, "The Politics of US Antitrust Regulation," American Journal of Political Science, 37 (1993): 1, find that the Department of Justice's Antitrust Division is strongly affected by the major U.S. political actors, including the president, Congress, and the courts. Ricardo Paredes, "Jurisprudencia de Las Comisiones Antimonopolios en Chile," Estudios Públicos, 58 (1995): 227, notes that Chile presents potentially problematic institutionalized political influence in its antitrust structures that may allow the executive to manipulate and influence both the antitrust commissions as well as individual decisions (p. 232). 26. There are a number of excellent sources on Mexico's development experience and development model. Among them, see Eliana A. Cardoso and Santiago Levy, "Mexico," Rudiger Dornbusch and F. Leslie C. H. Helmers, eds., The Open Economy (New York: Oxford University Press, 1990); Javier Aguilar Alvarez de Alba, "Características Esenciales de la Ley Federal de Competencia Económica," U N A M , ed., Estudios En Torno A La Ley Federal de Competencia Economica (Mexico: UNAM, 1994), pp. 10-16; Benito Solís Mendoza, "Política de Sustitución de Importaciones vs. Economía Abierta," in Federico Rubli K. and Benito Solís Mendoza, eds., Mexico: Hacia La Globalization (Mexico: Editorial Diana, 1992); Jose I. Casas, et al., La Organización Industrial en México (México, DF: ILET S i g l o V e i n t i u n o E d i t o r e s , 1990); and D i a n a H u n t , Economic Theories of Development: An Analysis of Competing Paradigms (Hemel, Hempstead, Hertfordshire: Harvester Wheatsheaf, 1989). 27. Gerarro Bueno, "The Structure of Protection in Mexico," in Bela Balassa, The Structure of Protection in Developing Countries (Baltimore: Johns Hopkins University Press, 1971), p. 180; OECD, OECD Economic Surveys: Mexico (Paris: OECD, 1992), p. 137; and World Bank, Mexico: Industrial Policy and Regulation, Report No. 8165-ME (Washington, DC: World Bank, 1990). Official or reference prices were special customs figures used as a base to calculate tariff payments on imports. These prices hardly ever reflected any real values. 28. Ibid. 29. The influence of entry on economic performance has long been recognized by economic theory. See Paul Geroski, Richard Gilber, and Alexis Jacquemin, Barriers to Entry and Strategic Competition (New York, NY: Harwood Academic, 1990); and Harold Demsetz, "Barriers to Entry," American Economic Review, 72 (1982): 47. Any excessive profitability of industry that exists under the umbrella of protectionist policy cannot persist once new competitors enter. Entry or the anticipation of entry should cause prices to fall to competitive levels. Markets vulnerable to anticipated entry are known as "contestable" markets. See William J. Baumol, John C. Panzar, and Robert D. Willig, Contestable Markets and the Theory of Industry Structure (San Diego: Harcourt Brace Jovanovich, 1988). 30. The simultaneous use of tariffs and licensing was handled by two different government departments: tariffs by the Ministry of Finance and import permits by the Ministry of Commerce and Industrial Development. A manufacturer seeking protection could thus turn to one or the other, depending on which offered less resistance (Buenos, "The Structure of Protection," p. 181). 31. Export subsidies were never sufficient to counterbalance the antiexport bias of the trade regime. See Cardoso and Levy, "Mexico," p. 357. 32. For example, the 1955-1970 period was characterized by an antiexport bias and price distortions that favored the use of capital in place of abundant labor (ibid., p. 350). 33. Lustig, Mexico, p. 18, explains the increase in the state's already significant participation as follows: "The belief at the time was that a country in which the

Mexico

145

state controlled a larger share of investment, owned more 'strategic' sectors (energy, steel, and so on), and regulated more of the price-setting mechanisms would be more prosperous, more equitable, and less vulnerable to the political pressures of the business sector at home and abroad." 34. OECD, Economic Surveys: Mexico, p. 141. 35. It is well known that large macroeconomic disequilibria will have effects on the structure of protection. Sebastian Edwards, "The Sequencing of Structural Adjustment and Stabilization," Occasional Paper No. 34 (International Center for Economic Growth, San Francisco, 1992), observes that as macroeconomic pressures mount, most countries will hike tariffs and impose trade, exchange, and capital controls in an effort to slow down the outflow of reserves (p. 15). 36. Nairn, "Mexico's Larger Story," p.8. 37. Ibid. 38. Cardoso and Levy, "Mexico," p. 349, observe that it was at the beginning of President Miguel Aleman's administration (1947-1952) that the private and public sectors reached the formal and informal agreements that established the political and social structures that were to permit growth in future decades. 39. C o n s i d e r John H. C o a t s w o r t h , " O b s t a c l e s to E c o n o m i c G r o w t h in Nineteenth Century Mexico," American Historical Review, 83 (1978): 80, whose characterization of the institutional environment of nineteenth-century Mexico is as follows: "The interventionist and arbitrary nature of the institutional environment forced every enterprise, urban or rural, to operate in a highly politicized manner, using kinship networks, political influence, and family prestige to gain privileged access to subsidized credit, to aid various stratagems for recruiting labor, to collect debts or enforce contracts, to evade taxes or circumvent the courts, and to defend or assert titles to land. Success or failure in the economic arena always depended on the relationship of the producer with political authorities" (quoted in Douglass C. North, "The Historical Evolution of Polities," International Review of Law and Economics, 14 [1994]: 381). It would be interesting to determine whether the interv e n i n g years h a v e m i n i m i z e d the f e a t u r e s of M e x i c a n society r e c o r d e d by Coatsworth. 40. It was incumbent on these interest groups to act not only as agents for the government, but also as cartel ringleaders. For the most part, the groups' obligations were limited to carrying out two of the three well-known cartel functions: monitoring the agreement and disciplining cheaters. A private cartel's function of finding and setting the monopoly price is, of course, not required of a state-sanctioned cartel, where the state sets prices. Thus, the interest groups had only to concentrate on monitoring and disciplining their members. Monitoring and disciplining were facilitated by years of association and collaboration with state agencies, which forged group identification for manufacturer, regional, and other pressure groups. This group identification provided the cartel with a number of benefits. First, it facilitated cooperation among members, which, in turn, aided the cartel in the collective exercise of market power. Second, group identification, combined with the special relationship with government officials, aided the development of exclusionary devices to keep out new entrants. Finally, group cohesiveness facilitated the disciplining of members who chose to diverge from group practices. The threat of rescinding an import permit or a special subsidy often sufficed to prevent any violation of cartel discipline. See Nathaniel H. L e f f , "Industrial Organization and Entrepreneurship in the Developing Countries: The Economic Groups," Economic Development and Cultural Change, 26, no. 4 (1978): 661-675; and Douglass C. North, Structure and Change in Economic History (New York: Norton, 1981), note 12. 41. Douglass C. North, for example, puts it as follows: "the larger the percent-

146

Latin American Case Studies

age of a society's resources influenced by government decisions (directly or via regulation), the more resources will be devoted to such offensive and defensive (to prevent being adversely affected) organizations" (Institutions, Institutional Change, and Economic Performance [London: Cambridge University Press, 1990], p. 87). 42. This is the notion of "path dependency." "But if the process by which we arrive at today's institutions is relevant and constrains future choices, then not only does history matter but persistent poor performance and long-run divergent patterns of development stem from a common source" (North, ibid., p. 93 and chap. 11 passim). The article that first called attention to the issue of path dependence is Paul David, "Clio and the Economics of QWERTY," American Economic Review, 75 (1985): 332. 43. The hypothesis that institutions affect economic performance is hardly controversial. See Douglass C. North, "Institutions, Ideology, and E c o n o m i c Performance," Cato Journal, 11 (1992): 477. Observers note that the institutional requirements essential to create efficient markets entail a set of political and economic institutions that provides for low transaction costs and credible commitments, thus making possible the efficient factor and product markets that underlie economic growth. See, for example, Silvio Borner, Aymo Brunetti, and Beatrice Weder, Institutional Obstacles to Latin American Growth (San Francisco: ICS P r e s s , 1992); and M u s t a f a K. N a b l i and J e f f r e y B. N u g e n t , e d s . The New Institutional Economics and Development: Theory and Application to Tunisia (New York: Elsevier Science, 1989). 44. Adoption of an antitrust regime has been for many years a recommendation advanced repeatedly in numerous international forums. In 1980, for example, the United Nations General Assembly adopted a worldwide antitrust code that condemned cartel practices and called on each nation to legislate against them. This relatively unsuccessful initiative included the creation of a UN unit to provide technical assistance for restrictive business practices. See Joel Davidow, "The Relevance of Antimonopoly Policy for Developing Countries," Antitrust Bulletin, 277 and 278 (spring 1992). 45. Some critics claim that antitrust is another form of governmental regulation. See, for example, Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself {New York: Basic Books, 1978). There is some truth to Judge Bork's claim. As does regulatory policy in general, antitrust also attempts to influence prices and output. But enforcement of the antitrust laws proceeds through indirect means rather than through the hands-on price and entry controls associated with public regulatory policy. 46. As an antitrust standard, allocative efficiency has not always been widely accepted. It attained preeminence only since the mid-1970s. In the United States, the Supreme Court explicitly addressed the economic grounding of antitrust only until that time. In a series of decisions, the Court tended to limit antitrust precedents so that conduct that served consumers was not unlawful. However, it was not until the Reagan administration that the enforcement agencies specifically tended to promote economic efficiency goals by protecting consumer welfare. See Bork, ibid. There are other guiding principles of antitrust, for example, to achieve an organization of industry that is as fragmented as possible to ensure, despite higher costs and prices, the survival of small firms. On this latter approach, see Robert H. Lande, "Wealth T r a n s f e r s and the Original and P r i m a r y C o n c e r n of A n t i t r u s t : T h e Efficiency Interpretation Challenged," Hastings Law Journal (1982); and Alan Fisher and Robert H. Lande, "Efficiency Considerations and Merger Enforcement," California Law Review (1983). 47. See Roger Boner and R. Krueger, "The Basics of Antitrust: A Review of

Mexico

147

Ten Nations and the European Community," Technical Paper No. 160 (Washington, DC: World Bank, 1991). 48. Under competition, where all firms are price-taker oriented, firms expand output until the incremental cost of an additional unit would equal or exceed the market price. When all firms act this way, price exactly covers each firm's incremental cost. With costless entry and exit, no firm has lower costs than its rivals, price just covers average cost, and no firm earns monopoly profits. 49. Although horizontal agreements have long been subject to a per se prohibition, reflecting the belief that they have little, if any, social merit, the growing recognition of the potential efficiency benefits of some types of horizontal arrangements has qualified this once-strict understanding. An example of this is Broadcast Music, Inc. v. Columbia Broadcasting Systems, Inc., 441 U.S. 1 (1979). BMI administered a collective agreement among thousands of recording artists and hundreds of radio stations fixing royalty payments for music broadcasts. The U.S. Supreme Court found the agreement to be legal largely because the arrangement reduced the socially wasteful transaction costs that would have resulted from bilateral negotiations between numerous artists and radio stations. But for the agreement, the quantity and variety of music broadcasts may have fallen. 50. See, generally, Oliver Williamson, "Credible Commitments: Using Hostages to Support Exchange," American Economic Review, 73 (1983); Benjamin Klein and Keith Leffler, "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy (1981); Benjamin Klein, "Transaction Cost Determinants of 'Unfair' Contractual Arrangements," American Economic Review, 70 (1980); Benjamin Klein, Robert G. Crawford, and A. Alchian, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics (October 1978); and Anthony Kronman, "Contract Law and the State of Nature," Journal ofl^aw, Economics, and Organization, 1 (1985). 51. Waller, "Neorealism," explains this apparent inconsistency by noting that the EU model differs dramatically from the U.S. system because it derives from a fundamentally different premise. EU competition law must be understood in the context of the need to break down the national boundaries among member states and to complete the unification of the common market. Dominance regulations tend to protect small companies (often linked to small countries) from aggressive competition when markets are opened to international competition. Moreover, they limit the ability of large firms, especially those associated with particular countries, to protect their position from competition. In effect, a dominance policy serves the political goal of consolidating interstate economic integration. 52. The optimality of free trade is, of course, one of the central propositions of international trade theory. However, recent experience with trade liberalization has been underwhelming. Many reform attempts have been reversed, while the effects of others have been unimpressive. See, for example, Steve Globerman, "Trade Liberalization and Competitive Behavior: A Note Assessing the Evidence and the Public Policy Implications," Journal of Policy Analysis and Management, 9 (1990): 80; Albert Fishlow, "The Latin American State," Journal of Economic Perspectives, 61 (1990); and, more recently, Paul Krugman, "Dutch Tulips and Emerging Markets," Foreign Affairs (July-August 1995). 53. C. Ford Runge, "Trade Protectionism and Environmental Regulations: The New Nontariff Barriers," Northwestern Journal of International Law and Business, 11 (1990): 47; Thomas Coughlin, "US Trade Remedy Laws: Do They Facilitate or Hinder Trade?" Review of the Federal Reserve Bank of St. Louis, 73 (1991): 3, "the concept of fair trade and trade remedy laws are often used by special industry groups to pursue their own agenda at the expense of the national interest"; and

148

Latin American Case Studies

Clement G. Krouse, "US Antidumping Law and Competition in International Trade," Journal of the Economics of Business, 1 (1994): 291-292, "it is argued that these [antidumping] laws and the duties they impose have become a substitute for tariffs now severely limited by GATT and, somewhat like these displaced tariffs, they are intended to limit the extent of price competition by foreign sellers." Allan V. Deardorff, " W h y Do Governments Prefer Non-Tariff Barriers?" CarnegieRochester Series on Public Policy, 26 (1987): 191, argues that nontariff barriers may be a reflection of valid concerns rather than of fuzzy-headed thinking on the part of governments. 54. Richard A. Posner, "The Social Costs of Monopoly and Regulation," Journal of Political Economy, 83 (1975): 807. 55. R. L. Faith, D. R. Leavens, and R. D. Tollison, " T h e Antitrust Pork Barrel," Journal of Law and Economics, 15 (1982): 329; B. L. Benson, M. L. Greenhut, and R. G. Holcombe," Interest Groups and the Antitrust Paradox," Cato Journal, 6 (1987): 801, "arguing that the anti-trust laws are a result of a special interest struggle between small and large economic entities seeking changes in the general economic environment rather than the specific favors usually associated with special interest legislation"; and William F. Shughart II, Antitrust Policy and Interest Group Politics (New York: Quorum Books, 1990): "advancing a private interest theory of antitrust, suggesting that enforcement was seldom in the public interest and often used to protect particular competitors at the expense of competition and efficiency." This literature has not gone unchallenged; see Russell Pittman, "William S h u g a r t ' s Antitrust Policy and Interest Group Politics," Review of Industrial Organization, 1 (1992): 91-95; and Russell Pittman, "Antitrust and the Political Process," in David B. Audretsch and John J. Siegfried, eds., Empirical Studies in Industrial Organization (Boston: Kluwer Academic Publishers, 1992), pp. 147-160. 56. As the technology to rent seek expands, the costs of rent seeking cannot go up ceteris paribus. If the new technology—lobbying the antitrust agency—is more efficient than other technology such as lobbying Congress members, then the cost (price of effort) of rent seeking falls. 57. Whether prices are higher depends upon the size of the shifts in prices of rent seeking and cartelization, as well as the position of the original equilibrium and the shape of the isoquants. Price will be higher if the income effect outweighs the substitution effect. 58. NAFTA took effect on January 1, 1994. NAFTA provisions stipulate that each party shall adopt or maintain "measures to proscribe anti-competitive business conduct and take appropriate action with respect thereto, recognizing that such measures will enhance the fulfillment of the objectives" of the agreement. Paragraph 1501(1) obligates the parties to consult "from time to time about the effectiveness of the measures" undertaken by each party. Paragraph 1501(2) further provides that the parties agree to "cooperate on issues of competition law enforcement policy." A significant feature of NAFTA is that it will lend credibility to Mexico's competition policy in two ways. First, it can weaken domestic political pressures from special interest groups to influence the proceedings and focus of the FCC. Second, it reflects the commitment of the Mexican government to the reforms and clearly signals to the investment community the new rules of the game. 59. Indeed, Mary Azcuenaga, commissioner of the Federal Trade Commission, recently advocated targeting government anticompetitive restraints in the United States in her article "The Tariff Is Still the Mother of the Trust," Washburn Law Journal, 29 (1990): 359. 60. That regulation adversely affects competition is a necessary, but not a suf-

Mexico

149

ficient, condition for it to be challenged; there are many types of regulation that may be socially efficient yet may restrain competition. A proposed regulation should not be challenged if it directly solves a serious market (or social) failure, the unavoidable efficiency losses of which likely outweigh the costs of the regulation. If the costs of the regulation outweigh the benefits, the regulation should be scrapped. 61. The FCC has recently announced that it will soon publish its resolutions. 62. Strictly speaking, the FCC classifies its activities into three areas: evaluation of mergers between two or more economic agents; ex officio investigations of possible monopolistic practices, and assessment of private suits filed in connection with possible monopolistic practices (FCC Annual Report, p. 11). 63. For example, an antitrust agency often conducts a preliminary investigation of a matter before opening a formal investigation. In numerous instances, these inquiries are closed, and no official investigation is ever opened. There is no way to determine whether the F C C conducted but did not open investigations or the amount of time it devoted to investigating a matter before it formally opened a case. In addition, ex officio investigations, contrary to merger cases, rarely face statutorily dictated deadlines. Thus, the tabulation of total days may in fact overestimate the resources allocated to nonmerger activities. On the other hand, it is well known that staff investigating mergers often spend weekends and holidays at work; in this case, accounting for days is likely to reflect a closer figure to the actual one. Article 21, Section III, of the LEC obliges the FCC to decide a merger under review within f o r t y - f i v e days. Moreover, the nature of merger activity is unpredictable and endogenous and largely unavoidable. Thus, the figures may be reflecting some uncommon occurrence in merger activity. Given the choice, the FCC may decide to allocate its resources to conduct non-merger investigations. 64. "Playing Monopoly," Economist, (July 9, 1994), p. 64; and FCC Annual Report, pp. 41^13. 65. FCC Annual Report, pp. 33-34. In March 1995, Gabriel Castañeda, the executive secretary of the FCC at the time, observed that in the nine months after the P E M E X action, just under 2,000 new service station concessions had been granted, with markedly noticeable improvements in quality of service in those stations that had opened. 66. In a paper presented at the annual meetings of the Latin American Studies A s s o c i a t i o n , J a n e t K e l l y , " L i f e P a t t e r n s of I n s t i t u t i o n s and P o l i c i e s : ProCompetencia in Venezuela," draft (Caracas: Instituto de Estudios Superiores de Administración [IESA], September 1995), concludes that the Venezuelan competition initiative has been a remarkable success in performing its conventional antitrust functions. This is a peculiar conclusion for a number of reasons. The Caldera government in Venezuela has reinstituted price controls and other regulations in fundamental contradiction with the view that efficiency is achieved only when markets assign scarce resources. This ideology is at odds with a competition agency's raison d'être, which is to prevent against violations of price competition. Moreover, Ana Julia Jatar herself (in "Competition Policies in Liberalizing Economies") observes that competition advocacy constituted the lion's share of the Pro-Competition Agency's functions during her tenure. And Claudia Curiel, currently director for mergers at the agency, agrees that the agency has, under the current political environment, engaged largely in advocacy functions; these are mainly actions intended to i n f o r m d e c i s i o n m a k e r s of p o t e n t i a l g r i e v o u s c o m p e t i t i v e d i s t o r t i o n s . U n f o r t u n a t e l y , the success or e f f e c t i v e n e s s of these interventions cannot be assessed. Still, contrary to the views proffered by Kelly, and echoing popular perceptions in Venezuela, one could draw an unflattering conclusion on the general

150

Latin American Case Studies

success of competition policy. Kelly writes, "Yet, somehow, ProCompetencia has survived and would seem to continue to function surprisingly well" (p. 22). In my view, Professor Kelly misses the point. True, the agency has not been shut down and, in that sense, continues to "function well." But whether it is fulfilling its intended mission of protecting competition is another matter altogether. The Federal Competition Commission in Mexico has faced similar reverses. As in Venezuela, the Mexican government chose to reimpose controls on several consumer items. Again, following a pattern similar to the Venezuelan case, the commission faced intense political pressure to conform to the different goals underlying the government's economic policy. The recent consolidation of Telmex and Cablevision brought about a schism within the commission that reflects the conflict between the short-run allocative efficiency goals of the FCC and the longer-term dynamic efficiency goals of the administration. On one side, the commission's president, Sanchez Ugarte, was inclined to approve the merger. Lining up in favor of bringing legal action to prevent the merger and thus, as they saw it, "to preserve the integrity of the agency" were several senior staff members and the executive secretary, Gabriel Castañeda. Castañeda and several of the senior staff are no longer with the commission. In this sense, the decision to approve the merger may reflect unfavorably on the prospects of the competition agency in Mexico.

8 Regulation and Deregulation in Colombia: Much Ado About Nothing? Rudolf

Hommes

A Historical Perspective of Regulation In Colombia, the role of the state in regulating monopolistic or oligopolistic activity has been of benign neglect. The governments have been traditionally more active in regulating the financial markets and in controlling the activities of managers and large shareholders of publicly held stock corporations than in regulating economic or market power by the private or stateowned companies. Moreover, the goal of state intervention traditionally has been to foster economic activity through tariff protection of the private sector, or through the distribution of subsidies to the productive sector and not to check its development through regulation of monopolies or oligopolies. The Colombian Constitution of 1886, which was revoked in 1991, authorized state intervention in the production, utilization, and consumption of public and private goods to rationalize and plan the economy, in order to reach "integral development." This wide constitutional authorization had to be regulated by a law before it could be applicable. The legal development was very slow. In 1936, President Alfonso Lopez "capped off his reform program with a series of amendments to the constitution . . . which specifically increased the powers of the state in economic matters, spelling out—in terms that inevitably brought to mind the Mexican Constitution of 1917—the doctrine that property rights must be limited by social rights and obligations."1 In this reformist environment, a 1936 law (Ley 16/1936) was approved that prohibited the participation of bank directors in the boards of directors of other, nonfinancial corporations. In 1959, taking advantage of the democratic mood that followed the fall of the Rojas Pinilla dictatorship, reformist minister Hernando Agudelo Villa sponsored and obtained a more comprehensive law (Ley 55/1959). It was inspired by the philosophy of the existing antitrust legislation of the United States, which, working under the assumption of an economy based on free enterprise and economic freedom, 151

152

Latin American Case Studies

attempted to regulate monopoly, oligopoly, and market power for the first time in Colombia. This law defined and regulated unfair competition, restrictions to trade, collusion to interfere with trade, price-fixing, and other practices that hinder competition. It also attempted to control firms that have a dominant position in their markets and to regulate mergers and acquisitions, requiring a previous government authorization for such actions; it also prohibited the ownership of distributors by members of the management of any corporation or by their families. This rule was a reaction to the textile manufactures' practice to grant regional dealerships to family members or favored associates of management, which increased their economic and political power and extended it through regional networks. It is not clear whether the new law intended to prohibit monopolies or the dominant market position of firms or simply to regulate them. At any rate, it gives considerable freedom of action to government because it states that firms that have a sizable proportion of the production, distribution, or consumption of a good or service, which allows them to influence the conditions of the market, will be subject to government control. The nature of the control is not specified, but it clearly allows for extensive regulation. This law also empowered the government to investigate violations to the regime through various superintendencies and the Ministry of Industry. In theory, consumer-citizens or competitors can take legal action against monopolies under the law, because it authorizes the same agencies to accept denunciations of violations of the law. But in practical terms, consumers or citizens have a very low likelihood of succeeding because the authorities are required to act only when these denunciations come with sufficient evidence of the violation, which would limit considerably the capacity of the public to take effective actions. 2 While the government of Colombia has had the legal capacity to regulate monopolies or dominant firms and to prevent practices leading to the obstruction of competition, it has done very little in the decades since the law was i s s u e d . In 1993, it r e i n f o r c e d the legal c a p a c i t y of the Superintendency of Industry and Commerce to act on behalf of the consumers, but after these changes, no known action has taken place. Clearly, this indicates that there is lack of interest on the part of Colombian authorities to control and regulate monopolistic and oligopolistic activity. This indifference with the regulation of economic power stems from the nature of the political coalition that rules Colombia. The constituency of government in economic matters traditionally has been comprised of the different business interests represented by pressure groups and associations rather than the public at large. There is no strong consumer lobby in Colombia, nor is there an important populist party. The left is splintered and has not pursued activist goals—such as the promotion of antimonopoly regulation—and the moderate social-democratic factions of the traditional parties depend on the same business interests for their electoral survival. As a

Colombia

153

result of this, any initiative that is taken in favor of a greater control of economic groups carries the risk of affecting the source of campaign contributions to the politicians of both traditional parties and is usually destined to fail, unless unusual political conditions prevail that give government an opportunity to act more independently. It will be argued later that these conditions were present during Cesar Gaviria's administration—or at least during the first two years—and that this gave that administration the opportunity to carry out reforms that would have been very unlikely under normal political conditions. 3 Something similar, although with a greater degree of government involvement, has occurred with respect to the regulation of securities and corporate practices, particularly in the fields of disclosure, stockholder protection, and insider trading or use of the corporation for the private benefit of large stockholders, the management, or its directors. Although the existing legislation permitted government regulation and intervention in these areas, not all administrations have been eager to strengthen, or even develop, the institutions responsible for establishing regulation and enforcing existing rules. During a brief period at the beginning of Turbay's administration (1978-1982) and during the Betancur period (1982-1986), the Stock Exchange commission was very active and played a role in preventing abuses against minority stockholders and mutual fund investors. These have been the exceptions rather than the rule. The entities responsible for supervision and enforcement largely have formal functions and enforce compliance to bureaucratic norms, but they do not have the power to effectively control; and unless they obtain presidential support, they rarely have the power to stand up to the influential economic groups they are supposed to supervise. 4 The origin of the Colombian legislation dealing with the regulation of monopolistic or oligopolistic activities or with the regulation of security markets and corporate practices is probably closer to the tradition of the United States and England than to the Spanish tradition, which leans in favor of concessions, monopolies, and licenses to the privileged. The formal organization of the laws and the judicial system in which they are e m b e d d e d operates f o r m a l l y according to the Continental tradition: Spanish, French, and Italian. These legal traditions do not mix very well with the Anglo-Saxon concepts and instruments of antitrust legislation because many of the concepts—especially those that require review by a judge or a supervisor—are conceived to operate in a common law environment and do not travel smoothly to a statutory system. Under this judiciary system and in this legal environment, it is usually necessary that violations of the existing regulation be described in full detail for it to be enforceable. But these descriptions are often incomplete or leave large loopholes. Nevertheless, if too much discretion is granted to the supervisor or to the judge, their decisions can be easily challenged, or they themselves can be

154

Latin American Case Studies

challenged politically—through the media or in Congress—by the business interest they have affected. The result is either inaction or a political and legal quagmire that requires a very strong political will of the executive or of the judiciary to confront the economic power of would-be transgressors. Governments, even when they have the ideological commitment to promote this type of control on monopolistic or oligopolistic activities, may not have the power to do it. In the case of Colombia, it is likely, though, that the main reason why regulation of this sort has not progressed is that governments have been interested in something else—the promotion of industrial activity—which stands at cross-purposes with the objectives of regulation of oligopolies and monopolies. After all, it does not make much sense to try to promote competition through the enforcement of antitrust legislation when in the office next door, in the same ministry, they are trying to keep competitors out of the country and to protect domestic production with high tariffs and quantitative barriers. The scarce interest of the authorities in antitrust activities must also be analyzed from the perspective of the historical development of industry. In Colombia, following the rapid growth of coffee production in the late nineteenth and the early twentieth century, industry also developed, mainly as a result of domestic or immigrant entrepreneurship and local capital. Bavaria, today's dominant beer firm, was founded by German immigrants in the late nineteenth century. As early as 1905, the Colombian government was using the concept of infant-industry protection to foster the development of modern textile manufacturing and flour milling by imposing high tariffs for the final product and very low tariffs for its inputs. With this inducement and that of the growing market fostered by expanding coffee exports, Colombian factories that performed only the last stages of the production processes sprung up in many cities, especially in Antioquia, where gold mining had created an entrepreneurial class with capital to invest.5 Other industries followed the lead of textiles and were organized either through joint stock ownership or through the merger of existing, smaller firms. Industry leaders such as Nacional de Chocolates or Colombiana de Tabacos got started this way.6 Perhaps the most illustrative example of the birth of Colombian enterprises is the case of Cementos Argos (Colombia's largest conglomerate in the cement industry). It was started during the 1920s through the entrepreneurship of two engineers who had been educated abroad. They came back from their studies with the idea and raised capital in Antioquia, mostly through family connections, to create a joint stock corporation. This corporation grew quickly with the surge of public works and the urbanization of the country in the 1920s, 1930s, and 1940s. Its savings were invested as seed capital to start other joint stock cement-producing corporations, with different partners in different regions, or to acquire stock of other Antioquia-based corporations that would, in turn, invest in the stock of

Colombia

155

Argos. The result is one of Colombia's largest, most diversified, most profitable, and best managed conglomerates: the Suramericana Group. 7 It was started and grew through domestic capital market financing, with local management and ownership. During the 1930s and 1940s, Colombian industry got a series of big pushes that helped and accelerated its development. There was the wave of fresh foreign entrepreneurship pushed out of Europe by the Spanish Civil War and by fascism. Jewish immigrants came from Europe and the Mediterranean countries. They and other immigrants settled in the country, started small consumer goods industries, capital goods producers, and new modes of trade and finance; both supermarkets and consumer credit can be traced to these European immigrants. Industry also flourished during those years because, as a reaction to the world economic depression and to its own domestic economic and financial crisis, the Colombian government devalued the currency, imposed capital and import controls, and increased tariffs. 8 Later, during World War II, not only entrepreneurship was called for, but also resourcefulness and indigenous technological development, because many of the inputs and intermediate goods that came from abroad had to be substituted by local goods. Finally, during the 1950s and 1960s and well into the 1970s, the country embraced enthusiastically an import substitution strategy, forcefully complemented with subsidized credit and government intervention in favor of industry. Foreign investment in consumer goods industries may be seen as an immediate consequence of the import substitution strategy. In other sectors, such as oil or mining, the foreign investment followed natural resources and has had very little bearing on the industrial development of Colombia. In banking, the foreign investors were very active and were very important for the development of financial practices and institutions. However, of the large banks that have played a role in the recent history of the financial sector, only one—Banco Comercial Antioqueno—stems from a foreignowned bank. All other major banks, with the exception of Citibank, which joined the country once again in 1990, have domestic owners. In agriculture, the infamous history of United Fruit notwithstanding, 9 there has not been large foreign investment in Colombia. The same can be said for the transportation sector, which developed primarily with local entrepreneurs and capital, with the exception of AVIANCA, the largest air carrier that was started by a group of discharged young Luftwaffe pilots, with some foreign capital. During World War II, these stocks were acquired by Pan Am and sold in the early 1970s to the present Colombian owners. In the area of public services, there was initially some foreign and local private investment. All the major ports were started by private investors, and the electricity and telephone services in large cities were private at first, as well as the water supply. Most of these private companies were

156

Latin American Case Studies

locally owned and run, but there were exceptions. The Barranquilla public services company was originally owned by U.S. capital and continued to be managed by an American many years after it had been nationalized. Similarly, the original phone company in Bogotá was owned by Americans. During the 1930s and 1940s, when Colombian firms did not continue to have access to international sources of credit, their investment capacity was severely curtailed. This, together with the growth of cities and their inability to supply services to the urban poor, created the conditions for the gradual takeover by the public sector. This process culminated in the 1950s and 1960s when the multilateral financial institutions—unable to lend to the private sector for infrastructure investment—collaborated with the governments in nationalizing the public service firms and organizing the centralized public monopolies that subsist today. Curiously, they now promote their privatization. To finish this introductory section, it is worth keeping in mind the early steps of Colombian industry and the way it grew, through conglomeration, fusions, and acquisitions, mostly under conditions of protection of the domestic market and government intervention in favor of industrial development. This environment was not conducive to the application of legislation that attempted to regulate monopoly or oligopoly, much less to regulate economic power. But the strategy paid off handsomely during the initial stages: Colombian industry grew 830 percent during the period between 1929 and 1957. Thereafter, it continued to grow at very rapid rates, until it started to slow down in the 1970s and 1980s because the import substitution model ran out of steam. This chapter provides a detailed account of the development of competition policies in Colombia, considering the historical context as well as the contemporary influences. This close analysis is critical for understanding the circumstances policymakers must consider in designing a regionally informed competition policy. As with several other Latin American countries, Colombia's success with the import substitution model, and especially its policy of protecting infant industries, fostered a strong and commercially influential state, eventually necessitating a constitutional amendment in 1991 to loosen the state's control and promote free competition. An examination of the actual events and decisions that constructed the state's protectionist policies offers much-needed insight into how these policies might be taken apart and replaced by more effective competition policies. Following this historical account of commercial and financial regulation in Colombia, this chapter focuses on the contemporary private sector, offering a brief analysis of the important elements, such as coffee, oil, and finance. Next, the study examines patterns of concentration and, conversely, competitiveness in different sectors of the economy. Then I proceed to describe the recent reforms begun under the Gaviria administration (1990-1994) and the effects of those reforms on competition, followed by

Colombia

157

an explanation of the political circumstances that made the reforms feasible. Finally, I have included an appendix with a more detailed description of the development of Gaviria's policies and structural reforms.

The Modern Private Sector The origins of the modern private-sector development can be traced to the expansion of coffee production and coffee exports during the first decades of the twentieth century. In 1924, coffee already represented 80 percent of Colombian exports, six times the value of exports at the turn of the century. By 1930, Colombia was the second world exporter of coffee, a position that it has maintained until the present time. 10 Public and Private Spheres of Influence In general, Colombian industrial development was a private affair. Nevertheless, the government intervened directly in its development. In the early 1940s, following a Latin American fad that also had an expression in fascist Italy and Falangist Spain, it created the Instituto de Fomento Industrial (IFI), a public-sector development bank and holding company with the purpose of investing in strategic industries that would be essential for industrial development and would not be developed independently by the private sector and of channeling credit, mostly subsidized, to the industrial sector. The IFI created the caustic soda production plant of Alcalis de Colombia, took over the salt production monopoly of the state, and started a number of ambitious and mostly ill-conceived investments that have either failed or produced substantial losses. The financial support for most of these projects during the 1960s and through the late 1980s came from the reserves of the social security system that were lost and had to be replenished by the central government. Further, in the early 1950s, another f o r m of g o v e r n m e n t intervention was introduced: Paz del Rio, the Colombian integrated steel firm, was created with capital forcefully collected from Colombian taxpayers in lieu of taxes. Specifically, a portion of citizens' income tax had to be subscribed to stock in Paz del Rio, and in this way, it became a privately owned, publicly run monopoly. For a number of years, the market value of these shares was negligible and was acquired by astute investors that gained control of the company. This scheme was utilized later to capitalize Banco Ganadero with the same results.

Oil and Mining In sharp contrast with the industrial sector, mining has been predominantly a joint public and private endeavor. Except for artisan coal and gold min-

158

Latin American Case Studies

ing, all other mining activities are either licensed by the government, which has control of natural resources, or jointly owned by public and private enterprises. In the early 1950s, under a very conservative regime, the oil industry was nationalized and ECOPETROL was created as a state monopoly to explore and develop this resource. As a result, investment in exploration and oil production fell sharply, and Colombia, in the early 1970s, ceased to be an oil-exporting country. Consequently, it was necessary to liberalize the regime and allow private firms to explore and produce oil under a much-celebrated, successful, but already obsolete joint production scheme that was introduced in the early 1970s. Under this joint production contract (contrato de asociación), the private firm is given the right to explore in a given field, bearing all the costs and risks of exploration. If oil is found, ECOPETROL reimburses the private associate for half of the exploration costs and enters an association to produce oil on a fifty-fifty basis. Following the early success of the joint production contract, it was replicated for the development of the North Cerrejón coal project, which was an association agreement between Exxon Coal and CARBOCOL, a public Colombian coal company created ad hoc for this purpose. A similar contract was used to develop the Cerro Matoso nickel project, with the participation of the IFI as the Colombian counterpart. In these two projects, the joint contract has failed because the public sector has had to invest very large sums in projects that have been less than profitable. The main explanation for the poor performance of these investments is that international prices did not turn out as high as expected in the early 1970s or early 1980s but, rather, were about half the expected level. Additionally, due to the high forecasts, the project designers and constructors incurred costs that probably could have been avoided if expectations had been less rosy. The combination of rock-bottom prices and conspicuous investment did away with profits. This led to a reassessment of the joint production strategy in non-oil-mining projects. Starting in the late 1980s, new mining investment by the private sector was allowed and encouraged under the old concession or licensing scheme, which places all costs and risks on the private investors and limits the government's role to collecting royalties and taxes. This also is applicable to emeralds and precious metals. Coffee The development of commercial agriculture was also in the private realm, although with some peculiar Colombian twists. The most interesting is the National Federation of Coffee Growers (FEDECAFE), a private nonprofit organization that was created in the early 1920s as a lobbying and support organization for coffee producers.

Colombia

159

In the early 1940s, the government created the National Coffee Fund as a public price stabilization fund, and it also established a coffee board (Comité Nacional de Cafeteros) with equal representation of government and private members but endowing the minister of finance with veto power for the key decisions to determine coffee support prices, to regulate the marketing of the product domestically and abroad, to dictate policies leading to changes in production or accumulation of stocks, and to decide how to spend the usually vast resources of the fund. These resources came from three sources until 1991: from an export tax, from the "retention" in money or stocks of a proportion of the yearly crop, and from the profits of the direct exports of FEDECAFE. This arrangement has worked fairly well despite some financial setbacks and the nagging question of whether the control of such vast resources does or does not give too much power to the management of FEDECAFE. Whether or not the resources have been spent and invested wisely is another debatable issue. In macroeconomic terms, the National Coffee Fund and the coffee board have been successful because Colombia has managed to largely delink the real exchange rate from fluctuations in international coffee prices, sheltering exporters of other sectors from the effects of these fluctuations. This was achieved by regulating domestic coffee prices and collecting the difference between them and international prices during the boom years and by smoothing the downfall with resources collected for the coffee fund during the upturn. Thus, the income of producers was stabilized, and the real exchange rate was prevented from appreciating to the full extent that it would have in the absence of regulation and the stabilizing mechanism. The management of the fund was entrusted to FEDECAFE, which also became an exporter of coffee, with a de facto monopoly of 50 percent of the exports. The remaining 50 percent is allocated to exporters selected and approved by this same organization, with the ensuing risks of cronyism and concentration of economic and political power among a few individuals or firms. This scheme continues almost intact to this day. The management of public funds has rendered the federation, the leaders of the coffee producers' political institutions, and the chosen exporters a very powerful pressure group that also has a high degree of control over the assets of the fund. These assets have been invested partially in coffee stocks but also in a number of organizations that have economic and political clout: the Flota Mercante Grancolombiana, the Colombian merchant marine flag carrier; Banco Cafetero, one of the largest Colombian banks; CONCASA, a large savings and loan corporation; Agricola de Seguros, an insurance company; ACES, an airline; and several other minor companies, as well as most of the regional private development banks.

160

Latin American Case Studies

Agriculture Other agricultural subsectors have not become as intertwined with the public sector as has coffee, but they are constantly seeking arrangements to secure subsidies and rents from the government. This has come invariably under the guise of support prices for commercial agricultural goods by the state marketing institute IDEMA, in the form of subsidized credit or high protection f r o m imports. The noncommercial, peasant agriculture has lacked political representation, has no effective lobby capacity, and has not obtained any significant benefits from the state despite the fact that most subsidy programs and "agricultural development" schemes are supposed to be directed to the peasants and small farmers.

Finance Another area that has been the object of heavy intervention by the public sector has been the financial sector. Until the enactment of Colombia's new Constitution in 1991, the government, through the president, was authorized to intervene in the financial sector only on matters related to the protection of private financial savings. This enabled the government to regulate all financial activities through presidential decrees. Additionally, the market was regulated by the Monetary Board, the Banco de la República (Central Bank), and the bank superintendent. But the Constitution of 1991 concentrated all regulatory power in the government and in the Central Bank—an autonomous authority in matters related to credit, monetary policy, and foreign exchange policy and management. The institutional regulatory power was retained by the government, as well as all precautionary regulation of the financial system. In addition to its regulatory role, the government has been a banker since the 1930s and 1940s. It created and still owns, in addition to the IFI, the Banco Central Hipotecario, a mortgage bank; the Caja Agraria, a commercial bank specializing in agricultural credit and agricultural insurance; and the Banco Popular, a commercial bank run by the government that was originally created as a popular consumer bank to increase public access to durable consumer goods but that is simply a mediocre, publicly owned commercial bank. Furthermore, in the early 1980s, Colombia suffered a major banking crisis caused by a combination of fraudulent management of some institutions and the effects of the international credit crunch on Latin America in the aftermath of a coffee boom during which credit had expanded significantly and banking standards had been loosened. The crisis forced the nationalization of Banco de Colombia and the intervention of Banco de Bogotá, the largest private banks. It also prompted the acquisition by the Fondo de Garantías de Instituciones Financieras of a number of other

Colombia

161

small- and medium-sized financial institutions, which were then run as private institutions under public trust until they were sold or liquidated. Industrial

Development

Although protectionism played an important role as an initial inducement for the creation of industry, it generated a precarious industrial development only until the big pull came from the expansion of the domestic market. This expansion was due almost entirely to the successful development of the coffee sector, which was facilitated by large public investments in railroads and by private transportation development. After 1930, industrialization took off. The share of the manufacturing sector as a proportion of gross domestic product (GDP) grew from less than 8 percent in the first half of the 1930s to 10 percent in the second half and to 15 percent by the end of the 1940s. It continued growing vigorously during the 1950s and less rapidly through the 1960s and 1970s, when it reached a share of 22 percent of GDP; but it lost dynamism thereafter. In fact, the share of manufacturing in GDP has been constant since 1980 (see Figure 8.1). Production in the manufacturing sector was initially concentrated in food processing, tobacco, and wooden products, which accounted for 77 percent of manufacturing value added in the late 1920s. With time, other sectors, such as beverage production, textiles, clothing, and cement, gained

Figure 8.1

Colombia: Industry Share of G D P

162

Latin American Case Studies

a greater share in the composition of manufacturing value added, as well as more sophisticated subsectors, such as paper products, chemicals, rubber, metal manufactures, and machinery. In the late 1970s, the three groups of products reached even shares of the manufacturing value added, which they have maintained to the present (see Figure 8.2). Clearly, technological development and rapid growth of high value-added industries are absent in the history of the industrialized development of Colombia. The development of the manufacturing sector in Colombia had special characteristics. In contrast to other countries in the region, it maintained a relatively conservative structure—low risk, low technology, and moderate investment—concentrating on light manufacturing and consumer products without making an all-out effort to produce intermediate or capital goods. This was due, in part, to the relatively less important role that the public sector played as a direct investor in manufacturing production and, in part, to the strategy of import substitution in a small economy. The expansion of industry did not take place at the expense of agriculture. It is remarkable that during the years of rapid industrial growth, commercial agriculture also developed very rapidly as a private-sector activity. According to José Antonio Ocampo, the agricultural sector has maintained a relatively high share of GDP when compared to countries of similar size and development." However, the share of agriculture is much lower than

Figure 8.2

Colombia: Composition of Manufacturing Value Added

Colombia

163

that of other comparable and more dynamic countries, such as Indonesia and Thailand. Industrialization, fostered by an import substitution scheme, did not contribute to a dynamic development of export industries. Exports were 24 percent of GDP in the last half of the 1920s, and this share was gradually reduced to 16 percent in the mid-to-late 1960s and to 14 percent in the early 1980s. The mixed strategy of import substitution cum export promotion adopted during the 1960s did not prevent the fall of exports as a proportion of GDP, and exports did not begin to gain ground again until the trade regime began to be liberalized in the late 1980s (see Figure 8.3). The wellknown story of the Asian tigers points to a different path in which exports gain an increasing share of G D P However, exports have diversified substantially, making the economy much more resilient to external shocks (see Figure 8.4).

Patterns of Concentration The concentration of the industrial sector has been substantial since its beginnings and has increased over time. In a very thorough analysis of the Colombian industrial sector, Kristin Hallberg shows that the proportion of

Figure 8.3

Colombia: Trade Share of GDP

1 64

Figure 8.4

Latin American

Case Studies

Colombia: Composition of Exports

industries at a four-digit level "with highly and moderately concentrated market structures has increased over time, with a corresponding decrease in the proportion of industries with less concentrated market structure." 12 In 1968, the share of total manufacturing production corresponding to moderately and highly concentrated industries was 47.2 percent; by 1984, the share of these same industries had grown to 65.3 percent (see Table 8.1). Moreover, a greater degree of concentration was shown in capital goods industries (see Table 8.2), where the moderately and highly concentrated industries had a share of 85.1 percent of production in 1984, and in intermediate goods, where the share amounted to 78 percent that same year, than in consumer goods, where the share of subsectors subject to moderate and strong competition was 53.5 percent, a figure that has since grown. The intermediate and capital goods industries have enjoyed a significantly lower degree of protection from external competition than the consumer goods sector. This would suggest that there may be a positive relationship among industry concentration, degree of openness to foreign competition, and the tendency of sectors facing international competition to require larger firms to compete. However, Hallberg did not find any pattern or clear association between the degrees of internal and external competition. For example, she found that some highly concentrated sectors (e.g., beer and nonalcoholic beverages) and nonconcentrated—(i.e., competitive) sectors (e.g., paper containers, knitting mills, bakery products) were equally subject to very little external competition. 13

Colombia Table 8.1

1 65

Concentration of Production, 1968 and 1984 1968

Highly concentrated Moderately concentrated Moderately competitive Competitive Total

1984

No. of Industries

%

No. of Industries

%

16 26 28 19 89

18.0 29.2 31.5 21.4 100.0

19 28 22 3 72

26.4 38.9 30.6 4.2 100.0

Source: World Bank, Colombia: Industrial Competition and Performance, 1988. Note: The total number of four-digit industries refers to the number analyzed in each of the two years. The definitions of the concentration categories are: Highly concentrated: 75 < Cr.(4) < 100; moderately concentrated: 50 < Cr.(4) < 75; moderately competitive: 25 < Cr.(4) < 50; and competitive: 0 < Cr.(4) < 25.

Table 8.2

Concentration by Type of Industry, 1968 and 1984 (as percent of Industries Analyzed) Consumer Goods

Highly concentrated Moderately concentrated Moderately competitive Competitive Total

Intermediate Goods

Capital Goods

1968

1984

1968

1984

1968

1984

15.1 20.9 46.8 17.2 100.0

20.6 26.0 31.7 21.8 100.0

35.3 13.6 36.4 14.7 100.0

39.0 39.0 22.0 0.0 100.0

10.9 13.4 41.8 33.9 100.0

8.9 76.2 14.9 0.0 100.0

Source: World Bank, Colombia: Industrial Competition and Performance, 1988.

Another very interesting finding of the same study is the relationship between the price cost margins and the growth of productivity with the degrees of internal and external competition. It was found that industries in markets facing greater competition, be it domestic or international, showed lower price cost margins than firms in less competitive markets. In the same way, subsectors with more competition showed higher rates of total factor productivity growth than sectors facing less competition. 14 Clearly, all these findings are arguments in favor of opening up the economy, and they were in fact the main arguments for doing so in 1990-1991.

Ownership and Conglomerates The patterns of ownership of Colombian firms are also very concentrated and have become more concentrated over time. Gini coefficients calculated for the distribution of ownership of firms listed in the country's stock

166

Latin American Case Studies

exchange show that concentration increased substantially between 1973 and the early 1980s, 15 when several of the principal firms in the stock exchanges were taken over by conglomerates. In many developing countries, "a significant part of the domestic and privately owned industrial sector, and particularly the activities which use relatively modern and capital-intensive techniques, is organized in a special institutional pattern. Following the Latin American term, we may call this structure the 'group,' although this pattern of economic organization is also common, with different names, in Asia and Africa." 1 6 Likewise, in Colombia, the feature that dominates is the group or the conglomerate. Since the early 1930s, firms have attempted to integrate horizontally to corner specific markets and establish monopolies—like the beer monopoly or the cement oligopoly, for example—and, at the same time, they have integrated vertically to establish barriers to entry for prospective new competitors. During the decades of import substitution growth strategies and of intervention by the government in the economy to protect specific industries and to promote others, it became profitable for conglomerates to extend into the financial sector to capture the rents provided by government through subsidized credit and into the media to acquire political control. In this way, the modern Colombian conglomerate typically owns a "cash cow" in a low-competition sector, not subject to external competition, and protects entry into this market by vertical integration both upstream and down. Furthermore, it owns a bank or a large financial institution and has access to the media through direct ownership of a media channel or through heavy advertising in independent media. The clearest examples of this pattern are the Santodomingo, Suramericana, and Ardila conglomerates, as well as FEDECAFE, which are all among the most dominant economic organizations in Colombia. 1 7 Typically, these conglomerates generated liquid resources far in excess of their cash requirements for the expansion of their core activities, which produce for a small protected domestic market and not for exportation. Bavaria and Postobon are examples of cash cows generating the liquidity that the group utilized to finance other acquisitions in the age of import substitution and capital controls. 18 The limited extent of the market and the practical prohibition of expansion abroad that remained the rule for several decades facilitated or forced the channeling of funds initially to vertical and horizontal integration through mergers and acquisitions and later into diversification of the conglomerate. The management strategies vary from one conglomerate to another. For example, the Santodomingo and Ardila conglomerates are run hierarchically from the top as a single company, with the conglomerate management directly involved in the management of the different firms. Although both groups are managed as if they were wholly owned, the core firm of the Santodomingo conglomerate is an open stock corporation with thousands

Colombia

167

of small stockholders, while the Postobon equivalent of the Ardila group is a family-owned corporation. Suramericana firms are all open stock corporations and are run more independently by professional managers who collectively comprise the management committee of the conglomerate. Although Suramericana also has a centralized management that sets the objectives for the whole group and establishes constraints for the individual firms, the managers have independence and are accountable for results to the stockholders in a traditional way. It is possible that conglomerates in Colombia have been economically inefficient since they did not always seek economies of scale or scope, and some of their investments would probably not be able to subsist in a more competitive environment or if government enforced the existing regulations for protection of minority shareholders. This is so because some of the groups that manage the conglomerates can and may use the financial power of the core companies to enlarge their own empires at the expense of the smaller shareholders. For example, it is not clear whether the group of stockholders that has the controlling interest in a stock corporation can legally use its cash flow or its creditworthiness to finance the acquisition of other companies by the controlling stockholders, or if it can sell goods or services to the company in less-than-competitive conditions. These practices have been common in the formation of the conglomerates and are still used as levers for their expansion. More stringent application of existing laws and regulations would prevent their utilization and probably slow this process. 19 Given the present character of Colombian politics and the public opinion influence of conglomerates, it is not very likely that in the near future governments would introduce more effective antitrust legislation, preventing the creation of barriers to entry through vertical integration and the rent seeking and augmentation of political power through accumulation of economic power.

Recent Reforms and Their Impact on Competition Although conglomerates cast a large shadow over Colombian politics, there are times when the political atmosphere is more favorable to reforms because the attention of the country is focused on different problems or because the political forces are realigning and the popular constituency has a chance to express its desire for change. This happened during the 19901994 Gaviria administration, particularly during its first two years. The country had experienced a political shock after the confrontation of the Medellin drug organization with the authorities, which launched an unprecedented period of terrorism and the assassination of several presidential candidates, including the leading liberal candidate, Luis Carlos Galán, who had opposed the Mafia barons many years before other politi-

168

Latin American Case Studies

cians deemed it necessary to follow suit. This crisis, like most crises, opened avenues for reform that were cleverly used by Gaviria and his team. Their reforms spanned a wide range of activities: the Constitution was changed for the first time in 105 years; trade was liberalized; price controls were removed; financial-sector reform was approved by Congress; the exchange control system was liberalized and revamped; obstacles to foreign investment were completely removed; and the regulatory framework was modernized while some of the supervisory agencies were given more teeth. The government initiated a reform of the state, opening up investment in public services to the private sector, as well as in telecommunications and ports, and a modest privatization program was initiated. A summary of the principal reforms will be provided in the following sections. A more extensive description of the main legal changes is contained in the appendix to this chapter. Apertura In 1990, Colombia had the highest tariffs in the region, and together with Ecuador, it had the least-open economy of the Andean countries. Accordingly, from the point of view of fostering competition, the most important reform undertaken by the Colombian government was called the "apertura," or the opening of the economy to foreign trade and foreign investment. This reform was implemented by the Gaviria administration between 1990 and 1991, although a very timid action in the same direction had been started by Virgilio Barco's preceding administration. The foreign trade reform started in 1990 was much more ambitious and straightforward. During the first four months of the Gaviria administration, quantitative restrictions were practically eliminated. This involved moving from an environment of quantitative input restrictions, such as import quotas, import licenses, and lists of products of forbidden importation, to free trade. At the same time, the reduction of import tariffs was accelerated. After a hesitant start, they were cut from an average of 36.8 percent in 1990 to 12 percent in 1991. The average effective protection was reduced from 75 percent in 1989 to 34 percent in 1991 and to 21 percent in 1992. Although some tariffs have been increased due to political pressures or in response to price fluctuations in international markets, the tariff structure has remained largely unaltered since 1991.20 The reaction of the private sector to the apertura, as well as to the trade integration with Venezuela and Ecuador, was generally favorable among industrialists, who rose to the challenge of investing in new plants and equipment, who changed their production structures, and who have generally increased labor productivity year after year following the 1991 changes. In the agricultural sector, the response was largely negative, and the government had to soft-pedal some of the changes in 1993, when the

Colombia

169

low international prices of such agricultural goods as rice and cotton increased the competition of foreign products in these markets. As time elapses, such policies as the use of reference international prices for some products, the intensification of antidumping suits, or the use of safeguard clauses in international trade agreements are beginning to undermine the initial opening of the economy that was achieved in 1991. This drift to higher protectionism is a natural process because there are no strong consumer lobbies in Colombia, and all the pressure is in the direction of more protection. However, this is not exclusively a Colombian trait; it occurs everywhere, even in countries where consumers are organized. Unfortunately, the rules of collective choice are biased in favor of protectionism, since few benefit from it substantially while most pay a small amount for it. The disproportionate difference between individual benefits and collective costs works in favor of active and powerful associations of producers, not of consumers. The impact of the apertura on the market structure of the productive sectors is not yet clear. As a result of the apertura, there were no immediate business failures or significant plant closings. What has been noticeable, however, is a shift from the use of domestic raw materials to imported intermediate goods and much higher private investment. Additionally, labor productivity in the manufacturing sector has increased, and, consequently, employment in this sector is growing well below output. The conglomerates have been expanding inside the country and abroad, branching out to other industries and seeking economies of scale and scope. Although their core industries have not been affected by foreign competition, internal competition has become more intensive in the beer and soft-drink markets, for example. In those areas where conglomerate interests were affected—textiles, for instance—the government has been supportive and has curtailed foreign competition through different means. Overall, the apertura has been a shot in the arm of the industrial sector, introducing much-needed dynamism and increasing the potential of foreign competition and thus the need to invest and update technology and trading patterns. If anything, the apertura will probably force consolidation—mergers and strategic associations—and more concentration internally, but it will also render more competitive firms. Constitutional Reform and Derived

Legislation

The constitutional reform of 1991 laid new ground rules for the relationship between the state and the private sector, as well as among firms. It established that economic activity is limited by the public interest, that free competition is a universal right, and that the state is responsible for impeding restrictions to economic freedom. Additionally, the new Constitution, following the 1936 tradition,

1 70

Latin American Case Studies

authorized the state to intervene in the general direction of the economy and in all sectors to "promote productivity and competitiveness," which may be a contradictory mandate in some cases to foster rationality in the use of resources and to protect the environment and the quality of life. Furthermore, it prohibited the creation of legal monopolies but kept alive such state monopolies as liquor production and gambling. The Constitution defined banking, insurance, and all other financial services, including the exchanges, as activities of public interest that cannot be entered without express authorization of the state and directed the government to regulate these activities. No initiative has been presented to Congress leading to the legal development of the articles of the Constitution that deal with the regulation of monopolies or oligopolies, and there is a very high probability that such a legislation would be effectively blocked by the lobbies of the conglomerates that operate in highly concentrated markets. In fact, the Constitutional Assembly attempted to draft articles dealing with the concentration of economic power and its political consequences; this was blocked successfully by the conglomerate lobbies. Nevertheless, the Constitution left a small door open for reform that could lead to increased capacity of the state to regulate oligopolies and monopolies, because it authorized the government to restructure the government agencies to make them consistent with the new Constitution.21 The government used this authorization to restructure the Superintendency of Industry and Commerce, giving it new powers to increase the applicability of the existing legislation to regulate monopoly and oligopoly and to intervene in cases of abuse of dominant position or obstruction of competition (Decreto 2153/1992). Additionally, the norms defined when and how the superintendency can act in cases of mergers and acquisitions. With its new charter, the superintendency could act very forcefully to promote competition and to check violations of existing norms, with a wide field of action in the industrial and commercial sectors and following up complaints in the public services sectors. However, during the first two years of operation under the new charter, the superintendency did not act on any case dealing with restriction of competition, free trade, or abuse of the dominant position, and it would be a wonder if it did. The firms that operate under extreme monopolistic conditions, or even those that operate in oligopolistic markets in Colombia, either operate very large communication networks spanning radio and television stations throughout Colombia or have strong influence in the media through their advertising expenditures. Under these conditions, aspiring civil servants will very rarely risk, without the support of higher echelons in the government, the social and political costs of confronting the economic power of their would-be victims. As a result, even with an enhanced charter, the superintendency is as idle as it was before the charter and has not gotten involved in activities pertaining

Colombia

171

to the control of monopolies or oligopolies. This will remain without change until the higher government decides to act. When this will take place, it will be equipped with sufficient legal tools for the task. Price Controls Traditionally, the Colombian government actually helped the leading firms in various markets to set noncompetitive prices or to obtain above-normal profits through the mechanisms of price control that were in operation before the Gaviria administration largely abolished them in 1994. In the past, the government set the prices of beer, soft drinks, tires, transportation equipment, paper, medicines, and numerous other articles. This was done in coordination with the private sector through elaborate negotiations that included revisions that often surpassed inflation; and prices were set above the costs of the most inefficient producer. The result was that prices of "controlled" products often increased more than those of "free" products, that the prices set by the government generated large rents for the more efficient producers, and that all this, in combination with external protection, severely taxed the Colombian consumer. The Gaviria administration'liberated most of these prices and opened the markets to foreign competition as an instrument of price control. Very rapidly, the prices of tradable goods, such as tires and paper, began to decrease in real and relative terms. Others goods, such as beer and soft drinks, continued to grow with inflation but not above it. Financial-Sector

Reform

The government sought to liberalize the financial sector in 1990 but met with fierce opposition by the management of the Central Bank, which used all its considerable prestige and political power to prevent a full liberalization. A compromise solution was drafted into a new statute for the financial sector that allowed greater competition in the sector, permitted foreign ownership of banks, and brought down many of the preexisting barriers to entrance. The new regulation also helped to increase transparency and created more effective rules to promote disclosure of the real financial situation of banks and financial institutions. Despite this progress, the new system continues to induce market segmentation and to prevent competition, although to a lesser degree. After the 1991 Constitution was approved, the government had to go to Congress for a new law that regulated the intervention of the government in the financial markets. It created new opportunities for competition in the sector and lowered the barriers to entry even more, just stopping shy of authorizing universal banking. Although these laws introduced more freedom and potentially more

172

Latin American Case Studies

competition in the financial markets, and although the quality of government intervention and supervision has improved substantially as a result of the reforms, the sector remains overregulated and segmented. Financial institutions still show very large margins, and only two new banks have been created since 1990, although a number of financial institutions, including financial cooperatives, have transformed into commercial banks. The Regulation of Public

Services

According to the Constitution, the state is responsible for the efficient provision of public services. Following the prescriptions of the new Constitution, all basic services were reregulated (Ley 142/1994). Special commissions were created for energy, telecommunications, water supply, and sewage, which are responsible for fostering competition in their sectors, inhibiting practices that are restrictive to competition, setting guidelines for tariffs (including caps or maximum rates of return), regulating licenses, and overseeing costs.22 The reform of the public services regulation—including the deregulation of transportation, the privatization of ports,23 and the authorization of private investors to participate in the provision of public services—was aimed at increasing competition, eliminating the preexisting public-sector monopolies, and increasing the capacity of the government to control and monitor practices by the dominant firms in each subsector. The most significant innovation of this legislation is that anybody can organize and operate firms to supply public services, within the existing legal constraints. In the past, this had been reserved exclusively for public enterprises. The new regulatory framework for the provision and distribution of public services authorizes government intervention to promote free competition and to suppress the "abuse of a dominant position in the market" by private and public enterprises. It covers the whole realm of public services, ranging from water supply and local garbage disposal to street cleaning and telecommunications. Central and local governments are forced to grant operating licenses and to allow private firms to build and operate the networks that are required for their business. Governments cannot grant monopolies or special privileges to any supplier of public services that are not available to others under the same conditions. These firms, public or private, must avoid privileges or unjustified discrimination and must abstain from any practice that would restrict competition or constitute "disloyal competition." These practices consist of setting tariffs below operating costs, collusion agreements, and abuses of a dominant position in the markets. The abuse of a dominant position is also defined as imposing conditions on the buyers that would affect their freedom to operate a business or unduly limit the liability of the supplier. This law also obligates the owners of networks to give access to all

Colombia

173

suppliers, at the same prices, to deliver the services to consumers. The enforcement of these laws is the responsibility of the Superintendency of Public Services. This agency is empowered to supervise public service suppliers and distributors and to ascertain that their operations comply with the new regulations. It can impose fines, suspend the operation of a supplier, or directly intervene in the management of the firms when violations occur. The regulatory commissions have the responsibility for regulating the supply of public services and for promoting competition among suppliers when it is economically desirable in terms of efficiency and the quality of the services provided. They are authorized to regulate tariffs, issue quality norms, provide standards pertaining to the supply and distribution contracts of public services, and encourage systems that either increase the efficiency or quality of services or lower the supply costs. They have been empowered to order mergers of suppliers or to divide the firms into independent components when these actions contribute to promote competition or to increase efficiency. They regulate the access of suppliers to networks and the conditions of utilization of the networks. They can also regulate the nature and size of the subsidies that have to be provided by the government to low-income families; and they can adopt policies to promote the diversification of ownership of public service companies, as well as regulate the equity composition of those firms to avoid excessive concentration of ownership. Further, the commissions may act as arbiters in conflicts between suppliers or between suppliers and users. They must define the rules for the participation of the private sector and for the relationships among firms in the sectors that are regulated by them. Having been issued at the end of the Gaviria administration, most of these laws have not been exposed to the test of time. And it will probably take a long time before there is real competition in the public services because private investment is still timid and the authorities are not quite sure how to deal with it. But, at any rate, it is now possible to develop most public services without having to wait for the state to gather enough resources to do it; and in the future, it will be possible that the local public utilities can be privately run. This was impossible even in the late 1980s. Privatization The opening of the public services sector to private companies was the most important step undertaken by the government in favor of privatization. This will increase the participation of the private sector in activities that had been monopolized by the state, it will increase competition, and it will hopefully increase the quality of public services. However, private foreign and domestic investment will not flow freely to these sectors until the majority of the supply and distribution facilities are privatized. The government took very serious steps to privatize the banking sector, which had been substantially nationalized during the first half of the 1980s.

174

Latin American

Case Studies

It initially sold two small banks and one medium bank to private investors, began to privatize Banco Cafetero, and sold Banco de Colombia and the public share of Banco Ganadero and CORPAVI (Corporación de Ahorro y Vivienda), one of Colombia's largest savings and loan institutions, to private Colombian and foreign investors. This significantly changed the structure of ownership of the Colombian financial sector because the private sector now owns more than 50 percent of the combined equity of financial institutions, while in 1990, the public sector owned the majority. The gove r n m e n t also plans to p r i v a t i z e Banco P o p u l a r and Banco Central Hipotecario so that 60 percent of the sector would be in private hands. The IFI, the largest development finance company, has not been scheduled for privatization and continues to invest in dubious projects while it offers for sale, simultaneously, its shares of equally dubious companies that it acquired in the past. Other privatizations have been numerous but not important, partly because the Colombian government has not followed the lead of other countries on the continent, wherein governments owned an important share of the industrial and mining sector; and partly because the important holdings—TELECOM and ECOPETROL—are not for sale. Apart from these two companies, the list of public firms and assets that would be sold is not very large: the IFI and its investments; CARBOCOL; and important assets in the electrical sector, which include a hydroelectric generation facility, a thermoelectric plant, and the government's shares in ISA (an electric generation and national grid). CARBOCOL and two of the electrical generation plants have been restructured and can be sold when the decision is taken. ISA is being reorganized into two companies—the national distribution grid and the generation plants. The government plans to sell stock of the generation company to the private sector. Other assets to be privatized include the IFI's portfolio of investments—basically, shares in PROPAL and Monomeros ColomboVenezolanos, stocks owned by ECOPETROL in companies that are also owned by the private sector (TERPEL and PROMIGAS), and the Flota Mercante Grancolombiana. 24 Given the financial needs of the Colombian government, the poor state of infrastructure in the country, and the existing plans to substantially increase public spending in education, health, and social services, these assets will be privatized if the private sector wants them. The privatization of TELECOM will probably never take place, and Colombians have not even started discussing whether or not they want to privatize ECOPETROL. Telecommunications Telecommunications in Colombia have not developed at the pace required by private-sector development. In part, this is due to the state monopoly of

Colombia

175

telephone services and to the constraints imposed on investment by this type of ownership, since public companies were prevented from increasing their investments either because they did not have access to capital or because the adjustment programs of the public sector precluded such investment. During the first two years of the Gaviria administration, a plan was developed to privatize the state monopoly TELECOM, maintaining the monopoly it enjoys in domestic and international long-distance services for a period of ten years. The government did not wish to grant a permanent monopoly license to the private sector, but it was thought at that time that a temporary monopoly concession would bring up the price paid by the private sector. Any form of privatization of TELECOM was opposed by the firm's union. When it was announced that the government would seek congressional authorization to sell the company, the union went on strike and interrupted communications, which isolated Colombia from the rest of the world and created havoc in internal communications. Not being able to stop the strike or to operate an alternative communications system, the government had to withdraw this proposal and change strategy. The new strategy entailed opening the value-added, long-distance, and cellular phone services to private investment and allowing a gradual fade-out of TELECOM. This strategy has begun to show results. The cellular phone service was licensed to six companies for fees exceeding $1 billion and is operating in the main cities. The private sector has been able to develop private communication services that have upgraded the quality of services available and would undermine the strength of TELECOM'S union in the case of an eventual future confrontation. Domestic long-distance operation can be licensed to private operators at any time, if the government gives the go-ahead, and international long-distance services can also be granted in the new legal environment created by the public services law. Moreover, the opposition of the unions, as well as their power, is not as strong as in the past. In fact, they were informed that the new public services law offered these opportunities, and although they opposed it, they did not use their technical capacity to obstruct communications or to prevent the passing of the law.

The Political Environment of Regulation Thus far in this chapter, I have provided an overview of what has happened in Colombia in terms of regulation and control of monopolies and oligopolies and of what has been happening since the 1990-1994 reform period. The bottom line is that there is enough legislation to deal with monopolies and oligopolies, but there is insufficient action on the part of the government, the political parties, the leftist intellectuals, and even the populist factions of the ruling parties to enact this legislation. There are no relevant

1 76

Latin American Case Studies

civil organizations, such as consumer advocacy groups, to defend consumers, nor are there sufficient groups of consumers to take class actions against monopolists for any violation of their rights. This generalized indifference can be attributed to a number of factors, among them, insufficient political development, in the sense that individuals do not regard the state as a vehicle for safeguarding their interests and thus do not sue or appeal to supervisory agencies in defense of their rights, and insufficient independence of the bureaucracy from the political process and, more important, from the economic interests and power centers. Governments have not perceived that by not promoting competition, they are fostering technical stagnation and facilitating the laziness of private investors. Moreover, the political parties, drawing resources from the private sector to finance their electoral campaigns, have surrendered much of the political power to the financiers and are unable to promote, or even back, actions that would not receive full endorsement by the large private economic groups. For these reasons, if one were to single out the policy or set of related policies that has contributed most to promote competition and the modernization and international competitiveness of the Colombian productive sectors, that policy, without doubt, would be the liberalization of trade. It had immediate and profound consequences over private investment, market organization, and productivity. It shook up the economic groups and awakened them from the inaction induced by protected markets and private nonaggression agreements that were possible in a closed economy. It set them to compete to position themselves in the new markets opened up by deregulation and privatization. There is also renewed competition in the markets that had been protected by preexisting "gentlemen's agreements," as has been the case in the beer and soft-drink markets in Colombia. All the other reform efforts of the Barco and Gaviria administrations will probably induce changes in the organization of several sectors, which, in turn, will result in a more competitive business environment in the future; but the effects of these changes will not be as swift as those of the apertura. However, other legal reforms have cut very deep, and the changes can almost be labeled "revolutionary," at least on paper. The legal framework is now adequate for the application of pro-competition policies. Additionally, the country has shown that it has the political will to change—an element in doubt until the Gaviria years—and that the economic groups, although very powerful, can be effectively outmaneuvered if the government displays good politics and good ideas. Further reform will need less legislative action and more, much more, administrative and real action. What happened at the beginning of the Gaviria administration that made it possible for the government to obtain far-reaching reform legislation so swiftly? Gaviria came to power fortuitously—a dark horse that appeared in the presidential race after Galan's assassination—and did not owe his candidacy or the presidency to the backing of economic groups,

Colombia

177

nor to the traditional factions in the Liberal Party that had endorsed other candidates in the primary elections. W h e n he prepared his e c o n o m i c and political platform for the final election, he already w a s virtually president and w a s the undisputed leader of the Liberal P a r t y — t h e traditionalists j o c k e y i n g for positions, particularly those w h o had not supported him in the primary election. In these conditions, the c a n d i d a t e ' s team o f advisers had time to prepare a wide-ranging government program and draft reform proposals that were discussed and cleared with G a v i r i a w e l l in advance of his e l e c t i o n . A f t e r he w a s e l e c t e d , he s o u g h t c o n s e n s u s in the t e c h n o c r a t i c establishment and built bridges with the politicians. In his inaugural speech, he announced and outlined his main policies, w h i c h already had been d e v e l o p e d and very rapidly went to C o n g r e s s as part of an ambitious p a c k a g e of reforms. Traditionally, the first months o f a presidential term e n j o y what is called a " h o n e y m o o n " with C o n g r e s s ; this time, it w a s heightened b y the fact that the leading liberal political barons had opposed G a v i r i a and wanted to mend fences. C o n g r e s s also w a s pressured because the electorate had o v e r w h e l m i n g l y voted for the convocation o f a constitutional a s s e m b l y — a competing legislative b o d y — t o c h a n g e the Constitution. C o n g r e s s decided then to s h o w that it c o u l d act e f f i c i e n t l y and set to w o r k on the reform program with unprecedented enthusiasm and discipline. M e a n w h i l e , the attention o f the rest of the country w a s f o c u s e d on the apertura program and the dispute g o i n g on within g o v e r n m e n t about the s p e e d at w h i c h this p r o g r a m s h o u l d be a p p l i e d , on the e l e c t i o n o f the Constitutional A s s e m b l y , and on the twin wars against the M e d e l l i n cartel that w a s b o m b i n g the cities and the guerrillas w h o were b o m b i n g the oil pipelines. T h e tax reform that w a s being processed along with the reform p a c k a g e concentrated the attention of lobbyists and the press, and the labor r e f o r m obtained all the b a c k i n g o f the private sector and distracted the attention o f the labor movements. T h e rest o f the legislative agenda w a s not in the mainstream consciousness of the public, nor did it figure in the priority list o f the private sector. For e x a m p l e , F E D E C A F E b e c a m e aware that the National C o f f e e Fund r e g i m e that had been practically unaltered f o r f i f t y years w a s being changed in C o n g r e s s only the morning after the alteration had been voted on by the Senate. Thereafter, F E D E C A F E had t w o of its more skilled senior v i c e presidents sitting in on the discussions full-time to m o n i t o r the p r o g r e s s o f the l a w and steer its contents. B u t the main o b j e c t i v e had already been accomplished: C o n g r e s s had dared to change a C o l o m b i a n t o t e m — t h e foreign e x c h a n g e r e g i m e and the chapters dealing with the mechanisms of the c o f f e e board and stabilization f u n d — w i t h o u t a previous nod b y the c o f f e e g r o w e r s ' organization. Despite the announcements made b y G a v i r i a during his inaugural speech in w h i c h he outlined all the reforms he intended to pursue, the private and the public sectors did not expect that all of them w o u l d be presented at once, much less that C o n g r e s s

1 78

Latin American

Case Studies

would attempt to pass them all in one session. This explains why the pressure groups were ill prepared for the legislative "blitzkrieg" engineered by government and why their intervention was delayed and largely ineffective.

Some Ethnical Considerations Around Economic Liberalization The tax reform of 1990 contained a tax amnesty for returning capital flight, and the reform of the exchange regime legalized the tenure of foreign assets by Colombian residents, which had been outlawed by the 1967 foreign exchange regime of Carlos Lleras's administration. The fact was that most Colombians who could afford it had assets abroad and that violations of the foreign exchange regime did not carry any social sanction. Moreover, a very active parallel exchange market was openly operated and tolerated. The parallel exchange rate carried a small premium or a small discount over the official rate. 25 This was normally on the order of 1 to 5 percent, except for in 1983-1984, when the official exchange rate was 14 percent lower than the black market rate. At some point during this period, the differential was as high as 30 percent. That year was characterized by a confidence crisis, a financial crisis, and a massive change of land property between the old landed proprietors and the new rich, some of them presumably connected to drug organizations. 26 The legalization of a free exchange and the ability of Colombians to bring back their foreign assets without penalty cleared the way for introducing new measures to control money laundering, which had been impossible to implement in the old regime. Under the preexisting foreign exchange regime, it was impossible to ascertain who was violating the law just for their own portfolio precautionary reasons and who was a money launderer. Under the new system, it could be assumed that if the assets were not registered for tax purposes, taking advantage of the tax jubileum, they could be investigated. To make this more effective, an agreement was negotiated between the Colombian and U.S. tax authorities regarding the exchange of information about Colombian and U.S. taxpayers, and Congress authorized the government to sign this agreement in exchange for the tax amnesty. Before the legal change of regime, the Colombian authorities had been reluctant to pursue an agreement of this nature because many prominent Colombian names would come out, linked to a socially accepted and condoned but nevertheless illegal behavior: dodging the exchange controls. The liberalization also made it possible to apply the standard international controls of money laundering and to hold banks operating in Colombia legally responsible for reporting any unusual or suspicious movements of funds. In this way, deregulation of capital flows enhanced the opportunities to implement more strict controls to money laundering.

Colombia

179

Conclusion The question now arises as to what kinds of policies are best suited for a small, democratic country like Colombia. As in the case of Denmark, Sweden, or the Netherlands, local firms must develop into large enterprises to be able to compete in world markets. At the same time, the preservation of democracy requires that the political involvement of big business be checked because it may lead to the excessive concentration of political power. In this context, Colombia's apertura has already shown some positive results. Maintaining an open economy will ensure that domestic monopolies invest in their core businesses and expand them to capture economies of scale and scope. This will probably induce direct foreign investment of Colombian firms abroad and an expansion of exports in the medium to long run, because the firms will have to acquire "world size" to compete in an open market. This requires a fairly open capital account that permits this type of reverse foreign investment without the interference of government or a bureaucratic mentality that would allow these flows even with a restrictive foreign exchange regime. In the past, the capital account was closed, and the bureaucratic mentality was opposed to Colombian direct investment abroad. This brought about undesirable consequences: foreign investment by Colombian firms was limited to those that had the political clout to obtain the licenses; and even in those cases, it was severely restricted. All other firms had to invest illegally or not at all. As a consequence, many Colombian businesses could not compete advantageously in foreign markets unless they broke the law. This was exemplified by the flower exporters, whose investment in warehouses and distribution channels was impeded by the Central Bank bureaucracy. In the case of large enterprises, like those in the beverage and beer sector that generate autonomously large cash surpluses, or in the cement sector, which also generates large cash flows as a consequence of growth of housing and construction, firms were prevented from investing resources abroad in the same core businesses. This contributed to speeding up the concentration and the strength of conglomerates of the private sector, since they had to find outlets for the cash flow, greatly augmented by the preferential subsidized credit that flowed from the Central Bank through the financial sector to the firms that could offer the best collateral. In an open economy, firms will do what comes most naturally, which is to expand the core business internationally or to increase the scope of the core production. Both phenomena are taking place in Colombia at the present time, but conglomerates continue to grow and will continue as long as the largest firms or groups have privileged access to financial resources and the stock market prices remain fairly depressed and not competitive. In this respect, the role of the government beyond fostering competition in the

180

Latin American

Case Studies

goods markets should focus on promoting competition in the financial and capital markets and leaving firms alone in their decisions regarding size and vertical or horizontal integration. In the public services sectors, the problem is that the monopoly is the state's. Take, for example, the electrical sector: one public firm owns the national grid and the largest capacity of hydroelectric generating power. The same firm has a regulatory role and sets the rules for dispatching energy and for acquiring it from hydroelectric or other sources. If one compares this with a more liberal environment in which the generating capacity is diversified in private hands, the grid is a highly regulated private firm that acquires energy at market prices, dispatching according to legally set rules, and the regulation is by an independent government commission. Undoubtedly, more private investment (and more competition) is expected to flow into the second model than into the first. This example was selected to make a point: the regulations are in place to permit private investment in the public services sector, and there is already some investment, but true competition and dynamic investment will follow only when the government reduces its participation and dominance by selling existing assets and effectively privatizing the electrical sector. The same holds true for banking, gas distribution and production, transportation, telecommunications, and all other public services. In other words, greater privatization of public services in Colombia is a necessary condition to promote private investment and competition. The agenda for a would-be promoter of competitiveness in Colombian markets is fairly clear-cut: there is a first stage of competition enhancement that does not require excessive political courage and will not encounter unsustainable opposition. This encompasses maintaining an open trade policy, privatization of public services, allowing Colombian foreign direct investment to grow abroad, and encouraging foreign direct investment into the country. This, in turn, is achieved by maintaining stable rules, giving foreign investors the same treatment given to domestic investors, deregulating foreign investment—which has already been done—and offering stable macroeconomic and political conditions. Furthermore, legislation is required to bring down barriers to entry into different sectors and to permit private investment in sectors where public investment dominates. A lot of progress has already been made in Colombia on all these fronts. Additionally, a workable set of rules has been devised and has been in place for many years that permits regulation of monopolies and oligopolies by the central government superintendencies and by the regulatory commissions. These powers, in the case of antitrust actions, have been greatly augmented for the Superintendency of Industry and Commerce and for the Superintendency of Banks. The second stage of the process, which requires great political skill and the power to implement, is to control the behavior of oligopolies in the

Colombia

181

domestic market. The objective of such a policy cannot be to prevent or hinder the growth of firms, because size will be required to face international competition abroad and domestically; rather, the goal should be to regulate the activities of leading firms in the domestic markets so that they do not hinder the growth and development of competitor corporations in terms of services and size, do not conspire to fix prices or to segment markets, and do not erect insurmountable barriers to the entry of new firms into their markets. This would require a government decision to proceed with the policy and the maintenance of a consistent course during several administrations. A policy of this nature would necessarily have a constituency that has been absent in Colombia throughout the twentieth century. This would be akin to the grassroots movement that led to the antitrust legislation of the late nineteenth century in the United States or to the political coalition that made possible in the same country the strengthening of the Clayton Act or the functioning of the Federal Trade Commission and the Securities and Exchange Commission in the 1930s. Until political conditions arise, the existing legislation will probably lie dormant as a testimony to the countervailing power of Colombian economic conglomerates. Roughly the same can be observed in the case of security and exchange regulations and regulatory agencies. Until now, they have been very active devising regulations for a stock market that does not really exist, while failure of disclosure is widespread, and management and dominant stockholder groups have been fairly free to use corporate power, credit, and cash flows for their private benefit. There are indeed regulations in the commercial code that could be used to prevent this, but they are still waiting for a government that has the will and the political power to bring them to life. This would undoubtedly also require a reform of the rules that regulate the financing of political campaigns and public officials. A third, and much higher, stage of reformism dealing with the control of economic power would respond to the question of how much economic power is too much. One is reminded that Standard Oil was broken into several companies, not only because it was too big, but because it had so much political power that it threatened the public interest. This is very pertinent in the case of Colombia, where the public interest lies precisely in preserving some form of democracy and in promoting a pluralist society. The domination of politics by conglomerates weakens democracy and creates the conditions for the development of capitalism under more authoritarian modes of government that would have business as their sole constituency and could lead to latter-day mutations of fascism or to militarism. One does not have to go too far back in Latin American history to observe the consequences of these types of governments and of their corporatist economic structure. In Colombia, one group, very often a single person, controls banks and communications media, in addition to the productive and commercial activ-

182

Latin American Case Studies

ities. This concentration of power is not well suited to a democratic society; however, under the present political and economic conditions of Colombia, given the state of awareness of the middle class, it is hard to envision a government that would be willing to tackle this problem. Probably, it would be wiser to start with more modest goals, such as developing the bureaucracies that would be responsible for the application of antitrust legislation, the rules of securities and exchange, and the commercial code. Strengthening these bureaucracies and backing their activities in a setting of moderate reform goals, directed at stemming the misuse of the market power of monopolies, oligopolies, and conglomerates, will probably achieve much more than overreaching. The problem is more political than economic, and it is therefore difficult to predict the future course of events. A good cause for hope is to observe that these problems have been solved in some other countries with economic and political development, but not always and not everywhere.

Appendix: The Regulatory and Structural Reforms of the Gaviria Administration, 1990-1994 Apertura In 1990, Colombia had the highest tariffs in the region and one of the leastopen economies of the Andean countries, despite a trade reform effort that had been undertaken by the Barco administration. During the last year of that administration, a gradualist five-year trade liberalization program was initiated. The Barco reform was to have three steps: (1) the liberalization of trade for goods that did not compete with domestic products, which involved moving those tariff items from the restricted import to the free trade list; (2) a two-year subprogram involving the gradual substitution of quantitative restrictions with tariffs for all other items; and (3) once quantitative restrictions were completely eliminated, a three-year period of tariff reduction. During the first two years of the program, the government planned to auction import licenses for the items that were on the restricted list, to determine an initial level of protection. The goal of the program was to reduce tariffs to an average level of 25 percent. Additionally, in order to prevent a huge initial current account deficit, nominal devaluation was accelerated to record levels during 1990, achieving a real devaluation of nearly 17 percent for the whole year. This policy was embraced by the Gaviria administration and contributed to a record inflation rate of 32.4 percent in 1990 and to a record jump in the value of nontraditional exports, which increased more than 30 percent in dollar terms in 1991. The foreign trade reform started in 1990 was much more ambitious and straightforward than the Barco experiment. During the first four months of the Gaviria administration, quantitative restrictions were practically elimi-

Colombia

183

nated. This involved moving from an environment of quantitative input restrictions, such as import quotas, import licenses, and lists of products of forbidden importation, to free trade. At the same time, the reduction of import tariffs was accelerated. Initially, due to the pressures of the more conservative members of government that represented the point of view of several business sectors, a four-year reduction program was initiated and announced, which would have brought average tariffs down to 12 percent by the end of 1993. This gradualism proved to be impractical because importers and investors took a "wait-and-see" attitude that resulted in a very large current account surplus and a corresponding increase in the level of international reserves and the money base. The liberalization program was accelerated during the first seven months of 1991. As a result, tariffs were drastically reduced from an average of 38.6 percent in 1990 to less than 12 percent in 1991, where they have since remained. Constitutional

Reform and Derived

Legislation

The constitutional reform of 1991 established (a) that economic activities and private initiatives are free, limited only by the "common" good; (b) that nobody can impose licensing or other requirements without legal authorization; (c) that free competition is a universal right that presupposes responsibilities and obligations for enterprises; and (d) that the state, mandated by the law, is constitutionally responsible for impeding restrictions to economic freedom and controlling abuses of the dominant position of firms or individuals in the domestic market.27 Additionally, the new Constitution directly authorized the state to intervene in the general direction of the economy and to "promote productivity and competitiveness." It also established that the law can mandate the government to intervene "in the exploitation of natural resources, the use of the soil, the production, distribution, utilization and consumption of goods and in the public and private services, to rationalize the economy with the purpose of obtaining an improvement in the quality of life of the population, the equitable distribution of opportunities and the benefits of development and the conservation of the environment."28 Furthermore, it prohibited the creation of legal monopolies, excepting the old Spanish revenue-raising monopolies such as liquor production or gambling, but it limited these to those established for purposes of the public interest and according to the law.29 Financial-Sector

Reform

The deregulation of the Colombian financial sector was started in 1990 with a new law that encompassed the regulatory environment for financial

184

Latin American Case Studies

institutions in Colombia (Ley 45/1990). This law permitted complete ownership of Colombian banks by foreign stockholders, including banks, which had been forbidden since 1975, and removed the existing barriers to foreign investment in the financial sector. It also reformed the system of specialized banking that was the norm in Colombia since 1923 and moved toward universal banking by allowing finance corporations to offer savings accounts and by permitting financial institutions to own such specialized financial service institutions as brokerage or leasing firms. These financial institutions themselves had been prevented from supplying these same services under the previously existing system and are not allowed to provide them directly under the new law. Although this law sought to reduce the segmentation of the market induced by the specialized banking system and by overregulation of the financial sector, it fell short of instituting universal b a n k i n g because of the strong opposition to liberalization f r o m the Colombian Central Bank and the more conservative elements of the political sector. As a consequence, the new system continues to induce market segmentation and to prevent competition, though it has helped to increase transparency by regulating the disclosure of information by financial institutions, albeit at a lower level. Additionally, the new law clearly established the requirements for licensing new institutions and the minimum capital requirements for each type of new financial institution. These innovations lowered considerably the barriers to entrance in the financial sector because the Superintendency of Banks had previously had the autonomy to grant or deny licenses, choosing often to deny them without explanation. After the new Constitution was approved, this legislation was complemented by another law (Ley 35/1993) that established the rules for the intervention of government in the financial sector. This law developed the constitutional authorization of the government to intervene in the financial markets or financial institutions to protect the investors and users of the system, to seek adequate levels of capitalization of the financial institutions, to promote competition, and to foster transparency. It also ruled that the government is responsible for the "democratization of credit," stating that the government should specify maximum levels of credit or of risk exposure per borrower and provide lending guidelines that would help prevent credit discrimination. The law also contributed to bringing down the barriers to competition by allowing mortgage corporations to create or acquire financial service companies and by authorizing these institutions and commercial finance companies to participate in the foreign exchange market. This market had been reserved previously for the commercial banks and the finance corporations, which were the only institutions allowed to buy, hold, and sell foreign exchange on a commercial basis.

Colombia

185

Reform of the Superintendency of Industry and Commerce Under the new charter, this superintendency was given the following functions: (a) to watch for the observance of the laws and regulations that deal with the promotion of competition and with restrictive commercial practices; (b) to follow up on complaints dealing with market competition; and (c) to process those cases in which the action of the superintendency would increase the efficiency of production—those that would ensure that consumers have freedom of choice or better access to markets, those that would increase the participation of firms in the markets; and those fostering variety in prices and quality of goods and services. The superintendency was empowered to give fines and other penalties to firms that restrict trade or do not comply with guidelines issued by the agency and to act at the request of the public service regulatory commissions when public or private firms obstruct free competition or when they violate the regulations pertaining to tariffs, collections, and trade or client relations. It was also required to observe regulations dealing with consumer protection and to accept complaints in these matters when they are not of the jurisdiction of other agencies. In such cases, the superintendency can establish responsibilities and issue instructions that must be obeyed. To achieve this mandate, the superintendency was authorized to visit firms, to obtain all the relevant information, and to interrogate under oath anybody whose testimony may "result useful" in the exercise of its functions. In addition to the functions of the agency, the same decree defined very specifically what acts, conducts, or agreements affected free competition; singled out which ones are contrary to free trade and competition; and specified what "abuse of a dominant position" is in a market. It also delimited the power of the superintendency to intervene in the case of mergers and acquisitions (i.e., the agency cannot act when the parties can demonstrate either that efficiency gains can be derived from the transaction or that a reduction of costs that could not be achieved by other means would ensue). Moreover, the new charter determined that the superintendency could act in all cases on its own accord and when a complaint is filed. In this latter case, it is authorized to conduct a preliminary inquiry to determine if there is cause to proceed. When a process is concluded, the investigators are to inform the superintendent, who, in turn, informs the subject of the investigation. This subject can inhibit the process by altering the behavior that would otherwise be punishable by high fines. These provisions were designed to fill some of the gaps that were left open in the 1959 law and that rendered it inapplicable. The objective was only partially accomplished due to the restrictions imposed by the legal and constitutional authorizations. For example, the superintendency cannot act in the communications and media sector on its own accord, and it is confined to follow up complaints that are filed with it. Consequently, even

186

Latin American Case Studies

though it is widely known that there are violations to the existing rules of competition in television, it cannot act until there is an independent complaint. The Regulation of Public

Services

The regulatory law for the electrical sector (Ley 143/1994) determines that the state is responsible, in relation to the provision of electricity services, to promote free competition in the activities of the sector; to prevent unfair competition or abuse of the dominant position in the sector; to protect the users; and to regulate the circumstances in which natural monopolies arise and free competition is unable to guarantee the efficient provision of services at the lowest possible economic cost. The law guarantees that private or mixed ownership—public and private—enterprises are free to develop their activities in the context of free competition, regulated by the government. The law created a commission for energy and gas regulation composed of eight members, three of which represent the Ministries of Mines and Energy, Finance, and Planning, and five of which are appointed by the president for a four-year period. This commission has the responsibility to regulate the energy sector with the basic objective of supplying electricity and gas at the lowest cost possible, utilizing the available resources and providing opportune and quality service to the users. All this is to be achieved in the context of free competition, and the commission has a mandate to promote and create the conditions for freer competition. The law also rules that electricity generation is allowed for all economic agents and that they can sell this electricity freely at market rates. The owners of the national networks are required to interconnect suppliers and users at preestablished and regulated tariffs. The abuse of dominant position and the violation of the norms of free competition in the energy markets are clearly defined, and the penalties for these violations are defined as well, ranging from warnings by the authorities to fines and administrative actions such as ordering the dismissal of management or temporary takeover of the management by the government. The law also contains provisions to foster competition, to punish unlawful conduct interfering with this purpose, and to impose strict penalties in those instances. Transportation In air transportation, deregulation was also implemented. Increased competition in the airline sector has changed significantly the market structure of the service. The leading company, AVIANCA, decreased its share of augmented international flights from 56 percent in 1990 to 35 percent in 1993 and its share of the domestic market from 49 percent to 38 percent. As a

Colombia

187

consequence, the company had to invest in fleet renewal and upgrading of services, which it had not invested in for many years. It also drastically reduced its personnel from 7,000 in 1990 to just over 4,000 in 1993. 30 Land transportation has also benefited from the apertura. Before 1990, the government allotted import licenses of transportation equipment with the idea of protecting the existing shipping companies from excessive competition. After 1990, trucks and all transportation equipment could be freely imported. As a result, shipping tariffs decreased 50 percent in real terms between 1990 and 1993. The railway sector was one of the first sectors to be deregulated in Colombia, in the last year of the Barco presidency. The almost-extinct monopoly Ferrocarriles Nacionales was dissolved, and two new companies were created: a public company that is responsible for the upgrading, expansion, maintenance of the rail network, and regulation of tariffs, and a private company that would run the trains. So far, the reform has failed to produce results. The deregulation of the shipping sector has been very drastic. The Flota Mercante Grancolombiana, a public shipping firm jointly owned by the National Coffee Fund of Colombia and the government of Ecuador, had virtual monopoly based on the "flag reserve," which reserved 50 percent of foreign shipping to domestic carriers. Since other domestic shipping lines were very small, this firm practically dominated the market, offering poor service at high, noncompetitive tariffs. Beginning in 1989, the government started a gradual deregulation program that was accelerated in 1991, when it abolished the quota and allowed free entrance of foreign ships to Colombian ports, excepting those from countries that do not grant reciprocal treatment to Colombian carriers. The share of the market of the Colombian line was drastically reduced, and it was forced to restructure. This brought down prices significantly and increased the supply and quality of services. 31 Port Regulation The ports had been strictly a public-sector activity until 1991. In that year, a law (Ley 1/1991) was issued that permitted the liquidation of the national port company and allowed private-sector investment and management in the operation of the Colombian ports; it also created a new Superintendency of Transportation and Public Works that oversees the port activities, regulates tariffs, and intervenes to secure land where new facilities have to be built and the concomitant private negotiations are stalled. This legislation was complemented in 1992 by a decree (Decreto 2171/1992) that restructured the Ministry of Transportation and its agencies. These norms authorized the government to lease or sell the existing facilities to independent port companies that can be partially or wholly owned by the private

188

Latin American Case Studies

sector. As a result of the new regulations, Colombian ports are now managed with private-sector participation, new private ports have been constructed, and tariffs have decreased substantially.

Notes This chapter was sponsored by the Office of the Chief Economist of the InterAmerican Development Bank, where I worked as a consultant when this chapter was prepared. Ulpiano Ayala, Armando Montenegro, and Luis Alvaro Sanchez reviewed the first draft and offered very helpful comments and suggestions. Moisés Nairn and Joseph Tulchin revised the second draft and made valuable suggestions to improve substance and editing. 1. David Bushnell, The Making of Modern Colombia (Berkeley: University of California Press, 1993), p. 189. 2. Jorge Suescún Melo, Monopolios y Concentración Económica (Bogotá: Asociación Bancaria, 1977). 3. For a brief description of the alignment of political power in Colombia, as related to economic policymaking, see Miguel Urrutia, "On the Absence of Economic Populism in Colombia," in Rudiger Dornbusch and Sebastian Edwards, eds., The Macroeconomics of Populism in Latin America (Chicago: University of Chicago Press, 1991), pp. 369-386. A description of the political barriers to change in Colombia may be found in Rudolf Hommes, "Social Security Reforms: A Case Study of Political and Financial Viability," paper presented at the Second Hemispheric Conference on Social Security, Pension Reforms, and Capital Markets Development, Inter-American Development Bank, Institute of the Americas, Washington, DC, June 1995. 4. Rudolf Hommes and Gabriel Silva, "La Sociedad Anónima en Colombia: Un Análisis Histórico," Estrategia, 44 (May 1981): 13-19. 5. Bushnell, The Making of Modern Colombia, pp. 174-180. 6. Hommes and Silva "La Sociedad Anónima," pp. 13-18. 7. E. M. Velez and M. F. Velasquez, "Estructura y Funcionamiento del Grupo Suramericana," Temas Económicos (1981). 8. Bushnell, The Making of Modern Colombia, p. 184. 9. The bad reputation of United Fruit stems from the 1928 banana strike. After a three-month strike, "matters came to a head on December 6, when in the town of Ciénaga soldiers fired into a mass of strikers," killing about sixty people (ibid., p. 179). This incident was elevated to literature in one chapter of Gabriel Garcia Márquez's One Hundred Years of Solitude. 10. Bushnell, The Making of Modern Colombia, p. 169. 11. José Antonio Ocampo, Colombia ante la Economía Mundial (Bogotá: Tercer Mundo Editores, 1993), pp. 19-65. 12. World Bank, Colombia: Industrial Competition and Performance (Washington, DC: World Bank, 1990), p. 45. Notice that in this study, the concentration scale goes from highly concentrated to competitive. This may create semantic confusion since competitive subsectors in this context are those that are less concentrated, not necessarily more efficient. 13. Ibid., pp. 56-62. 14. Ibid., pp. 65-67. 15. Ibid., p. 55. 16. Nathaniel Leff, "Industrial Organization and Entrepreneurship in the

Colombia

189

Developing Countries: The Economic Groups," Economic Development and Cultural Change, 26, no. 4 (July 1978): 661-675. 17. Colombia: Private Sector Assessment, Report No. 13113-CO (Washington, DC: World Bank, August 1994), annex II. 18. During the late 1980s, Bavaria maintained very large idle cash deposits in the Colombian Central Bank, while AVIANCA was obtaining subsidized credit from the same bank. Postobon boasted not to need any credit to finance its acquisitions of other soft-drink bottlers. This changed after the opening of the economy, when both groups started to expand into other activities. 19. The Superintendencia de Valores and the Superintendencia de Sociedades are responsible for the protection of small stockholders. However, they are fairly ineffective in pursuing this goal. For example, the Santodomingo group has used Bavaria as collateral for loans to other group companies that do not have the same shareholders and has sold stock of other group companies to Bavaria without eliciting any intervention by these agencies in defense of the interest of third-party stockholders. 20. Luis Alfonso Torres, "La Reforma del Régimen de Comercio y la Apertura Económica," in Olga Lucía Acosta and Israel Fainboim, eds., Las Reforms Económicas del Gobierno del Presidente Gaviria: Una Visión desde Adentro (Bogotá: Ministerio de Hacienda, 1994), pp. 61-76. 21. Constitución Política de Colombia (Bogotá: Presidencia de la República, 1991), Provisional Article 20, p. 152. 22. Acosta and Fainboim, eds., Las Reforms Económicas, pp. 127-132. 23. The Colombian Departamento Nacional de Planeacion estimated that Colombian firms paid an overcost of about 10 percent of the border price of imports and exports due to port, transportation, and infrastructure deficiencies. The deregulation of transportation has brought tariffs down considerably, and something similar has happened to port tariffs. This will promote competition not only in those services, but also by removing implicit trade barriers embedded in the inefficiencies of ports and transportation. 24. Acosta and Fainboim, Las Reformas Económicas, p. 72. 25. Urrutia, "On the Absence of Economic Populism," p. 371, table 11.1. 26. Rudolf Hommes, "Capital Flight: Colombia," in Capital Flight: The Problem and Policy Responses (Washington, DC: Institute for International Economics, 1986). 27. Constitución Política de Colombia, Art 333, p. 129. 28. Ibid., Art 334, p. 130. 29. Ibid., Art 336, p. 130. 30. Colombia: Private Sector Assessment, p. 62. 31. Ibid., pp. 69-70.

Part 3 Competition Policy at the Global Level

9 The Antitrust Experience of the United States: The Model for Regulation of a National Economy Confronts the Global Economy Barry M. Hager Latin American economic and trade policies during this period of liberalization have been strongly influenced by both foreign and domestic U.S. policies. These policies have been influenced in turn by economic theories developed under Milton Friedman's tutelage at the University of Chicago. These policies promoting free market orthodoxy have become the order of the day in most of Latin America. The economic theories of what is commonly referred to as the "Chicago School" hold that antitrust law and other commercial regulations undermine allocative efficiency by distorting free market prices, which provide the truest gauge of the values of goods and services. However, the experiences of both the United States and Latin America offer a response to the question posed by Moisés Nairn at the outset of this volume: Latin America most certainly needs a competition policy to be competitive. While the development of U.S. antitrust law might serve as a model for some Latin American nations, policymakers must distinguish between the antitrust laws as they originally developed and the current, comparatively lax, enforcement of them in the United States. Rather than taking a theoretical approach, this chapter will employ a more historical perspective, emphasizing how changes in U.S. antitrust law have been experienced rather than how they have been conceived. In particular, I will examine two important shifts in the enforcement of U.S. antitrust laws. First, the recent increasing faith in free market economic theories has obscured concerns about the size and influence of corporations. Historically, it was these "Jeffersonian" concerns that galvanized the antitrust movement over a century ago and, until fairly recently, have provided the foundations for antitrust enforcement. Second, the belief that the economy has become more global has justified corporate behavior that previously would have been considered in conspicuous violation of antitrust law. Given these shifts, it is clear that the United States is holding its competitors to a higher standard of antitrust law than it holds itself. As the liberalizing countries of 193

194

Competition Policy at the Global Level

Latin America consider the importance of creating competition policies, they would do well to consider the principles behind the original U.S. antitrust legislation rather than the Chicago School theories currently in vogue.

Executive Summary Antitrust law was developed first and most extensively in the United States. The nineteenth-century experience with largely unregulated capitalism, culminating in the formation of trusts the power of which was perceived as excessive, led to the creation beginning in the 1890s of a construct of laws intended to abridge the size and regulate the conduct of private economic entities. This body of antitrust law was significantly expanded and strengthened at certain points during the early twentieth century.1 Other national regimes had not generally adopted the theoretical and legal approaches to regulating private economic activity found in U.S. antitrust law prior to the post-World War II era. It became a tenet of U.S. legal and governmental policy that antitrust laws, along the U.S. model, should be adopted by other countries. Moreover, U.S. government officials and courts over time adopted the position that U.S. antitrust law applies extraterritorially to conduct occurring in other nations that affects the U.S. economy in ways inconsistent with the antimonopoly, pro-competition policies of U.S. antitrust law.2 Since at least the early years of the 1980s, spurred by a new generation of laissez-faire U.S. leaders and the emergence of a new school of economic thought regarding antitrust, U.S. antitrust law has been in a period of declining application and questioned validity. The view generally associated with the Chicago School is that U.S. antitrust law does not contribute, as its assumptions would suggest, to economic efficiency, at least not of an allocative nature,3 within the domestic U.S. economy. During the same period, the volume of international trade increased and the perception grew that the U.S. economy was being increasingly integrated into a global market. Those factors gave rise to the view that U.S. antitrust law was a hindrance to U.S. companies that were no longer competing at the national market level but instead were confronted with a global economy in which the linkage between nation-states and the corporations that call those nations home was strong. The anti-antitrust argument, which is increasingly dominant within the U.S. system today, is bottomed on both of those views: first, that antitrust, with its emphasis on limiting size and market control, does not in fact enhance allocative efficiency; and second, that nations compete in a global economy, and therefore markets and competition should be measured at the global, not the national, level. U.S. companies should thus not be impeded

The Antitrust Experience of the U.S.

195

in cooperation that has pro-competitive consequences for the U.S. national economy, nor should they be penalized for market positions or dominance measured strictly in terms of the domestic U.S. economy. At the same time, however, the United States frequently argues that other nations should adopt its pro-competitive principles of antitrust law at the national level. Whether that position springs from a continuing, theoretically consistent official commitment to the principles of U.S. antitrust law or from a results-driven view that such changes in foreign legal regimes would afford economic advantage to U.S. businesses engaged in global trade is a matter for fair debate. In that context of global competition, an increased interest in the extraterritorial applicability of U.S. antitrust law has emerged, espoused both by proponents of classical antitrust theory and by the U.S. business community as it confronts cartel-style competition from Japanese keiretsus and others. Again, whether that interest represents genuine allegiance to antitrust doctrine or a search for a national advantage in the global trading economy is a fair question. The future of U.S. antitrust law will be determined to a significant extent by the outcome of the current domestic political debate over the global economy, specifically over how the U.S. government should relate to its own business community and those corporations that are domiciled within the United States but active in the global economy. The current orthodoxy appears to be the view that the global economy does involve international competition that calls for team-style cooperation and collaboration at the national level and is even tolerant of dominant market positions within the domestic U.S. market. Such a view plainly is inconsistent with the past economic rationale for, and the actual legal requirements of, current U.S. antitrust law.

Introduction to Antitrust Law Competition is the aim of antitrust laws. 4 Simply stated, the whole structure of antitrust law is grounded in the belief that perfect competition is the norm toward which capitalist economies should strive. Exceptions are granted; patents are a notable one, with constitutional sanction in the U.S. system. 5 But overall, the belief is that the most efficient and desirable economic model is one that features markets that at least approach, and regularly strive for, perfect competition. By this, of course, both economists and antitrust lawyers mean a market in which willing buyers and sellers exist in sufficient number and with sufficient information to make a rational decision about the value, hence the price, of goods being traded. In such a market, those goods trade at prices that are reasonable and related to the actual cost of production plus

196

Competition

Policy at the Global

Level

profit incentives sufficient to induce the production. Extravagant profits, hence economic inefficiencies, are not permitted by such market transactions, since under real, or at least "workable," competition, competition will lead some producer(s) to offer the goods at the lowest price consistent with meeting production costs and reasonable profits, and rational buyers will take the lowest-offered price to maximize their own economic interest.6 Given that aim of competition, antitrust laws were first found to be necessary by the U.S. government based on the observably anticompetitive behavior of capitalists in the marketplace absent countervailing regulatory or economic power. During the latter part of the nineteenth century, as the United States completed its first century of existence and moved vigorously into the industrial age, the emergence of monopolies, trusts, and related anticompetitive behavior gave rise to a general view that governmental regulation of the markets was necessary to preserve real competition. In reviewing and analyzing U.S. antitrust laws, it is helpful to keep in mind the familiar dictum of Supreme Court Justice Oliver Wendell Holmes, who sat on the Court during the crucial period that saw the nascence of antitrust law: "The life of the law has not been logic, but experience." 7 The rather direct and plain language of the antitrust statutes makes it clear that the political perception of conduct in unregulated markets is what has driven Congress and the courts in the creation and articulation of the U.S. system of antitrust laws. That is, the statutes typically have been crafted to respond to specific developments in the marketplace that were seen by governmental authorities as anticompetitive in impact, and they were designed to outlaw those specific, not theoretical, types of market behavior. Moreover, the simplicity of the statutory language in some cases makes clear that U.S. antitrust law has developed from the outset as a hybrid of both statutory and case law. In this regard, it is helpful to have a basic understanding of the Anglo-Saxon common law legal tradition. Under that tradition, judges decide specific cases brought before them based upon both broad legal principles and their determination of the facts of the case. Those judicial decisions, in turn, become part of an evolving and cumulating body of "case law" that constitutes precedent governing the disposition of similar legal cases in the future. Over time, this case law becomes settled on key points of law and carries the weight of an explicit statute that hypothetically might have been passed, under a civil law system, to state the same point of law.8 Indeed, one of the preeminent modern scholars of antitrust, Professor Phillip Areeda of Harvard Law, observed that: federal anti-trust laws are very much simpler than commercial codes or tax statutes. The basic statute, the Sherman Act, simply condemns (1) contracts, combinations, and conspiracies in restraint of trade, and (2) monop-

The Antitrust Experience of the U.S.

197

olization, combinations to monopolize, or attempts to monopolize. . . . Indeed, the Sherman Act may be little more than a legislative command that the judiciary develop a common law of anti-trust.9

Therefore, as noted, the first major antitrust law, the Sherman Act, 10 was a general command to the judicial system to curtail the specific types of anticompetitive abuses that were the stuff of contemporary headlines and political debate in 1890, the year of its passage. The specific applications of such a prohibition on "monopolization" and "restraint of trade" has consumed over a century of judicial resolution of actual cases in controversy within the U.S. courts, including the most prominent current antitrust case in the United States: The Justice Department suit against Microsoft. At the same time, the Congress, in its capacity as the legislative branch of the U.S. government, has continued to react to additional specific perceived abuses in the U.S. economic system by passing additional statutes that seek to prohibit other conduct that has come to light through actual marketplace experience and that the Congress and the political system ordain as either intrinsically inconsistent with the public interest or at least requiring some degree of regulation in order to curtail or control the conduct. The evolution of U.S. antitrust statutes in that regard serves as a useful primer on the constitutional interaction among the three federal branches and between the federal and state governments. U.S. antitrust law has followed a meandering, event-driven path that reflects those federal interactions: Congress cites and disciplines economic conduct of which it disapproves; where courts have been unwilling to find that specific examples of conduct were reached by existing statutory limits or prohibitions, Congress has acted again to expand or broaden the reach of the laws. Likewise, the ebb and flow of prosecutorial vigor in the executive branch has prompted Congress to act, and even the movement at the state level to enact antitrust legislation has played a role in forming Congress' approach at the national level.11 Throughout that event-driven history, and with increasing fervor since the mid-1970s, economists, courts, and the Congress have debated whether antitrust law as enforced in the United States in fact achieves its objectives of competition and enhancement of the general public interest. An influential, now perhaps dominant, school of thought is that it does not, since it does not in fact contribute to the allocative economic efficiency that many view as the proper goal of any regulatory or deregulatory regime. In the next section of this chapter, the existing U.S. antitrust statutes are outlined and their enforcement history and jurisprudential status described. Based on that review of the state of the law, the following section relates antitrust law to the other economic regulatory regimes in the United States, a discussion that is then succeeded by one describing the

198

Competition Policy at the Global Level

current political debate regarding the wisdom and efficacy of U.S. antitrust law. The concluding section makes selected predictions about the future course of U.S. antitrust law and enforcement both domestically and extraterritorially in the context of the new, globally oriented trading economy. It also offers observations regarding the relevance of U.S. antitrust law as a model for other emerging and liberalizing market economies. It should be stated before proceeding, however, that despite the emerging orthodoxy within the United States that antitrust laws may have been superseded by global economic competitive realities, my view is that the fundamental premise of the antitrust laws—based not on logic, but on experience—is that capitalist markets produce predatory and monopolistic behavior ("rent seeking," in the current favored parlance) and that this behavior needs to be curbed by countervailing political, regulatory, or economic power. If anything, there is reason to believe that these tendencies are increased, rather than reduced, in the context of a globalizing economy, where national security interests and nation-state ambitions become intertwined with the raw search by market participants for market advantage and enlarged profits. Thus the fundamental objectives of antitrust law, whether enforced at a national or at a global level, remain fundamentally sound; and antitrust enforcement remains an important component of a free market system that serves the interests of the many rather than the few.

Historical Review and Statement of U.S. Antitrust Law There are numerous antitrust statutes in the century of legislation and jurisprudence devoted to the topic, but five statutes are at the core of this area of US law: • • • • •

The The The The The

Sherman Act of 1890 Clayton Act of 191412 Federal Trade Commission Act of 191413 Robinson-Patman Act of 193614 Hart-Scott-Rodino Amendments of 197615

The Sherman Act The cornerstone U.S. antitrust law, the Sherman Act, was passed in 1890, based on public and congressional opposition to the amassed power of major trusts and near monopolies in oil, tobacco, and railroads. As with any major statutory development, the Sherman Act did not occur in a political vacuum. The growing post-Civil War power of certain companies, such as Standard Oil and American Tobacco, fueled a public belief that the big

The Antitrust Experience of the U.S.

199

companies were taking over the country and the economy, to the detriment of the "little guy," whether small business owner, laborer, or consumer. This political concern had in fact resulted three years earlier, in 1887, in the creation of the Interstate Commerce Commission (which was eventually dismantled in 1996). The principal purpose of the commission was to regulate the railroads and to set prices for freight transport on the rails, since it was generally agreed that major railway companies, through monopolistic and anticompetitive practices, were reaping undue profits (rents) by overcharging the public for their services. Issues of misallocation of wealth also arose because the railways were accused of shifting costs between short-haul and long-haul services, thereby creating hidden crosssubsidies that were unfair to small farmers and producers. 16 The Sherman Act had a broader aim, not limited to one sector such as transportation. It was intended to provide the legal basis for challenging, and blocking, anticompetitive, monopolistic practices of all kinds in all sectors of the economy. As noted above, the simple language of the statute condemned and proscribed both actual and attempted monopolies or "restraints of trade." In so doing, it drew upon existing common law concepts of unfair trade and deceptive practices, but its new and unique contribution was to make it clear that in the entire United States, such anticompetitive conduct was proscribed and to endow the judiciary and aggrieved parties with the formal legal cause of action—and the threat of substantial criminal and financial penalties—to stop such conduct. One of the hallmarks of the Sherman Act was its reliance on private actions for enforcement. No new federal agency was created to enforce the act. Rather, the attorney general was accorded the power, as in all other cases, to enforce federal criminal statutes, and a novel inducement was offered to private citizens to assist in its enforcement: treble (triple) damages were made available to those injured by anticompetitive behavior in violation of the statute when they brought successful legal actions in the courts against the offending monopolists/unfair traders. It is not an exaggeration to state that this implicit "privatization" of law enforcement has been crucial in the history of U.S. antitrust law and has been a key to the success of other U.S. economic regulatory schemes. American lawyers, who of course profit from the availability of this potentially lucrative inducement to litigation, tend to view this private enforcement feature as one of the positive distinguishing features of U.S. antitrust law.17 By using the common law system of developing the law itself through the disposition of actual cases and by encouraging private economic actors to enforce laws where they are most likely both to perceive the violations of the law and to have been directly harmed by such violations, U.S. antitrust laws (and other economic regulatory laws) have created legal regimes that have a high likelihood of being enforced while having a low

200

Competition Policy at the Global Level

requirement of a formal enforcement apparatus or watchdog bureaucracy.18 Nevertheless, the early years of enforcement of the Sherman Act were characterized by key Supreme Court cases that were publicly and politically perceived as lacking in adequate antitrust, antimonopoly zeal. This view emerged despite some noteworthy achievements in the early years. In the 1899 decision in Addyston Pipe & Steel Co. v. United States, for example, the Supreme Court interpreted the Sherman Act as illegalizing cartels formed for price maintenance or territorial market segmentation. 19 Five years later, the Court went further, endorsing the power of the government to seek divestiture as a remedy in monopoly cases in Northern Securities Co. v. United States (a case involving J. P. Morgan's use of a holding company to control railways). 20 This meant the government could literally engage in "trust-busting," as the popular political phrase put it, rather than relying only on injunctive remedies prospectively limiting monopolistic conduct. Indeed, with that power, in two of the most famous cases in antitrust history, the U.S. government did achieve the Court's approval for two major corporate breakups: the Standard Oil Company 2 1 and the American Tobacco Company. 22 Despite those high-profile enforcement successes, the popular view remained that the U.S. economy was increasingly cartelized. The divestiture decrees against even such major perceived malefactors as the Dukes and Rockefellers did not alter the political consensus that stronger antitrust laws were needed. The next wave of major antitrust legislation thus hit U.S. shores in 1914, propelled by a new generation of muckraking stories about the excesses of untrammeled capitalism.

The Federal Trade Commission Act and the Clayton Act The year 1914 saw the enactment of a brace of antitrust statutes that accomplished two goals. First, the Federal Trade Commission (FTC) Act did precisely what the Sherman Act had left undone: it created a formal, federal enforcement bureaucracy. The congressional intent behind this act was to make certain that there was in fact a federal watchdog to bring federal enforcement actions where necessary to protect competition in the marketplace and to provide to the judiciary and private litigants who did come forward under the Sherman and other acts with an expert advisory source capable of assisting in economic analysis relevant to such cases. Finally, the FTC was to be an expert agency advising the Congress itself about developments in the marketplace and any needed legislative remedies to anticompetitive behavior. Second, passage of the Clayton Act was based on specific concerns about a number of marketplace practices around the turn of the century that had thus far survived the Sherman Act, as enforced by the Justice

The Antitrust Experience of the U.S.

201

Department and interpreted by the courts. The Clayton Act dealt with price discrimination, monopolistic sales practices, interlocking corporate directorates, and anticompetitive mergers. Viewed from the perspective of both 1914 and the present, the most important provision of the Clayton Act is Section 7, which barred mergers or acquisitions that "substantially lessen competition" or that "tend to create a monopoly in any line of commerce." This focus on blocking anticompetitive mergers was a main reason for the enactment of Clayton and came specifically because Congress was concerned that the Supreme Court had not construed the Sherman Act broadly enough in merger cases. The history of Section 7 is a clear example of the interaction among the federal branches noted above. Far from accepting the congressional rebuff, the Supreme Court narrowly interpreted the new, supposedly stronger antimerger provision in a 1926 case, 23 and "by 1930 it had been rendered useless in preventing anti-competitive mergers." 24 The economic chaos and governmental tinkering with economic regulation induced by the depression, plus the necessarily dirigiste aspects of the U.S. economy during the mobilization for and the conduct of World War II, meant that the status of Section 7 was not revisited by Congress until 1950. When it did so, the antimerger, antibigness instincts of the Congress were reasserted. As strengthened by the Celler-Kefauver Act of 1950, the language of the Clayton Act became even more encompassing, to the effect that "no corporation engaged in commerce . . . [shall acquire another company] where in any line of commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition or to tend to create a monopoly." 25 That high threshold barring mergers or acquisitions, sought by Congress in 1914 and achieved by the 1950 amendment, seems plainly not to be enforced today, for reasons discussed later, yet it reflects the thinking that has guided the theoretical—and for periods, the actual—application of antitrust law: a core assumption of U.S. antitrust law is that bigness of individual corporations and limited numbers of participants in any market are inherently anticompetitive. True competition, hence maximum economic efficiency and general welfare, it is held, is enhanced by ensuring that a sufficient number of market players exist so that no one player or even a small number of players acting in concert or through collusion can control that market. The core assumption is that large market share by any one market participant leads to control of the market, which is highly likely, if not inevitably, the path to abuse, particularly to monopoly (or oligopoly) pricing that overcharges consumers and creates unjustified profits or rents for the dominant market player(s). This underlying assumption is precisely wrong in the view of Chicago School critics of U.S. antitrust policy. In their view, now increasingly wide-

202

Competition

Policy at the Global

Level

ly held, no hard economic evidence exists to support the contention that size and market dominance lead to such pricing abuses and concomitant allocative inefficiencies. Despite the growing dominance of the Chicago School view in intellectual and judicial circles, mergers and acquisitions are nevertheless still, under the currently controlling law of the United States, to be skeptically viewed and subjected to the legal test that they not "lessen" competition nor even "tend" to create monopolies, as called for in the amended Clayton Act. The difficulty for the courts in applying such a standard, of course, is that it is predictive. It requires a judgment as to what will happen in the future—not what has happened already, the normal province of fact-finding in the judicial forum. In practice, defining the threshold past which a merger is presumed likely to "lessen" competition, and therefore to be barred, has been an inexact science, subject to some variation among courts and to shifts over time in prevailing enforcement views. Generally, however, the analysis of whether competition is likely to be lessened or tendencies toward monopoly created has begun with an effort to mathematically assess market share. To do so, the threshold analysis the courts must conduct is the definition of the market. 26 This definition of the market is a step necessary in all antitrust analysis, since the courts cannot sanction conduct that appears to be unfair competition or in "restraint of trade" without first defining what are the goods or services being traded in the relevant market. This market definition step usually involves identifying the type of goods being traded, an analysis of the possible substitutability of other products for those goods, the presence of other actual or potential market participants, and an assessment of the geographic limits of the market. 27 It is in this regard in particular that the increasing volume of international trade has had an analytical impact, since modern communications and transportation plainly have made it possible for producers/competitors from distant places to enter and compete in a "market" that previously would have been defined in a limited geographic way. Once the market is defined, the antitrust enforcers and the courts have looked to market share as the major means of determining whether mergers might accord too much market power or control to any one (or group of) market player(s). Standards of how much market control is too much have varied over time, but since at least 1982, the preferred technique for quantifying market share is the Herfindahl-Hirschman Index (HHI). The HHI is arrived at by adding the squares of the individual market shares of all the market participants. (Prior to 1982, a four-firm concentration ratio was the dominant technical method of quantifying market share and control.) Thus, a ten-player market perfectly divided, with a 10 percent market share each, would have an HHI of 1,000 (the sum of ten 100s); a four-participant mar-

The Antitrust Experience of the U.S.

203

ket with a 25 percent share each would have an HHI of 2,500 (the sum of four 625s); and so on. The higher the HHI would be after a merger, the more that market is seen as concentrated and the more likely it is to draw a challenge from the government. 28 The Justice Department's Antitrust Division and the Federal Trade Commission in recent years have issued occasional guidelines to give potential merger and acquisition dealmakers a sense of the ranges that the government views as important trigger points for scrutiny of mergers. Under the prevailing guidelines, issued in 1992, an HHI of over 1,800 is "highly concentrated," and one between 1,000 and 1,800 is "moderately concentrated." The highly concentrated market corresponds roughly to a four-firm concentration ratio of 70 percent. It is above that level, according to current enforcement philosophy, that mergers should be the subject of heightened scrutiny. 29 Those market concentration guidelines and the actual enforcement practices of the government since 1982 reflect the increasing prevalence of the Chicago School view that questions the inevitability of the link between bigness or market concentration and anticompetitive practices, particularly in pricing. Today, mergers are much less likely to be challenged by the Justice Department or the FTC, let alone actually blocked by the courts, than they were just twenty years ago. Nevertheless, the concern for market share and control remains a central preoccupation of U.S. antitrust law. That focus was the basis for the last major antitrust statute to be enacted, the HartScott-Rodino Amendments, discussed below, which continue to subject mergers and acquisitions to special hurdles of disclosure and official scrutiny before they can be consummated. The Robinson-Patman Act of 1936 This act is a vivid example of congressional concern over unfair marketplace practices that leads to legislation. Robinson-Patman amended the Clayton Act to address a particular market problem that had arisen as the nationwide marketing and retailing of goods became increasingly prevalent in the post-World War I boom years. Congress and the public perceived cases of price discrimination that offered different prices to different customers not because of some actual difference in the costs of production or delivery to certain markets, but based on a predatory intent, generally to drive a regional competitor out of business by offering economically unsustainable low prices for long enough to bankrupt that competitor. The Robinson-Patman Act sought to provide an airtight statutory prohibition of such conduct. As ever, the plain economic rationale was fair competition. Predatory pricing was unfair and uneconomic in two ways. In the immediate term, it required some hidden transfer of cost from one customer to another, since

204

Competition Policy at the Global Level

underpricing one's goods in one market (assuming rational, profit-seeking economic behavior) required compensating for lost profits by overpricing to other customers, creating a hidden subsidy by one class or region of customer to another. In the long term, such predatory pricing, of course, was intended to have a more directly anticompetitive and monopolistic effect. Once the local or regional competitor was forced out of business by having to match economically unsustainable low prices, then the remaining sole provider of the goods or services had no local competition and was able to raise prices to achieve excess profits. Any new entrant in the market was effectively forewarned it would face the same predatory pricing challenge.30 Students of trade policy immediately recognize that the same concepts, in the context of global, supranational trade, are embodied in the U.S. antidumping laws. The same concept of unfair pricing, which even though it benefits the consumer on a short-term basis by making cheaper goods available, is seen as unfair competition over the longer term because the presumed intent of such pricing, or "dumping," is to drive out the "local" (in this case, consumers' home country) competitor and create the monopolistic setting needed to raise prices and achieve excess profits in the future. 31 The Hart-Scott-Rodino

Amendments

The last hurrah of major antitrust legislation in the United States appears to have been the amendments that bear the name, among others, of the last great congressional articulator of classic U.S. antitrust thinking. Senator Philip Hart of Michigan was for decades a forceful and thoughtful advocate of the view generally referred to as "Jeffersonian democracy," which espouses that bigness in corporate activity is, almost without exception, bad.32 Bigness equaled with badness, again, is a concept based on perceptions of actual marketplace experience, not theoretical logic. The behavior of large corporations in American economic life— whether that of the railroads in the nineteenth century, the tobacco companies in the early twentieth century, the steel companies in the mid-twentieth century, or the oil companies throughout—has consistently been to seek economic advantage tending toward monopoly in order to maximize profits. Classic antitrust proponents believe that bigness inherently creates more market power and greater potential for abusive pricing and rent seeking unless it is countered by an equally potent competitor. Since every market in the end is finite, no matter how large, the tendency of major corporations to attempt to grow larger by mergers and acquisitions, again, is inherently a tendency toward attempting to create regional, sectoral, and national monopolies.

The Antitrust Experience of the U.S.

205

These observations and concerns animated the work of Senator Hart and others in Congress in the early 1970s. The amendments to the antitrust laws passed in 1976 were aimed at ensuring that the Federal Trade Commission had ample information and timely opportunity to examine the potential anticompetitive impacts of proposed mergers and acquisitions. The amendments empowered the FTC to seek, in advance of such proposed mergers and acquisitions, substantial data regarding the shape of markets, the market shares of proposed merger partners, likely impacts of a merger on parallel markets, and other factors that determined whether the merger or acquisition would likely be anticompetitive in ultimate impact. This premerger notification requirement was intended to make it easier for the government to block an anticompetitive merger or to put pressure on the participants to alter the merger in ways to make it less anticompetitive, for example, by spin-offs or divestitures as appropriate. That concern of the Congress, still potent as recently as the mid-1970s, has been rather completely overtaken by subsequent political and economic events. U.S. antitrust law and enforcement appear to have reached, at least for the foreseeable future, their zenith and entered into a period of decline. As evidenced by the renewed merger fever in the most promising sectors of the current economy (information technologies, entertainment, communications, and financial services), it is apparent that bigness is alive and thriving in the U.S. economy and in little danger of being blocked or reversed by the federal antitrust officials or private economic actors relying on U.S. antitrust legal theories. While it is safe to say that the concern for bigness and concentration, with its presumed commensurate market power, has been the foremost preoccupation of U.S. antitrust law, other marketplace developments have triggered the broad concern of this body of law that no market participants should be permitted to gain advantage over competitors, suppliers, or customers through actions that the Congress views as unfair. Price-Fixing, Territorial Exclusivity, Tying, Boycotts, and Other Unfair Behavior U.S. antitrust law also condemns a range of practices viewed as predatory or unfair to other competitors, to suppliers, and to consumers. The broad, seminal concern of the Sherman Act with blocking actions in "restraint of trade" has been articulated to respond to a range of real-world market practices that the courts and Congress have deemed to be simply unfair and tending toward eventual excessive market control or concentration. The practices that have been barred are those that involve efforts to control or limit competition. Price-fixing has been the most consistently and firmly disfavored of such practices. Price-fixing has long been subject

206

Competition Policy at the Global Level

to a per se prohibition; that is, it is illegal in virtually every circumstance.33 Likewise, agreements to carve up markets into exclusive territories, thereby avoiding face-to-face competition among competitors, are also per se illegal. Both of these practices are typically characterized as "horizontal restraints"—that is, as efforts to restrain competition among side-by-side competitors. In addition, certain practices that involve "vertical restraints," such as limits on what an intermediate purchaser of goods can do in subsequent sales transactions, what price the goods can be sold at, in what geographic area, and so forth, are likewise forbidden by the antitrust laws.34 Before discussing the current state of antitrust law and enforcement in the United States, a brief description of the interrelationship of antitrust law, historically, with other economic regulatory laws in the U.S. system is helpful.

Interaction with Other U.S. Economic/Regulatory Law U.S. antitrust law on its face blankets all aspects of the U.S. economy, but exceptions have existed in a number of areas. In certain cases, monopolies have been explicitly sanctioned. In others, a sector-specific regulatory system has been set up, generally with a dedicated federal regulatory body, to see that market participants play fair and abide by rules that protect that market from either unfair competition or conduct that harms consumers and ultimately the general public interest. The most basic exception to the antitrust laws is that of patent protection, provided for in the Constitution itself. It was always thought to be necessary to encourage creativity, innovation, and invention by ensuring to authors and inventors the copyright and patent protection that guaranteed that they, and they alone, would reap the economic benefits of their creative works and inventions for at least an initial, specified period of time. Such patent and copyright privileges obviously constitute monopolies but ones thought to be consistent with the larger public interest in fostering new products for the market.35 As for sector-specific regulatory systems, as noted above, the first such regulatory system was established just prior to the enactment of the first major antitrust statute, the Sherman Act. In 1887, the Interstate Commerce Commission was created largely to curb abusive pricing practices of the then-powerful railways. Consumer protection, especially the vulnerable farmers of the Midwest who relied on the railways for getting their goods to market, animated Congress in the creation of a regulatory agency that largely focused on itself setting appropriate prices for services in the transport sector. Writ large, it is fair to say that such price setting by federal regulators was the core element in the sector-specific schemes of economic

The Antitrust Experience of the U.S.

207

regulation that emerged and were dominant in the federal regulation of the U.S. economy until the late 1970s. Aviation, electric power generation, and communications regulations are the other major examples of that regulatory approach. Under a variety of statutes, power-generating utilities were regulated, as were the communications utilities, principally the telephone industry, and the airlines. Until the complex legislative and judicial actions of the 1970s, 1980s, and 1990s completely remapped the landscape of U.S. communications policy, one company, AT&T, was, in effect, a government-sanctioned monopoly in the business of telephonic communications. The price AT&T paid for that monopoly status was thoroughgoing regulation of its activities by federal regulatory authorities, specifically the Federal Communications Commission, which had both rate- or price-setting powers and a broad range of powers over how AT&T conducted its business. In addition, of course, U.S. government intervention in the marketplace to set or fix prices and to control levels of production is notoriously prevalent in the agricultural sector. That sector more than any other has been and remains the prime example of politically potent special interests that succeed in seeking rents through governmental intervention into the putatively free market. Finally, the unique role of the financial and capital markets in sustaining a capitalist economy has led to an entirely separate set of legal regulations and regulatory bodies that govern that sector. As always, it was based on the perceived experience of the depression failure of the U.S. banking system (as well as numerous previous nineteenth-century bank panics and episodic disruptions in the capital markets familiar to all developing economies, as the United States was then), that the major laws governing banking, securities, and all aspects of the capital markets were passed in the early 1930s. Those laws, including the Glass-Steagall Act and the Securities and Exchange Act, basically established the financial market system that remains largely in place today, albeit a system that is very much undergoing reconsideration based on the same market forces that have brought U.S. antitrust law into question, as discussed below. 36 While the antitrust laws have broad scope and are applicable to participants in the capital markets, the federal banking regulatory system includes an elaborate set of agencies and laws that governs the activities of the several subsectors of the financial markets: commercial banks, securities firms and investment banks, insurance companies, and others. That complex financial regulatory system is outside the scope of this chapter, but the discussion below of the current status of thinking about antitrust also accurately describes the current thinking and the global economic realities that are leading Congress, the courts, and the public to rethink, and possibly to radically restructure, the U.S. financial services sector and its regulation.

208

Competition Policy at the Global Level

The Modern Era of U.S. Antitrust Two developments have converged since 1980 to radically alter the landscape of U.S. antitrust enforcement. The first has been the shift to a more conservative, pro-business political climate, under the stewardship of President Ronald Reagan, President George Bush, and then the new Republican congressional leadership under then-House Speaker Newt Gingrich, brought to power in the 1994 elections. This movement has been intellectually fueled by a strong shift in the views of many, if not most, professional economists toward an amalgam of perspectives that are generally antiregulatory and highly skeptical of interventions in the markets either through antitrust actions or other regulatory schemes, particularly those involving rate setting. The second development has been the perceived emergence of a "global economy" in which trade has a newly important role in the determination of each nation's economic health and in which markets, and competitive impacts, increasingly are analyzed at the global, rather than the national, level.

The Shift in U.S. Politics It is apparent that the U.S. presidential election of 1980 marked an important shift in American politics. Even though Presidents Richard M. Nixon and Dwight D. Eisenhower had been Republicans, the period up to 1980 can fairly be characterized as having been an extrapolation of the New Deal, pro-regulatory era in U.S. economic management. The federal regulatory and antitrust regimes described above were not significantly curtailed, despite shifts in the pace and focus of their enforcement from one presidency to the next. Indeed, arguably one of the most far-reaching federal efforts to regulate private economic activity for public purposes, and one that clearly agitates the business community as much or more than any other, is the effort to control the environmental consequences of economic activity. This effort was made largely through the work of the Environmental Protection Agency, which was significantly expanded during President Nixon's administration, and through the application of the National Environmental Policy Act, likewise enacted under President Nixon.37 President Reagan's election was characterized by a clearly stated political intent to dismantle much of the federal economic regulatory apparatus. From 1981 through the present, antitrust enforcement, as well as other major portions of federal economic regulation, has been comparatively dormant. Certain types of economic regulation, notably in the price-setting area, have been dismantled with bipartisan consent. Beginning even in President Jimmy Carter's administration, there was a growing consensus that price

The Antitrust Experience of the U.S.

209

setting by federal agencies was an unwise intrusion into the marketplace and should be ended, hence the abolition of the agencies and the price and service restrictions in such industries as aviation during the "deregulatory" phase begun in 1977 under Carter and continuing through the 1996 dismantling of the Interstate Commerce Commission under Clinton's and Gingrich's leadership. Likewise, the unique history of AT&T and its dismantlement reflect a bipartisan, if highly complex, decision to move away from the regulated national monopoly model to a blended model of smaller regional monopolies of some types of communications services combined with open competition in other communications services. In the AT&T case, antitrust principles were themselves brought to bear, beginning with the formal government case against AT&T in 1974, to achieve this outcome. But the ultimate result and the subsequent, continuing evolution in the structure of the U.S. communications sector have entailed congressional, executive, and court actions that mutually reflect the new bipartisan consensus that such overarching governmental intrusion into the marketplace through rate setting and limitations on market entry and related regulatory controls are a mistake and should be replaced increasingly by deregulated market competition. 38 In the antitrust arena generally, however, there has been less of a clear bipartisan consensus. Congressional Democrats have continued in important respects to argue that antitrust concepts, particularly the antibigness philosophy of the late Senator Hart, remain valid. The Reagan administration plainly thought otherwise, with the result, among others, that the 1980s saw a massive trend toward mergers and acquisitions with a diminished enforcement response. Deals of a magnitude previously unheard of were consummated, and higher concentrations occurred in and across sectoral lines. This political and legal shift was intellectually grounded in the work of professional economists of the Chicago School. The views of that school are as important as they are relatively simple to summarize. Viewing price theory as the lodestone for analysis of the functioning of the economy, these economists do not believe that there is substantial evidence that antitrust law, with its insistence on opposing bigness and large market share, actually enhances allocative efficiency by preventing price abuses by monopolies (or oligopolies). 39 Their view is that, instead, even those market players with large market shares verging on monopoly are obliged by the likely eventual entry of competitors, or by the marketplace ability of consumers to find substitutable goods or services, to eschew abusive pricing practices. And, in certain cases, the view is that antitrust law, with its dislike for excessively aggressive competition, through "predatory" pricing and related techniques, actually operates to reduce competition and to protect rent-seeking

210

Competition

Policy at the Global

Level

market participants who themselves are engaging in price-setting behavior that is not maximally efficient economically. One of the best-known proponents of this view is Robert Bork, whose highly influential book The Antitrust Paradox appeared in 1978. Bork's prominent career as a jurist, political spokesperson, and economic analyst is reflective of the growing influence of these scholarly views on the practical politics of the Reagan and post-Reagan era. Along with Bork, Judge Richard Posner and others of the Chicago School have written extensively in the professional literature to advocate these views and have implemented them as influential federal judges and as political participants. Other scholars such as William Shughart, Robert Tollison, Paul Rubin, Peter Asch, and Joseph Seneca have labored steadily to undermine the notion that there is any empirical basis to support the intuitively held position of antitrust advocates to the effect that competition is increased, monopoly profits avoided, and consumer welfare enhanced by the actual application of the antitrust laws. Some of those academic studies contend simply that the antitrust laws have failed to enhance consumer welfare, while others go even further to suggest that the antitrust laws have been affirmatively bad for the consumer. 40 One example is a 1985 article by George Bittlingmayer that appeared in the University of Chicago's Journal of Law and Economics, which argued that the Sherman Act actually caused the wave of mergers at the end of the nineteenth century by illegalizing price-fixing, leading market leaders to achieve the same results by merger.« Most scholars of the Chicago School, however, do seem still to accept the notion that there is a place for prohibitions of those market activities that the antitrust laws have always sanctioned most severely as per se violations—price-fixing in particular. The view remains that under almost no circumstances can that sort of collusion among supposed competitors be in the interest of the consumer or the public at large, and indeed, the assumption remains that such collusive behavior is inherently one of rent seeking. Based on that view, even during the Reagan and Bush administrations, price-fixing allegations were taken seriously, and enforcement actions against such practices were undertaken. 42 In recent years, there are some scholarly voices arguing that the Chicago School falters at this point and in fact does not go far enough. The "public choice" model of analysis of governmental policymaking argues in essence that antitrust law and its enforcement spring respectively from two sources: rent seeking by special interests wishing to limit or avoid competition in their markets, and decisions by government antitrust enforcers who are interested in maximizing their own bureaucratic fiefdoms and professional careers, not in maximizing consumer welfare. 43 In part due to these intellectual currents in play during the 1980s, the election in 1992 of a Democratic president, Bill Clinton, did not greatly

The Antitrust Experience of the U.S.

211

alter the trend away from strong enforcement of the U.S. antitrust laws within the domestic marketplace. After January 1995, of course, one reason was that Congress had shifted to the control of Republicans for the first time in over forty years. The current congressional leadership consists of vociferous proponents of the laissez-faire approach to business articulated by President Reagan, and it certainly shares the Chicago School's skepticism about the benefits of antitrust. Yet even during the first two years of the Clinton administration, it seemed clear that strong antitrust enforcement was not a key objective of the Democratic administration and Congress. The reason is the convergence of the more conservative U.S. political mood, endowed with the intellectual respectability of the Chicago School, and the Clinton administration's focus on the emergence of the global economy. The Emergence of a Global Economy President Clinton, more even than his predecessor, President Bush, has associated himself with the view that today's economy is global in nature and that markets must be seen and analyzed at the global, rather than national, level. Such analysis, of course, has major implications for antitrust law. If the market for widgets is seen as being global, and if other countries, such as Germany and Japan, not to mention the "emerging" economies, have producers, then the possibility is greatly reduced that a U.S. company can be said to have "monopoly" power. Even a company that, hypothetically, was the sole U.S. producer of a good and that had a majority of the market share within the United States—plainly a case that would trigger grave antitrust concerns under the traditional, national market-based analysis—could be said to face real competition and not to be a monopolist if the antitrust/competitive analysis is done at the global market level. The subject can be developed at considerably greater length than is appropriate here, but again it is a fair, if broad, statement to assert that both Democrat and Republican U.S. political leaders have embraced this concept of global market analysis, which carries with it obvious consequences for the enforcement of U.S. antitrust law. Given this philosophical and political convergence, for example, there is little evidence that the Clinton administration—nor certainly the Congress—will limit the current wave of major mergers producing substantial consolidation of the U.S. information, entertainment, communications, and financial industries. 44 The intriguing aspect of this development is that, in fact, the U.S. economy remains largely driven by its domestic market. Trade accounts for only a small fraction of the gross national product and has thus far been comparatively unimportant in determining the level of U.S. national wealth. Long-term trend lines do suggest that external trade will become

212

Competition

Policy at the Global

Level

increasingly important to national wealth in the future, however. Hence the view of the U.S. economy as being engaged in "global competition" against other national competitors, notably Japan, Germany, and the newly emerging economies of Asia and Latin America, is now a dominant political view, on a fully bipartisan basis. This view, in essence, is a neomercantilist view that associates the business entities of each nation with that nation's interests; further, it assumes that fostering the prosperity of companies that are legally domiciled in the United States is in the U.S. best interest and is a part of an ongoing competition for national wealth conducted among the corporations of the United States and the keiretsus of Japan, the chaibol of Korea, and the family conglomerates of Europe. This view has analytical flaws, as has been pointed out in various ways from the early 1970s until the present. In the early 1970s, a range of business experts and political observers began expressing concerns about the global activities of U.S.-based corporations. Collectively, those concerns could be placed under the banner named by Harvard Business School professor Raymond Vernon as the "Sovereignty at Bay" view. The argument ran simply that multinational corporations, whatever their nominal domicile, had no national allegiance at all but would act to maximize their own profit without regard to national or political fortunes. 45 This perspective did not necessarily comfort those in Europe and elsewhere, such as J. J. Servan-Schreiber, who in the 1960s and 1970s vigorously lamented the growing power of U.S. corporations in Europe and around the world, power obtained through direct foreign investment and massive sales of products in non-U.S. markets. 46 Today, such esteemed economists as Paul Krugman have argued that the model of nations competing with one another in a global economy is misleading in another direction. He and others contend that this view arises from a fundamental misunderstanding of the basic economic theory of comparative advantage and the precepts of free trade that flow from that theory.47 Whatever its defects, this notion of the global economy and of the United States as a competitor with Japan and others is now deeply and widely held in political America, however. As a consequence, it seems highly unlikely that in the foreseeable future there will be a renaissance of aggressively enforced U.S. antitrust law on the domestic U.S. level. Certain anticompetitive practices, including those that harken back to the English common law concerning fraudulent sales practices and deceptive or misleading advertising, surely will continue to be enforced as part of a continuing commitment to consumer protection from such practices. But the antitrust laws associated with a concern over bigness, concentration, and monopolization of U.S. markets by one or a small group of economic actors do not appear likely to be much invoked within the United States in the near future.

The Antitrust Experience of the U.S.

213

Indeed, the most prominent current case that appears to counter the trend toward more lax enforcement of U.S. antitrust laws, the Justice Department suit against Microsoft, is a unique case in which the government has been offended by its perception that Microsoft has both engaged in restraints of trade and broadly succeeded in capturing a near-monopoly position in a global market, with overwhelming market share in the United States. The government's case is a Sherman Act case (conspiracies and combinations in restraint of trade), not a Clayton Act case (mergers), and is being fought out over factual allegations that Microsoft has engaged in ruthless sales and licensing practices designed to destroy its competitors in the Internet "browser" market. And even here, with the outcome of the case uncertain at the time of publication, it appears that the remedy likely to be sought by the government, if successful, may not be to break up Microsoft into smaller companies. Rather, the plaintiffs are considering asking for large financial penalties and for compulsory licensing of Microsoft products to other competitors, reflecting the underlying "restraint of trade" theory and not any particular drive by the Justice Department to dismantle a major cartel as the early Sherman and Clayton Act cases attempted to do.48 Notwithstanding the Microsoft case, the tendency in recent years has been to carve out explicit exceptions to the antitrust laws in order to enhance the ability of U.S.-domiciled companies to export goods and to compete in foreign markets. Legal support for export trading companies, antitrust exemptions for joint research and development efforts by major competitors in markets where other nations' companies are strong, and even government-sponsored and subsidized consortia to assist favored sectors in developing new products—all of these have been justified by the need to meet global competition. At the same time, however, those who continue to support the precepts of antitrust law argue that in the new world of more global interpenetration of markets, governed by new international agreements such as the new World Trade Organization (WTO), what is needed instead is a coherent "competition policy" that would use both antitrust law precepts and trade law precepts to shape a new approach to competition that, in turn, would prevent monopolization, abusive pricing practices, and unfair competition either at the subnational level or at the international level. F. M. Scherer, for example, has proposed that a new International Competition Policy Office (ICPO) should be created as a part of the WTO. This would, in effect, be a supranational version of the FTC. He proposes that all major cartels engaged in international commerce be first required to register with the WTO/ICPO. He contends that all export cartels should eventually be phased out by multilateral agreement. And mergers should be

214

Competition Policy at the Global Level

subjected to examination at this supranational level, as proposed mergers are now within the United States, to see whether they will have anticompetitive consequences. 49 This sort of proposal leads to the related question about the future of U.S. antitrust laws as a model for other economies and for extraterritorial applications that might advance U.S. global "competitiveness" goals.

Concluding Comment on the Use of U.S. Antitrust Laws as a Model and Their Extraterritorial Application by the United States Despite the current political atmosphere in the United States and the prevailing infatuation with the global economy, I retain the view that classic U.S. antitrust concepts incorporated in the Sherman, Clayton, and HartScott-Rodino statutes remain valid. Bigness and market power are appropriate concerns for national governments, certainly in a market the size of that of the United States. Bigness and market power do tend toward monopolization, rent seeking, and economic inefficiencies. This is, of course, contrary to the views of the Chicago School that monopolization is not really sustainable, that there will always be new market entrants, and that the fear of such new competitors compels fair pricing and other pro-consumer behavior even by those who do have major market shares or even monopolies. I tend to view the patience of the Chicago School with the eventual market outcome as being rather too patient. The global economy has not yet genuinely changed the effects of bigness and market power. Indeed, a case could be developed that the use by the U.S. business community of the global economy argument to gain congressional and executive blessings for activities and enterprises that otherwise would run afoul of the antitrust laws as plainly written is one of the more successful examples of rent seeking by economic actors who seek political sanction for their special, and economically inefficient, marketplace prerogatives. For the moment, however, that political debate has been settled. What remains, then, are two corollary questions about the future of U.S. antitrust law. First, to what extent will and should other countries, as they move to "liberalized" economies with less state intervention in the markets, adopt U.S. antitrust laws? My answer to that question is that the U.S. antitrust laws have a valid place in organizing a true free market capitalistic system where the genuine objective is to maximize economic efficiency and the general public welfare, while minimizing special economic privilege and oligopolistic power. For that reason, the use of U.S. antitrust laws as a legal model is to be recommended. Second, to what extent will the U.S. government pursue its episodic infatuation with the notion that U.S. antitrust laws can and should be

The Antitrust Experience of the U.S.

215

applied extraterritorially? The plain language of the Sherman Act and other U.S. antitrust statutes was never limited to U.S. citizens. U.S. antitrust laws could easily be read to reach conduct by non-U.S. citizens, even acting outside the physical borders of the United States, if that conduct has economic consequences involving monopolization or tending to monopolize, assuming the necessary legal requirements of collusive or collective action and actual intent are factually proven. 50 Increasingly, the concept of the global economy, as well as the model of the United States as a competitor against other mercantilist states, logically gives rise to the idea that the United States should seek to enforce its antitrust laws on an extraterritorial basis. Certainly some in Congress, such as former Senator Howard Metzenbaum, and others in the executive branch, in particular those of the Justice Department's Antitrust Division, have argued so. And the Clinton Justice Department and the FTC jointly released new guidelines at the end of 1994, which announced that the U.S. government will take enforcement action against foreign market activities that it deems to be in violation of U.S. antitrust law, where such actions can be shown to be damaging to U.S. commercial interests.51 In the real world, such actions by the U.S. government will be strongly resisted by other sovereign governments. The suggestion that the United States might bring charges that are, after all, criminal against officials of, say, Japanese companies for their activities aimed at enlarging their share of the U.S. market would not be idly accepted by the government of Japan. Hence the U.S. government thus far has chosen to tread lightly in its actual pursuit of this line of antitrust reasoning and application. In my opinion, however, there is a strong possibility that that avenue will be pursued in the future. The thinking behind the current U.S. orthodoxy regarding the global economy leads logically to assertions of U.S. antitrust law to advance U.S. economic interests where it can be claimed that economic actors in other countries are achieving unfair economic advantage in U.S. markets by actions violative of those U.S. statutes. As noted above, after all, some of the concepts of U.S. antitrust law, such as the discriminatory pricing prohibitions of the Robinson-Patman Act, are clearly consonant with U.S. trade laws and sanctions such as the antidumping statutes. The paradoxical prospect thus arises that the future of U.S. antitrust law lies not at home, where it has a diminishing number of advocates, but abroad, both as a model for others in the regulation of their own economies and as a tool to be used by the U.S. government in the competitive battle to prevail in the global economy. Perhaps the resolution of that paradox for those who still advocate the underlying tenets of U.S. antitrust law is the sort of international harmonization of competition policy, along lines such as those suggested by Scherer, through multilateral negotiation and agreement, rather than through unilateral application or enforcement by the United States. 52

216

Competition

Policy at the Global

Level

Notes 1. For a broad statement and analysis of the evolution of the antitrust law of the United States, see Phillip E. Areeda, Antitrust Law Analysis: Problems, Text, and Cases, 4th ed. (Boston: Little, Brown & Co., 1988; supplement, 1994). 2. See, for example, Hartford Fire Insurance Co. v. California, 113 S. Ct. 2891 (1993). 3. See discussion below in the section "The Modern Era of U.S. Antitrust." 4. Areeda, Antitrust Law Analysis, pp. 7-45; and John H. Shenefield and Irwin M. Stelzer, The Antitrust Laws: A Primer, 2nd ed. (Washington, DC: AEI Press, 1996), pp. 5-13. 5. U.S. Constitution, Art I, § 8. 6. Areeda, Antitrust Law Analysis, pp. 42-45. 7. It should perhaps also be noted that Justice Holmes expressed reservations about the practical impact and theoretical soundness of antitrust law, as in his private correspondence where he wrote, "The Sherman Act is a humbug based on economic ignorance and incompetence" (from J. J. Marke, ed., The Holmes Reader, 2nd ed. [1964], p. 112, quoted in Donald Dewey, The Antitrust Experiment in America [New York: Columbia University Press, 1990], p. 24). 8. For a general review of the U.S. court system and the role of the courts in developing legal doctrines, see Daniel John Meador, American Courts (St. Paul, MN: West Publishing Co., 1991). 9. Areeda, Antitrust Law Analysis, p. 51. 10. Sherman Act, 26 Stat. 209(1890). 11. F. M. Scherer, Competition Policies for an Integrated World Economy (Washington, DC: The Brookings Institution, 1994), pp. 18-19. At least twelve state antitrust statutes were passed in the United States, largely in the agrarian Midwest, prior to the passage of the first federal antitrust statute, the Sherman Act. 12. Clayton Act, 38 Stat. 730 (1914). 13. Federal Trade Commission Act, 38 Stat. 717 (1914). 14. Robinson-Patman Act, 49 Stat. 1526(1936). 15. Hart-Scott-Rodino Amendments, 90 Stat. 1383 (1976). 16. Dewey, The Antitrust Experiment, pp. 4-6. 17. Harry First, "Antitrust Law," in Alan B. Morrison, ed., Fundamentals of American Law (New York: Oxford University Press, 1996). 18. Areeda, Antitrust Law Analysis, pp. 83-103. 19. Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899). 20. Northern Securities Co. v. United States, 193 U.S. 197 (1904). 21. Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911). 22. United States v. American Tobacco Co., 221 U.S. 106 (1911). 23. Thatcher Manufacturing Co. v. Federal Trade Commission, 272 U.S. 554 (1926). 24. First, "Antitrust Law," p. 439. 25. Celler-Kefauver Act, 64 Stat. 1125 (1950). 26. A huge volume of literature has been expended in argument over whether the underlying rationale for the antitrust laws is valid. One of the flagship books in that debate was Robert Bork's influential The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978). At least two separate schools of thought have constructed arguments that debunk the antitrust rationale. First, "price theory" advocates associated with the University of Chicago argue, in essence, that markets are the best determinants of what people (consumers) want and that virtually any interference with the voluntary

The Antitrust Experience of the U.S.

21 7

arrangements produced by the marketplace will result in some "welfare loss" greater than any putative collective welfare gain arising from such interference. In the case of antitrust specifically, their argument is that the economic case has not been made that monopolies or monopolistic behavior actually reduces consumers' welfare. To the contrary, they argue that economies of scale and efficiencies associated with plant size may in fact make larger-scale enterprises and even monopolies more efficient and result in reduced, not increased, costs to consumers. Their suspicion is that the antitrust laws have in fact functioned to protect the economically inefficient "small businesses" by blocking the natural marketplace development of larger, more efficient enterprises. Second, the "public choice" theorists argue more broadly that political markets are really like economic markets, with individuals making decisions intended to maximize their own self-interest, rather than being motivated by some disinterested devotion to the general "public interest." By this reasoning, as one scholar puts it, "legislative and policy decisions in the realm of anti-trust are shaped not by some ideal conception of the public interest, but rather by the interactions between wellorganized private interest groups seeking protection from the forces of competition and politicians and other government officials seeking to maximize their own personal welfare" (William F. Shughart II, "Public Choice Theory and Antitrust Policy," in Fred S. McChesney and William F. Shughart II, eds., The Causes and Consequences of Antitrust [Chicago: University of Chicago Press, 1995], p. 8). 27. Shenefield and Stelzer, Antitrust Laws, pp. 29-32. 28. Ibid., app. B. 29. First, "Antitrust Law," p. 442n30. 30. Areeda, Antitrust Law Analysis, pp. 923-996. 31. See Scherer, Competition Policies, pp. 13-22, 78-86. 32. For a discussion of this Jeffersonian view and a statement of the view that it is an appropriate goal of antitrust laws to prevent monopolization or cartelization of the economy, see Dewey, The Antitrust Experiment, esp. pp. 1-51. 33. Per U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940). 34. Shenefield and Stelzer, Antitrust Laws, pp. 49-54, 67-79. 35. Per U.S. Constitution, Art I, § 8. 36. The Banking Act of 1933 (48 Stat. 162 [1933]) is commonly referred to as the "Glass-Steagall Act" and is the core of a set of prohibitions (subject to important exceptions) limiting the power of banks that are participants in the federal deposit insurance system to affiliate with financial services companies in other sectors of the financial industry, including securities underwriters and insurance underwriters and sellers. The two core securities statutes are the Securities Act of 1933 (15 U.S.C. Sec. 77a-77aa [1988]) and the Securities Exchange Act of 1934 (15 U.S.C. Sec. 78a—7811 [1988]). At the time of publication, the U.S. Congress has under consideration, as it has several times since 1991, major revisions to these laws governing the structure of the U.S. financial services sector. Generally, the direction being taken by the courts and the executive branch, and therefore now being debated in the Congress, is quite parallel to that seen in antitrust law. Specifically, the trend is toward an economic analysis that suggests that with the obvious and rapid "globalization" of the capital markets and financial services, the various inhibitions on affiliation and conglomeration across subsector lines (commercial banking, securities underwriting, insurance) should now be abolished and larger and broader integration of financial services firms permitted. 37. National Environmental Policy Act of 1969, 42 U.S.C. Sec. 4321^370d. See Richard B. Stewart, "Environmental Law," in Morrison, ed., Fundamentals of American Law, pp. 4 8 3 ^ 9 3 .

218

Competition

Policy at the Global

Level

38. For a broad discussion of the development of the federal regulatory system and the subsequent movement toward deregulation, particularly of price and rate structures, see Cass R. Sunstein, After the Rights Revolution: Reconceiving the Regulatory State (Cambridge, MA: Harvard University Press, 1990). 39. See Dewey, The Antitrust Experiment; and McChesney and Shughart, eds., Causes and Consequences of Antitrust. 40. McChesney and Shughart, ibid. 41. George Bittlingmayer, "Did Antitrust Policy Cause the Great Merger Wave?" Journal of Law and Economics, 28 (April 1985), reprinted in McChesney and Shughart, ibid. 42. First, "Antitrust Law," p. 431. 43. McChesney and Shughart, eds., Causes and Consequences of Antitrust. 44. Indeed, as noted above, the trend is toward removal of various barriers limiting affiliations among financial and even nonfinancial companies, toward more permissive approaches to foreign ownership of U.S. companies, and toward a range of other measures that promote, rather than inhibit, "bigness," expanded market share, and cross-market combination. See note 36 above. 45. Raymond Vernon, "Economic Sovereignty at Bay," Foreign Affairs (October 1968), reprinted in Raymond Vernon, ed., The Economic and Political Consequences of Multinational Enterprise: An Anthology (Boston: Harvard University Press, 1972). 46. The famous view expressed by Servan-Schreiber in his Le Défi Américain was that the third greatest power in the world in the early 1960s was, after the United States and Europe, the United States in Europe. The idea that U.S. corporations with major investments and sales in Europe posed a threat to European independence of course accepted the notion that is implicit in today's analysis of "global competition": that multinational corporations promote the interests of their home, or domiciliary, nations. That view has been disputed aggressively from the 1968 publication of Vernon's "Sovereignty at Bay" article to the present by those who see multinational corporations as having no national allegiance at all. 47. Paul Krugman, "Competitiveness: A Dangerous Obsession," Foreign Affairs, 73, no. 2 (March-April 1994). 48. United States of America v. Microsoft, No. 97-5343, U.S. District Ct., District of Columbia; see also "If Microsoft Loses . . .," New York Times, March 16, 1999, CI. 49. Scherer, Competition Policies, pp. 89-97. 50. Hartford Fire Insurance Co. v. California. 51. Press release, U.S. Department of Justice, October 13, 1994. 52. Scherer, Competition Policies, pp. 89-97.

10 Competition Policy in the European Economic Community: Lessons for Latin America Ana Julia Jatar

The Relevance of the European Economic Community Experience to Latin America In considering policy in Latin America as a region, the experience of the European Economic Community (EEC) provides an extremely useful example of regional integration. Having developed several national case studies in this volume, stepping back to consider a regional case study facilitates a consideration of possible regional approaches to developing Latin American competition policy. Several concerns emerging from the national case studies, such as black market trading, special interest lobbying, and multinational cartels, could be better addressed through supranational policies rather than national policies. While the historical and political circumstances in the EEC clearly differ in important ways from those of Latin America, policymakers considering a regional approach to competition policy could certainly learn from the successes and failures of the European approach. The experience of the EEC shows that the enforcement of competition laws at both the national and the supranational level is essential to achieve these objectives of behavioral and institutional change. Domestically, a healthy and strong competition policy stimulates local rivalry among firms, a key element for efficiency enhancement and international competitiveness.1 Internationally, cooperation among countries in the enforcement of antitrust laws encourages the development of common rules to regulate trade across the region. In the EEC, by going a step further and developing a supranational competition law, it has been easier to limit interest group pressures over governments. Also, it has prevented the formation of transnational anticompetitive practices that may elude domestic enforcement. Multinational cartels are a clear manifestation of such behaviors. The relevance of these issues for postprotectionist Latin America is evident. The need for new rules and new institutions to support new behav219

Competition Policy at the Global Level

220

ior is becoming obvious as countries liberalize their economies and subregional trade negotiations expand and develop. In December 1994, at the Summit of the Americas in Miami, the countries of the hemisphere reached an agreement to build the "Free Trade Area of the Americas" and to conclude the negotiations by the year 2005.2 This goal imposes new challenges on the countries of the region. Important negotiations will continue to take place on such different issues as regulations on investment, intellectual property rights, environment and labor issues, macroeconomic policy, and antidumping and competition law. The objective of this chapter is to highlight, from the successful EEC experience, the issues on competition policy that are relevant to Latin America. The EEC experience is particularly useful regarding the following questions: •

•

• • • •

What is the role of competition policy and antitrust enforcement within a process of trade liberalization and, more specifically, in the creation of a free trade area? What are the policy priorities when enforcing supranational regulations? (I.e., should the emphasis be on cartel prohibitions or vertical restraints?) How are merger regulations implemented in the context of expanded geographic markets? What are the lessons derived from the EEC experience regarding the enforcement of a supranational competition law? How do supranational and country laws conflict with and/or complement each other? What should be the relationship between competition policy and antidumping regulation?

This chapter addresses these questions in the different subsections. First, a historical background is presented to highlight the impact of the special geopolitical conditions that were present when the EEC was created. In the second section, some of the major elements of the EEC competition law are described and analyzed. The third section highlights the policy priorities in competition issues as the EEC evolved. In the fourth section, the legal and economic rationale for the enforcement of supranational competition laws is evaluated. The next section describes the lessons that competition enforcement has for international trade issues. Finally, in the last section, a summary of the conclusions is presented.

Historical Background The European Economic Community was created in 1957.3 It had its origins in the European Coal and Steel Community (ECSC), the first

Competition

Policy in the European Economic

Community

221

European effort toward economic integration, established under the Treaty of Paris in 1951 among France, Germany, Italy, Belgium, Holland, and Luxembourg. The same six countries signed the EEC Treaty of Rome, on March 25, 1957; and by 1994, sixteen members had joined, including the United Kingdom, Spain, Austria, Sweden, and Norway. Soon after World War II and before these issues began to be considered global priorities, the Western European countries established the basis for removing barriers between their economies. Although the initial objective was to dismantle trade barriers, competition issues quickly became a priority. The treaty included prohibitions against cartel-like behavior and monopolistic practices such as quantity restrictions; restrictive practices tending toward the division of markets or the "exploitation of the consumer"; and measures or practices discriminating among producers, among buyers, or among consumers, as well as practices that hinder buyers' free choice of suppliers. As membership of the EEC increased, 4 deeper integration also became an important goal. This was achieved through common policies in different areas, including macroeconomic issues, financial transfers, labor, competition, and the environmental, agricultural, and transportation sectors. The European Economic Community is a unique combination of successful policymaking and institution building. It is probably the only effective example of a cooperative effort to deepen economic integration and to build political institutions that efficiently create and enforce common rules for the region. The reasons for the significant achievement of this subregional group are rooted in its origins. To evaluate European integration efforts from only an economic perspective would be a mistake. Important political and security considerations were the driving force of the integration objective after World War II. The United States and its war allies saw the economic integration of Western Europe as the cornerstone of political stability in the region. The union of the six countries that formed the ECSC was conceived as a positive step in that direction after the war. It was also an effort to avoid repeating the negative consequences of isolating Germany after World War I.5 The stability of the region would be based on the economic interdependence of the member states; economic objectives were secondary to political stability: "Democratic societies, rebuilt on the ruins of World War II, were to be secured by linking their governments and their economies, and stabilized by the economic growth that regional integration may stimulate. The conditions for full participation were similarly political as well as economic." 6 These geopolitical considerations are important to understand the priority given by the EEC to the development of autonomous institutions with supranational authority. The member states invested heavily in institutional development over forty years. The Treaty of Rome establishes that member states are to transfer power to the EEC's institutions in those international matters in which the Community has competence. There are four institu-

222

Competition

Policy at the Global

Level

tions that form the basis of the EEC: the European Commission (EC), the Council of Ministers, the European Parliament, and the Court of Justice. The EC makes legislative proposals, executes policies, and monitors member states' compliance with EEC obligations. Therefore, the EC has wide executive responsibilities in the supervision and implementation of the EEC's policies, including those regarding competition. The European Commission's officials are appointed by the member states. One fundamental characteristic of this institution is that its members are remarkably independent and virtually immune to political pressure.7 The Council of Ministers decides on EC proposals with representatives chosen by the members states. The Council of Ministers is, therefore, the primary decisionmaking body and, as such, exerts considerable influence over other EEC organs, especially on policy issues. The Council of Ministers acts as a collective head of state of the European Union and decides over external trade policy and international treaties. As to its structure, the Council of Ministers is formed by ministers of the government of each member state, and these ministers have the legal power to commit their respective governments. 8 A system of checks and balances is set: the Council of Ministers checks the actions of the EC, but at the same time, the Council of Ministers can work on only those legislative proposals originating in the EC. This intergovernmental control of the Community's institutional action has increased in recent years.9 The European Parliament approves the legislation applied to the Community. The members of the Parliament are democratically elected every five years. The Parliament can impeach the members of the EC and is very important as a political forum. The Court of Justice is the maximum constitutional authority of the EEC, 10 and it is often used by private actors to sue national governments. The Court plays a vital role in guarding an EEC legal order that is both effective and respectful of individual rights. The Court's doctrinal contributions have helped to identify the member states' responsibilities under EEC law. The Court's understanding of the relevant norms is considered authoritative. The Court has a special relevance in antitrust enforcement. All EC decisions imposing penalties for violations of competition rules can be appealed before the Court of Justice. The original structures of the EEC were far more ambitious in integration goals than, for example, those proposed in the North American Free Trade Agreement and the Asia-Pacific Economic Cooperation.11 The reason for such differences may lie in the overriding political and security concerns that surrounded the creation of the EEC. At the outset, it was in the U.S. interest to invest politically, economically, and militarily, as it did for several decades, to counterbalance the threat of the Soviet Union and to integrate West Germany into the European economy. It has been argued that in the absence of such leadership and such geopolitical objectives, it is

Competition Policy in the European Economic Community

223

difficult to move the nations of any subregional group from shallow subregional pacts into deeper common rules. It could be argued that the geopolitical relevance of economic integration has not been absent in the Americas. The United States has expressed its interest in a more united hemisphere. Economic development, as well as democratization of the region, has been signaled as an important goal.12 At the same time, the formation of Mercosur—which unites Brazil, Argentina, Uruguay, and Paraguay in a common external tariff area—has obvious political objectives that go beyond the economic benefits of the agreement. The question remains whether there will be the geopolitical consensus to build effective supranational institutions and regulations for the hemisphere. Nevertheless, at a subregional level and as far as competition policy is concerned, there are still applicable lessons for current economic integration efforts in Latin America. In the EEC, the European Commission, as the institutional body, is responsible for the enforcement of the competition law. It acts as the supranational referee, standing detached from national interests to guarantee the application of common competition rules that place all member states on an equal footing. Similar schemes could be applied by the member countries of subregional trade agreements in Latin America. In the next section, some of those rules will be analyzed.

The Community Competition Law Historically, the promotion of competition was not at the top of the agenda for European countries. Most countries of the Continent had a tradition of strong interventionist industrial policies that pursued more directionist policy objectives.13 These policies were consistent with corporatist social organization schemes that dampened tendencies toward competition in the market and with a social welfare net that also inhibited competition. With the adoption of a supranational competition law, countries in the region began to make important efforts not only to harmonize competition rules among themselves, but also domestically to define more severe enforcement regulations. As the body in charge of enforcing the law, the European Commission has jurisdiction to investigate cases brought to it by third parties and to rule on their validity under the corresponding articles in the Treaty of Rome. Also, by its own initiative, the EC can investigate agreements that might be in violation of the treaty's provisions. EEC competition policy is wide in scope. It covers different actors: private and public firms, local or multinational. Also under the scope of the law are public policies such as subsidies, import and export restrictions, and state monopolies and their regulation. The prohibited behaviors are also broad and explicitly defined in the articles of the EEC treaty.

224

Competition Policy at the Global Level

The two most important articles regarding competition in the Community are Articles 85 and 86 of the Treaty of Rome. These articles state the goals the EEC will pursue with respect to competitive practices in all member states. The articles are designed to prevent, after the elimination of market protective practices, the substitution by private firms. Article 85 Article 85(1) prohibits all practices, horizontal and vertical, that restrict, by object or effect, competition. It prohibits agreements, decisions, and concerted practices that: 1. Directly or indirectly fix purchase or selling prices or any other trading condition 2. Limit or control production, markets, technical development, or investment 3. Share markets or sources of supply 4. Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage 5. Make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of such contracts Underlining the apparent simplicity of this provision are subtle but important ambiguities that can make enforcement complicated. First, Article 85 makes no clear distinction between horizontal and vertical agreements, despite their very different impact on competition. For example, agreements to set prices among competitors is a clear anticompetitive practice as stated in Section (a) of Article 85(1). Nevertheless, can the same judgment be made for agreements among noncompetitors—for example, for a supplier with its client? In some Eastern European and Latin American countries where the text of Article 85 has been incorporated into domestic competition rules, Section (a) has often been interpreted to apply to only horizontal agreements, not vertical restraints. 14 To avoid costly legal battles, this ambiguity must be resolved in the text of the law. In the EEC, it took years, as well as decisions by many courts, to clarify under which circumstances the law applies for vertical restraints.15 Second, Article 85 prohibits agreements the object or effect of which is to restrict competition. The use of the two words "object" and "effect" generates confusion in the enforcement of the law. What should be the difference between the treatment of agreements the object of which is to prevent competition and those the effect of which might be to do so? The Court of Justice has ruled that such cases need to be considered disjunctively. In

Competition Policy in the European Economic

Community

225

other words, it is first necessary to consider what the purpose of the agreement is. Only if it is not clear whether the object of the agreement is to harm competition would it be necessary to consider if it may have the effect of doing so. There are agreements the anticompetitiveness of which can be assumed simply because of their object. For example, an agreement to fix prices or to divide markets geographically among competitors is considered to have as its object the prevention or restriction of competition. Usually, these types of behavior are considered to fall under Article 85. On the other hand, when it is not possible to agree that the object of an agreement is to restrict competition, a more detailed analysis is needed in order to evaluate the nature of its effects before it can be said that it violates the article. In these cases, it is necessary to define the relevant geographic and product market, barriers to entry, the presence of efficiencies, the history of market rivalry, and the relevance of other regulations. Put another way, for this purpose, it is necessary to weigh the pro-competitive and anticompetitive consequences of the agreement. Most vertical restrictions 16 tend to be analyzed in this exhaustive way, since very rarely can it be assumed that they have as their object the restriction of competition. The same is true for exclusive dealings and franchise agreements, among other types. To avoid this confusion, other jurisdictions have introduced a clear differentiation between per se restricted behaviors and those analyzed under the "rule of reason." Exemptions to Article 85 There are many agreements that, while falling under Article 85(1) and restricting competition, should be allowed due to the economic efficiencies they generate. As stated in Article 85(2), "An agreement that falls within Article 85(1) is not necessarily automatically void." This was interpreted by some lawyers as the legal base for the use of the rule of reason approach. Nevertheless, the EC rejected it in 1964 when it was used for the interpretation of a price-fixing case. The rule of reason criterion was not accepted. Instead, the Court of Justice ruled that to allow an agreement that violated 85(1), it had to meet the conditions for individual exemptions as stated in Article 85(3). According to the regulations, the agreements have to meet the following criteria: (a) the benefit: the agreement must contribute to the improvement of either the production or the distribution of goods; (b) the fair share: the parties have to demonstrate that the consumer (also industrial consumers) will enjoy a fair portion of the benefits that result from the agreement; (c) the essential restriction: the exemption is not granted if the restriction to competition that it entails is greater than that necessary to procure the alleged benefit; and finally (d) for the exemption to be granted, no substantial elimination of competition may result from the agreement. In

226

Competition

Policy at the Global

Level

conclusion, the EC has the power to grant individual exemptions for certain practices that comply with predetermined efficiency and welfare conditions. The problem with the concept of individual exemptions was that very soon it became administratively impossible to respond to all the applications. The staff working at the EC found it impossible to deal with the increasing number of cases that came before it. A system created to promote economic efficiencies was intrinsically highly inefficient. In order to expedite the process, "block exemptions" were created. Agreements within the terms of a block exemption do not need to be reported to the Commission. They are valid without a specific authorization. At first, block exemptions concentrated only on "practices," such as exclusive dealings in distribution, intellectual property rights, research and development, and franchises. Later, the "sector" criterion was used for giving block exemptions. Exemptions by sector are usually more controversial than by conduct. It is difficult from the point of view of the policymaker to explain why exemptions are given to one economic sector rather than to another. Article 86 and the Concept of Dominance

Article 86 deals with the abuse of dominant position 17 and expressly prohibits such abuse if it affects interstate trade. 18 The EEC law prohibits anticompetitive behavior by firms that enjoy a dominant position in the market. This article concentrates on conduct. Large dominant firms are allowed to operate as long as they do not provoke "abusive" practices. In other words, the size of the firm is not what determines the action of the EC; rather, it is the behavior of such firms. The following are some examples of abuse of dominant position provided in a nonexhaustive list in the law: 1. Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions 2. Limiting production, markets, or technical development to the prejudice of consumers 3. Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage 4. Making the conclusion of contracts subject to acceptance by other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of such contracts The key issue in the application of Article 86 is whether the firm in question has a dominant position or market power. The legal test for establishing the existence of a dominant position was stated by the EEC Court of

Competition Policy in the European Economic

Community

227

Justice in the following manner: "The dominant position thus referred to (by Article 86) relates to a position of economic strength, enjoyed by an undertaking, which enables it to prevent effective competition being maintained in the relevant market, by affording it the power to behave to an appreciable extent, independently of its competitors, customers and ultimately of its consumers." Defining "dominance," as well as "market power," is a difficult task. In all countries with antitrust tradition, jurisprudence has been built up around the notion of quantifying dominance. One of the most common definitions of dominance is "freedom from the constraints of competition, or control over the economic viability of (upstream or downstream) trading partners." 19 Market share is the most-used criterion to evaluate dominance. Nevertheless, it is often considered a necessary but not sufficient condition; barriers to entry comprise the other important factor to consider. For example, it could well be the case that a very large firm could be charging prices at marginal cost and could lose market share if it were to increase the prices. The concept of dominance is highly useful for Latin American antitrust enforcement. On the one hand, after decades of protectionism, markets in Latin America are highly concentrated, and often the typical sector would have a dominant firm. On the other hand, the emphasis on the behavioral aspect, punishing only the "abuse" of such a dominant position, makes antitrust enforcement less traumatic than if the emphasis were placed on the market structure. If the emphasis were not placed on the behavioral aspects of competition, there would be an increased risk of focusing more on corporate divestitures and other structural remedies. For countries that are just beginning to open their economies to international competition, optimal firm size is still unknown. The accent given to behavioral considerations over structural enforcement in the Treaty of Rome was not incidental. The signatories of the treaty believed that control over structure, particularly over mergers, would hamper the concept of the European firm and impede the ability of EEC companies to compete in the international arena. In fact, for decades, the EEC did not have a merger regulatory body. The legal reasoning for it was based on the fact that Article 85 covers only "concerted practices," which would make it nonapplicable to "unilateral purchases" of shares (acquisition of companies). The EC and the Court of Justice became, over the years, more concerned with the possibility of large firms exercising market power; and finally, in 1990, the EEC passed a merger control regulation. According to this new regulatory body, any merger or cooperative agreement among firms operating in the common market must be reported to the EC prior to consummation, if annual world sales of the merging parties exceed 5 billion European Currency Units (ECUs). The EC has four weeks to decide whether it will open an investigatory proceeding. With these merger regula-

228

Competition

Policy at the Global

Level

tions, the EEC competition enforcement has moved closer to the guidelines traditionally imposed by U.S. antitrust regulators. The proceedings involved in Article 85 and 86 issues take place in five stages. The first stage is preceded by notification of an act prohibited under either article, or an "own initiative" proceeding under which the EC decides to investigate a situation or sector or complaint that can be declared admissible. In this first investigative stage, the EC examines the matter and either issues a letter of comfort or discomfort or drops the case. The second stage is the initiation of actions that can move in two directions: either toward a positive decision or toward a prohibition. To move toward a positive decision, a summary of the notification in the Official Journal has to be published to achieve knowledge of objections by third parties, after which a letter of comfort or discomfort would be issued. If the move is toward a prohibition, the EC would send a statement of objections to the parties, and the agreement would be amended leading to the objections being dropped. The third stage is access to the file and objections. This stage takes place if the move in stage two has been toward a prohibition and no amendment of the agreement was possible. If this is the case, a written reply and hearing of the parties and interested third parties takes place. Stage four—consultation with member states—takes place if the move in stage two was toward a positive decision. In stage five, the draft decision is assigned either negative clearance, which means that the Commission has decided that there are no grounds for applying either article; or exemptions, under which the Commission can either state that there are no grounds to grant an exemption or grant one for a specific period; or a prohibition, which requires an end to the practices that violate Articles 85(1) or 86, the imposition of a fine or periodic penalty, and the granting or refusal of interim measures. Some

Lessons

There are some lessons to be derived from the structure of the EEC competition law. A persistent problem in EEC competition policy is the large number of cases handled by the European Commission. According to the general prohibition, all restrictive practices among competitors and noncompetitors are automatically banned. This implies that those allowed for efficiency reasons must be explicitly authorized by the EC. This creates a cumbersome process with unnecessary delays, affecting efficiency and eroding the reputation of the competition agency. The introduction of block exemptions alleviates, but does not solve, the problem. For recently created agencies, as is the case of Latin American countries, this could be a task beyond their technical and administrative capabilities. In order to avoid this problem, Latin American countries should evaluate the risks of the EEC

Competition Policy in the European Economic

Community

229

exemption regime. The recommendation would be to try to use other legal instruments that may provide a much clearer differentiation between practices prohibited per se and those with positive impact on efficiency. 20

Competition Policy Enforcement in the EEC: The Priorities In the EEC, competition policy has been used more to consolidate the unification of the European market than to promote competition within the boundaries of national markets. From its creation, the C o m m u n i t y acknowledged the need for competitiveness within the European Common Market. Nevertheless, this objective was not shared by all the founding members. Though all member signatories had antimonopolistic principles in their constitutions, those philosophical orientations had not been transformed into specific laws. Some countries even had statutes with language resembling that of the provisions later agreed on in the Treaty of Rome, but the practice of such provision significantly varied among countries. 2 1 Germany and Holland, for example, insisted that competition policy had to be guided by general regulations under the responsibility of a supranational court. Italy, France, Belgium, and Luxembourg argued, instead, that each country should have the freedom to decide over competition issues according to national priorities. Germany did not give up its main concern with France's long tradition of protectionist industrial policies. Consequently, during the 1960s and under pressure from the German government, Regulation 17 was approved. 22 The enforcement of Articles 85 and 86 thereafter became the responsibility of the Commission instead of the individual national agencies. According to Regulation 17, for example, only the Commission can grant block exemptions. Also, it was decided that all investigations initiated by the Commission in any matter regarding Articles 85 and 86 implied immediate withdrawal from the case by any national authority. From then on, the role of the supranational entity was over and above country competition agencies. The main purpose of this decision was to limit pressure from private interest groups on individual governments to take anticompetitive actions. Thus, since the 1960s, with the creation of the single market, the EC has embarked on the task of building the notion of firms within member states as "European firms." This goal would be achieved through fiscal and legal harmonization. 23 European firms would provide for specialization within the EEC and would effectively reinforce the notion of a common market by changing the structure of the E E C ' s economy. 2 4 Having European firms would increase the number of sellers through free trade. It would also reduce dominant positions of firms in domestic markets by generating increased competition, which, in turn, would create pressure to specialize through economies of scale and comparative advantages.

230

Competition

Policy at the Global

Level

In the consolidation of the common market, the EC used competition policy as an important instrument. Different anticompetitive behaviors became the focus of the enforcement depending on what the general goals of the EEC were. For example, during the 1960s and 1970s, the fundamental goal was the elimination of trade barriers among the countries of the region. Hence, the Commission placed heavy emphasis on vertical restrictions and distribution channel control. According to the Commission, agreements between suppliers and distributors hampered the effects of trade liberalization in the region while impeding market penetration by foreign competitors. The Commission did not show particular interest in opening cases against horizontal restrictions or abuse of dominant position. National agencies were left free to act in those cases. With this strategy, the EC wanted to serve two objectives. First, by opposing vertical restrictions, trade barriers among the countries of the region would be reduced and local companies would have to rapidly adjust to foreign competition. Second, placing less emphasis on horizontal restrictions and dominance would help the development of bigger European corporations, better suited for international competition. During the 1970s, driven more by external pressure than by internal conviction, more emphasis was placed on investigating abuses of dominant position and cartels. The Commission responded to complaints from multinational companies not based in the EEC and from U.S. companies. Also during the 1970s, internal antidumping regulations within the Community began to be phased out and replaced by competition policy rules regarding intramarket price discrimination.25 The 1980s were characterized by two debates. One concentrated on whether or not the EC would be allowed to take merger control actions, previously in the hands of domestic bodies. After two crucial decisions of the Court of Justice, 26 the EEC passed a merger control regulation in 1989 that took effect in September 1990.27 The other debate concerned maintaining the integrity of the common market by regulating distribution practices. In a 1985 case, 28 the Commission ruled that distributors that failed to export to another state, so as to protect the geographical market of another distributor, fell under the scope of Article 85(1).29 The Commission, in this ruling, tried to prevent the fragmentation of the European Common Market through concerted practices by distributors that prevented competition in the supply to outlets of certain products. The EC's decision maintained the policies that had been the backbone of competition law enforcement in the 1960s: namely, protecting the common market from practices that disguised anticompetitive behavior by not taking the form of the usual practices and structures characteristic of such behavior. The Commission's goal of achieving a common market made imperative the homogenization of competition rules throughout the EEC. For this reason, a "decentralization" process was initiated during the 1980s. Articles

Competition Policy in the European Economic

Community

231

85 and 86 became part of the internal laws of EEC member states, and some of the Commission's staff were assigned to the national competition agencies. After over twenty years of enforcement by the Commission and Court of Justice decisions, competition policy in the EEC had reached independence and maturity. Finally it was felt that it would have been very difficult for individual countries and interest groups to impose particular policies over the rest. Articles 85 and 86 have been directly applicable in the six original member states since 1962; in the United Kingdom, Ireland, and Denmark since 1973; in Greece since 1981; and in Portugal and Spain since 1986.30 The Commission can use a variety of mechanisms in order to enforce the law. As opposed to U.S. antitrust law, those mechanisms do not include penal actions like imprisonment, but they do cover an important variety of punishments that have been effective in deterring prohibited behaviors. First, the EC can force violators to stop their behavior through legally binding decisions. Such decisions are wholly effective after their publication; 31 nevertheless, a period for compliance may be granted according to the case. 32 Second, the EC can order a specific action to be performed. Such action may be either to inform third parties that an illegal situation has been o r d e r e d to s t o p , 3 3 or to p e r i o d i c a l l y p r o v i d e i n f o r m a t i o n to the Commission, 34 or to show a specific performance. 35 However, the EC cannot order performances as sanctions for conduct that is not in direct violation of Articles 85 or 86 of the Treaty of Rome. 36 Third, the EC can order the divestiture of a merger that is considered to unduly affect competition in the common market. 37 Fourth, the EC can impose fines on firms that violate Article 85(1) of the Treaty of Rome. The amount of those fines may be between 1,000 and 1,000,000 ECUs or 10 percent of the net income of the previous fiscal year, whichever is higher. Such fines may be imposed even after the illegal conduct has ceased. 38 The fact that other similar cases might have gone unpunished is irrelevant. 39

Legal and Economic Reasons for a Supranational Competition Law Maybe the single most important reason for the success of the EEC is the power and the relevance of its supranational institutions. As far as competition policy is concerned, the priority given to the creation of a common market was fundamental. Protection of interstate trade was essential to this ultimate goal, since a true common market would only be achieved if free movement of goods, services, capital, and labor could take place. If national laws were allowed to prevail, these most likely would protect national markets from external competition. A supranational law would ensure that national interests would not prevail over the common market goal.

232

Competition Policy at the Global Level

It is not surprising that the founding fathers of the Community included a chapter on competition in the Treaty of Rome. The need for one set of rules to achieve the ultimate goal of creating a common market was seen as essential for improving employment and growth and for ensuring firm survival by forcing them to incorporate the single market into their strategic thinking. Economically, a supranational law would prevent barriers to interstate trade from being erected. As well, the important issue for European authorities was the protection of the competitive process, and not of individual competitors. For this reason, antidumping measures were phased out and replaced by price-discrimination rules in the 1970s. Antidumping regulations tend to protect competitors, rather than the competitive process, which made them inconsistent with the EEC's competition policy goal. 40 A supranational law ensures that economically efficient agreements that could benefit the common market are pursued, even though they might be inconsistent with national laws. If national competition laws had been allowed to prevail in the European Union, the economic welfare of each member state would have depended on the actions of other members. If this had been the case, each country would have wanted to erect barriers to competition in areas in which it had a comparative advantage. This, in turn, would have reduced the welfare in countries where those products were consumed. A set of common competition rules creates, instead, a credible commitment not to impede competition among the countries that adhere to the rules. It causes countries to surrender their rights to engage in conduct through which they could extract rents, given that all other members surrender such rights as well.41

Harmonization and Other Problems It was already mentioned that Articles 85 and 86 of the Treaty of Rome have become part of national legislation in the member states. In this way, supranational law became part of national laws, and harmonization of policies were simplified. The members of the EEC transferred part of their sovereignty to the European Commission, which was conferred with legal personality and capacity through Articles 210 and 211 of the Treaty of Rome. 42 This provides the Community with an institution that is legally recognized by all member states. To consolidate the concept of "European firm," it was agreed that EEC competition law would prevail over domestic laws if the practice in question affected or could potentially affect interstate trade, either by decreasing or increasing such trade. 43 By giving EEC law prevalence, the Commission ensured that member states would not allow firms within their borders to fragment the market and that it would in some way curtail discrimination.

Competition Policy in the European Economic Community

233

The Commission views its rulings as overriding domestic court or agency decisions, even in cases where an exemption granted by the Commission would not be permitted under domestic laws. This implies that there is a duality in the system of competition law enforcement and that this duality allows both the Commission and domestic courts or competition agencies either to find differently on the same matter or to impose dual penalties on the same behavior, if such behavior violates both domestic and EEC legal provisions.44 This duality seems to represent a failure in policy implementation within the EEC. It implies that there is a need to harmonize not only the law, but the process of penalization, so that if the Commission imposes a penalty, domestic courts might be used only to ensure enforcement, and they might lose all rights to penalize offenders after the Commission has taken such steps. In a case decided by the European Court of Justice, some of these potential conflicts between national and supranational norms were analyzed with the following findings: a prohibition under EEC law prevails over any authorization allowed by national law45; and if a national agency is investigating the same conduct of an EC investigation, the national agency must ensure that its decision will not be inconsistent with that of the EC.46 At the same time, in the context of enforcing EEC law in national courts, the Court of Justice has held that in the absence of Community rules on the subject, the domestic legal system of each member state can determine the procedures for actions intended to ensure the application of EEC law.47 Even though EEC law overrides domestic law, Article 192 of the Treaty of Rome establishes that member states are responsible for enforcing Community decisions on individuals under their jurisdiction, therefore limiting the enforcement possibilities of the Commission by requiring the cooperation of member states to ensure compliance.48 In 1962, the Council of Ministers of the EEC adopted Regulation 17, which gives the Commission pecuniary enforcement rights in its rulings on competition matters,49 as well as stating the general norms that are to be used in the application of Articles 85 and 86.50 This regulation was adopted in compliance with Article 87(2)(b) of the Treaty of Rome, which specifies that the Council of Ministers must detail the rules that apply to the enforcement of Article 85(3) of the treaty.51 The regulation does not eliminate the applicability of Article 192 and therefore maintains the cooperation of member states as essential to enforcing EC rulings.

Lessons on Competition and International Trade Reaching an agreement on common rules for competition is not easy. It is so difficult, in fact, that the only real practitioner in international competi-

234

Competition Policy at the Global Level

tion law is the European Union. One of the most important obstacles for its practice is the conflict between national policy goals and international competition rules. This is especially true when the goals are designed to promote growth in one nation at the expense of the consumers in another. The EEC has been particularly successful in designing common rules. When comparing the provisions of the EEC law with domestic laws enforced in individual countries in Europe, it becomes clear that they share common principles and economic rationale. This has been the result of a long process by which competition policy dilemmas, at both the local and international levels, have been resolved. In this section, I discuss some of those cases and how the EEC has dealt with them. Export Cartel

Exemptions

Collusion is the first important provision in antitrust regulation, and there is very little disagreement on the way it should be treated. Agreements among competitors are usually per se prohibitions with high sanctions against those who violate the law. Countries may show some differences on how to deal efficiently with merger or vertical restraint regulation, but there is wide consensus on a strong position against agreements among competitors. Nevertheless, there are situations in which governments may allow, or even promote, the cartelization of local firms when trading abroad. Pricefixing among exporting companies, for instance, may contribute to national policy goals by biasing the terms of trade in the importing nations to ward off sellers in the exporting nation. For this reason, most jurisdictions, including the EEC, the United States, Germany, and Japan, allow export cartels, sanctioning them only when they affect domestic markets.52 In the United Kingdom, where the jurisprudence has been built with broad public interest standards, the export cartels have been evaluated differently. U.K. judges have interpreted all export cartels organized to "harm export volumes" 53 as violations of competition law, since such behavior would push prices up. Nevertheless, since "volume" has been more often understood as "value"—defined as unit price by physical volume—agreements restraining physical volume but increasing value have been historically condoned. In spite of the benefits for local producers, export cartels have been decreasing in number and volume. In the United States and Germany during the period 1930-1981, export cartels decreased from near 20 percent to 2 percent of exports. This decline is probably due to a progressively hostile international legal environment55 and increased cooperation among countries. Nevertheless, current international law does not provide effective

Competition Policy in the European Economic

Community

235

instruments to prevent the export of restrictive practices. Usually, as in the case of export cartels, restrictive practices may be within the jurisdiction of antitrust law in the importing nations, and the practitioners themselves may be outside the jurisdiction of the antitrust authorities.55 A main lesson from the EEC experience is that export cartels tend to disappear where integration takes place. Where specialization in response to a comparative advantage is encouraged, as is the case of regional economic integration, each nation tends to be more often a consumer than a supplier in different markets. Since every country has the incentive to restrict competition on products for which it has comparative advantage, everyone would be worse off if all were to follow this behavior. Since national welfare depends on the action of others, countries need a commitment by which they will refrain from engaging in anticompetitive practices in markets where they have a competitive advantage. For the EEC countries, a supranational competition law has been such a mechanism. Distribution

Agreements

Block exemptions have been granted for vertical agreements restricting distribution in the EEC law when the efficiencies they provide are greater than their anticompetitive effect. Among others, exceptions by category for franchise agreements are outlined in Regulation 4087/8, and exceptions by category for the selective distribution of automobiles are outlined in Regulation 123/85. Agreements on exclusive representation are considered separately from exceptions under Article 85(3). Their specifications are unique to each agreement, since their effects on the economic activity vary extensively. Exclusive distribution agreements have ambiguous impacts on welfare. While on the one hand they restrict competition in a geographic area, they also allow producers of goods and services to penetrate markets where they might not have been able to enter. Moreover, they streamline the distribution process and make it more efficient. In spite of these ambiguous arguments, there is a basic principle in communitary law that establishes that an exclusive distribution agreement infringes on the prohibition of Article 85 when it prevents the reexportation of goods under the exclusive distribution agreement by the exporter to other member states, or the imports of such products from other member states to the territory of the exclusive distributor by third parties. The first major competition policy enforcement action in the EEC was a vertical case. Grundig, a West German electronics manufacturer, had established a network of distributors in various EEC countries. In the contract, Grundig established conditions; for example, it prohibited its dealers from shipping products to other countries of the region. The EEC

236

Competition Policy at the Global Level

Commission and the Court of Justice ruled that this territorial restriction violated Article 85. The Court reasoned that if the distributors had been allowed to ship to other countries, the "parallel imports" would bring down supracompetitive prices in high-price nations.56 Not only authorization, but encouragement of parallel imports, has been common policy by the Commission in order to promote price competition in the region. In general, the elimination of anticompetitive vertical restraints has been an important priority of the EEC, especially during the 1960-1970 period. The emphasis was given to vertical restraints over horizontal, since the former represented high barriers to competition for goods from other member countries. Horizontal agreements were readily taken care of by local competition agencies. Most of the cases addressed by the EEC Competition Commission were agreements among distributors and producers designed to hinder competition from abroad and isolate domestic markets. This is an interesting lesson for Latin America, where highly vertically integrated firms are hampering the effects of liberalization and delaying the benefits to the consumer of foreign competition.57 Parallel Imports As discussed above, a basic competition rule established by the Commission has been to guarantee consumers access to the lowest prices for all goods produced by EEC members. For this reason, parallel imports are not only authorized, but encouraged by the Commission. Parallel imports are basically transnational trade transactions made by intermediaries outside distribution channels directly authorized by the manufacturer. The trader buys goods at the lowest prices and then exports and sells them—at a discount—in countries where prices are higher. In other words, parallel imports drive down the prices in high-price nations through competition. Many cases have been brought to the Commission against parallel imports without success. Local exclusive distributors feel unjustly bypassed by unauthorized importers offering lower prices. They argue that they charge higher prices because they need to comply with the preconditions set by the manufacturers; that is, they need to invest in the inventory levels, spare parts, guarantees, and service and financing requirements set by the manufactures. The position of the Commission has been firm. The decisions have always favored encouraging arbitrage through parallel imports. Price Discrimination

and

Antidumping

Price discrimination occurs when a supplier charges different prices to different parties under similar circumstances. Price discrimination is generally

Competition Policy in the European Economic

Community

23 7

prohibited because it may represent the exercise of market power against a group of buyers. In the case of input markets, the consequences are even more distorting since a supplier who discriminates in a downstream market may create or enhance competitive disadvantage on the part of the clients who are charged higher prices. But almost by definition, when discriminating, if somebody gets a higher price, somebody else gets a lower price. When this happens in an international context, such behavior initiates an antidumping action. In the European Economic Community, after barriers to trade were eliminated, the dumping problems between member states were eradicated since dumped goods returned to arbitrage prices in the market from which they were dumped. While keeping antidumping action for third parties, internal antidumping regulations were enforced only until 1970, when they began to be replaced by competition policy rules concerning price discrimination. The complexities of price discrimination have led to different policies and different legal standards. It seems obvious that a total prohibition of price discrimination would deeply affect price competition. The case of the airline industry illustrates how price discrimination can be used to foster competition. The same seat in the same airplane can be sold at different prices depending on a variety of conditions. In this case, the policy has pushed average prices down. For this reason, domestic competition policy and international trade policy face important differences and conflicting objectives. According to EEC law, price discrimination by dominant firms is an abuse of power. Actions against discriminating practices in the EEC have been oriented toward promoting price competition by diminishing price inequalities across member nations. The rationale for a similar regulation in the United States has been dramatically different. The U.S. price-discriminating statute, the Robinson-Patman Act of 1936, had a rather different purpose than that set by its European counterparts. 58 The explicit intent of Congress was to "give the little business fellows a square deal" by preventing a situation where large retail chains would buy merchandise at favorable discriminatory prices. Antidumping laws like the Robinson-Patman Act are designed to protect competitors, not the competitive market process. Mergers Traditionally, antitrust enforcement has focused on anticompetitive behavior. Nevertheless, regulations over structural changes such as mergers, joint ventures, and takeovers are becoming more important since they can affect long-term competitive behavior. It was not until 1990 that the EEC passed a merger control regulation. The regulation requires that any merger or coop-

238

Competition Policy at the Global Level

erative agreement among companies operating in the common market be reported to the Commission before the transaction is made. In other words a "premerger notification" is required if at least two of the merging parties have between them annual EEC sales of at least 250 million ECUs, or approximately $300 million. Europe has traditionally enjoyed a much more relaxed policy toward mergers than the United States. Such countries as France, Germany, and the United Kingdom have defended, until recently, the position that competition policy should not be used to impede the formation of efficient large firms. They are at the heart of global competitiveness. In fact, merger policy is facing increasing challenges in the context of market globalization, and the dynamics of market enlargements have been introduced in merger analysis. Many have argued that the EEC should decrease the established threshold. It has been found that if the Community were to reduce the existing threshold to standards similar to the United States for mergers, the cases regarding mergers before the Commission would increase by some 40 percent. The threshold has not been reduced because of member state opposition. Member states might see mergers as a positive step toward ensuring international competitiveness in a growing global context. Reducing the threshold would prevent these mergers from occurring and might damage international competitiveness. At the same time, the issue of the Commission's jurisdiction on mergers involving foreign firms remains a controversial subject. Ever since the Continental Can Co. case, 59 the European Court of Justice asserted the Commission's jurisdiction over foreign firms with subsidiaries in the Community merging within the common market. In the case referred to as the "Philip Morris case decision," 60 the Court also asserted jurisdiction over mergers between two non-EEC-based firms having subsidiaries within the EEC. It is unclear, although unlikely,61 whether the Commission will claim jurisdiction over mergers of non-EEC firms without EEC subsidiaries producing effects on EEC territory.62 The jury is still out as far as merger policy is concerned. The relevance of these issues for Latin America is particularly important. Competition

Policy and Industrial

Policy

The practice and enforcement of international antitrust policy is largely influenced by its political context. It is sometimes difficult to reconcile the often conflicting goals of the member states. The most common source of friction is industrial policy within individual countries, especially when it is designed to promote growth in one nation at the expense of the consumers in another. This deals with the question of how the EEC resolves the problem of conflicting strategies at the EEC and national levels. Community

Competition Policy in the European Economic Community

239

law takes precedence over national laws. The Community has concentrated, until now, on the inclusion in its international trade policy of international trade agreements and rules against anticompetitive behavior. It is now moving more toward enforcement of those rules and laws. National industrial policy is not necessarily at odds with Community competition laws because the perspectives under which they are devised are different. The Commission sees competition from the perspective of the Community as a whole, while national legislatures design policies for their own state. The relevant markets in each case are different. There has been little conflict between the Commission's view of competition policy and state policy, indicating that there is effective collaboration.

Conclusion The European Economic Community is probably the most successful example of deep economic integration. Some have argued that there are specific reasons for this important achievement. The geopolitical circumstances in which this integration effort was initiated were quite unique. After World War II, the United States rapidly realized that the economic recuperation of Western Europe was a key element in the future political stability of the region. Economic integration was an important part of that agenda. Promoting trade among European countries meant not only economic growth and prosperity, but also economic interdependence. Previous bellicose conflicts in the region had proven that nationalism and isolationism made for a dangerous combination regarding the conservation of peace in Europe. In spite of the peculiar context in which the EEC was conceived, its experience of almost forty years in policymaking is very valuable for Latin America. So far, this chapter has outlined some lessons to be gleaned from the implementation of competition policy by the European Commission. Now a brief summary will be presented including the structure of the law and some policy and strategic issues. As far as the structure of the EEC competition law is concerned, one of the major conclusions has to do with the spirit of the regulation. Since the EEC law is negative in nature—meaning that it prohibits all restrictive practices unless otherwise stated—parties must ensure an exemption to engage in practices that, even though prohibited, might be economically efficient. The process of granting hundreds of individual and block exemptions creates important administrative pressures to the competition agency. In the case of the European Commission, it has been detrimental for the efficiency and reputation of its work. A law that requires an exemption regime does not seem advisable for smaller agencies with weaker institutional capacity, as is the case with most Latin American agencies. A second conclusion has to do with the role of competition policy in

240

Competition

Policy at the Global

Level

the context of trade liberalization and in the creation of a free trade area. The Commission, responsible for the enforcement of antimonopoly regulation in the EEC, strategically used competition policy for the promotion of free trade and the consolidation of the common market. It focused on different competition restrictions depending on the specific goals of the Community. Vertical restrictions, for example, were the centerpiece of enforcement for the period in which the fundamental goal was to eliminate barriers to trade among countries. Later, the focus changed to anticompetitive behaviors related to abuses of dominant position and mergers. The Commission began to seriously regulate mergers only after the concept of the European firm was established and it had a clearer idea of the optimal size of firms to compete in global markets. For European competition policy enforcers, as opposed to their U.S. counterparts, bigger is better. According to the EEC experience, another important conclusion is that the use of a supranational competition law can be very helpful in consolidating free trade in a region. First, it helps in the enforcement of the law when the anticompetitive practice involves parties from different countries. Transnational cartels are a good example. Second, it limits interest group pressures on individual governments, making it easier to protect the competition instead of the competitors. Also, the application of merger regulations at a supranational level permits a better assessment of the optimal size of the firm according to its geographic market. Finally, the EEC experience shows that antidumping regulations can easily be substituted by competition rules regarding price discrimination. In the EEC, actions against discriminating practices by dominant firms have had the purpose of promoting price competition. Contrary to antidumping regulations, where the objective is to protect the local producer at the expense of the consumer, price-discrimination enforcement promotes competition. Although these lessons may not apply seamlessly to the Latin American case, the experience of the EEC certainly underscores the importance of competition laws and demonstrates the advantages of supranational competition laws to complement national ones. While Latin American policymakers would want to avoid creating another overburdened, bureaucratic system to replace those they are currently trying to eliminate, a suitably straightforward and flexible policy, focusing on discouraging anticompetitive effects rather than navigating the intricacies of international trade regulations, could foster intraregional cooperation and economic stability and growth.

Notes I would like to thank Susana Sitja and Arnaldo Posadas for their research assistance.

Competition

Policy in the European Economic

Community

241

1. Michael E. Porter, The Competitive Advantage of Nations (New York: Free Press, 1990). 2. "We therefore, resolve to begin immediately to construct the Free Trade Area of the Americas in which barriers to trade and investment will be progressively eliminated. We further resolve to conclude the negotiations to the Free Trade Area of the Americas no later than 2005, and agree that concrete progress toward the attainment of this objective will be made by the end of this century. We recognize the progress that already has been realized through the unilateral undertakings of each of our nations and the sub-regional trade arrangements in our hemisphere. We will build on existing sub-regional and bilateral arrangements in order to broaden and deepen hemispheric integration and to bring agreements together" ("Leader's Declaration," Summit of the Americas, Miami, FL, December 11, 1994). 3. The European Economic Community, since January 1994, is now referred to as the European Union. For the purposes of this essay, the abbreviation EEC will be retained. 4. This regional organization is expected to have over twenty-five member states by 2000. 5. In fact, after the defeat of the Nazis, the U.S. occupation authorities were convinced that the high levels of cartelization of the German industry had contributed to Hitler's political success and to Germany's incentives and ability to wage war. For a discussion of this point, see Volker R. Berghahn, The Americanization of West German Industry, 1945-1973 (New York: Berg, 1986) pp. 84—110. See also David J. Gerber, "Constitutionalizing the Economy: German Neoliberalism, Competition Law, and the 'New' Europe," American Journal of Comparative Law, 42 (1994): 25-84. 6. W. Wallace, Regional Integration: The West European Experience. (Washington, DC: Brookings Institution, 1994). 7. See B. Guy Peters, "Bureaucratic Politics and the Institutions of the European Community," in Alberta M. Sbragia, ed., Euro-politics: Institutions and Policymaking in the "New" European Community (Washington, DC: Brookings Institution, 1991), pp. 98-100; H. G. Thomas, "Democracy and 1992: Integration Without Accountability?" Liverpool Law Review, 10 (1988): 185; Stephen Green, "European Unity Marred by Unelected Superbureaucrats," Los Angeles Daily Journal, (October 6, 1992), p. 6; and Paul D. Marquardt, "Deficit Reduction: Democracy, Technocracy, and Constitutionalism in the European Union," Duke Journal of Comparative and International Law, 4 (1994): 267. 8. George A. Bermann et al., Cases and Materials on European Community Law, (St. Paul, MN: West Publishing, 1993), p. 51. 9. See Joseph H. H. Weiler, "The Transformation of Europe," Yale Law Journal, 100 (1991): 2423-2430; Neill Nugent, The Government and Politics of the European Community, 2nd ed. (Durham: Duke University Press, 1991), p. 371; and John Pinder, European Community: The Building of a Union (Oxford: Oxford University Press, 1991), pp. 38-39. 10. William Nicoll, Trevar C. Salmon, Understanding the New European Community (New York: Harvester Wheatsheaf, 1994), pp. 20-21. 11. For a thorough discussion of these institutional issues, see Wallace, Regional Integration, chap. 2. 12. See, for example, Eduardo Gitli and Gunilla Ryd, "Latin American Integration and the Enterprise for the Americas Initiative," Journal of World Trade, 26 (1992): 26-45. 13. For example, the Belgian Competition Law of 1960 (which was superseded by a 1993 text more consistent with the EEC's rules) had a provision that allowed the national authorities to declare a cartel agreement in a particular indus-

242

Competition

Policy at the Global

Level

trial sector, binding on that sector as a whole, if it was in the public interest. The underlying policy was, of course, to allow cartels on the basis that they were necessary for Belgian business in order to compete with (generally larger) competition from abroad. For more details, see John Ratliff and Elisabethann Wright, "Belgian Competition Law: The Advent of Free Market Principles," World Competition Law and Economic Review, 16(1992): 33-52. 14. In 1991, the Venezuelan Congress passed the first competition law in the country's history. Unfortunately, the text of the law was a copy of Articles 85 and 86 of the EEC law. The law was discussed in Congress with the belief that Article 85 applied only to horizontal agreements. 15. See, for example, Decision 40/73, Suiker Unie v. Commission, ECR 1663, 2008-2010 (1975); Decision 47/76, De Norre v. Brouwerij Concordia, ECR 65, 92 (1977); Decision 56/65, Societe Technique Miniere v. Maschinenbau Ulm, ECR 235 (1966); and Decision 258/78, Nungesser v. Commission, ECR 2015 (1982). 16. Vertical relationships range from transactions among completely independent enterprises to the integration of two or more levels from input supply to retailing and distribution. Between these extremes fall contractual arrangements that restrict the freedom of action of the upstream or downstream firm. 17. In many circumstances, vertical restraints have the potential to enhance efficiency and are commonly judged under a rule of reason standard. But where restraints are imposed by a firm that is economically dominant, the anticompetitive effect of restraints is judged to be more likely and the antitrust prohibitions of restraints tends to be stricter, with per se treatment often substituted for a rule of reason approach. 18. Christopher Bellamy and Graham Child, Derecho de la Competencia en el Mercado Común (Madrid: Editorial Civitas, 1992). 19. F. Fishwick, "Definition of Monopoly Power in the Antitrust Policies of the United Kingdom and the European Community," Antitrust Bulletin (fall 1989). 20. See the Mexican Ley Federal de Competencia Económica, Diario Oficial de la Federación, December 24, 1992. 21. See Hans B. Thorelli, "Antitrust in Europe: National Policies After 1945," University of Chicago Law Review, 26 (1959): 222. 22. On the point of German influence over the EEC's competition rules, see Gerber, "Constitutionalizing the Economy." 23. B. T. Bayliss, "Competition and Industrial Policies," in Alim El-Agraa, ed., The Economies of the EC, 2nd ed. (New York: St. Martin's Press, 1982). 24. By "structure" I refer to the number of buyers and sellers in the market, variety of products, barriers to entry and exit, extent of unionization, and contractual and legal relationships linking actors in the market. 25. F. M. Scherer, Competition Policies for an Integrated World Economy (Washington, DC: Brookings Institution, 1994), p. 78. 26. In Europembellage Corp. and Continental Can Co., Inc. v. Commission (Decision 6/72, ECR 215 [1973]), the Court of Justice reasoned that the abuse prohibited by Article 86 might occur if an enterprise in a dominant position strengthens that position through a merger in a way that lessens competition in the market. In the second case, known as the "Philip Morris decision" (British American Tobacco Co. Ltd. v. Commission, Decision 142, 156/84, ECR 4487 [1987]), the Court held that corporate acquisition agreements involving shares in a competing company may be prohibited by Article 85 when the acquisition affects trade among EEC member states and restricts competition. With this approach, the Court gave ample discretion to the EC to decide on a case-by-case basis in which opportunities a determined merger or acquisition contravenes Article 85.

Competition

Policy in the European Economic

Community

243

27. Roger Alan Boner and Reinald Krueger, "The Basics of Antitrust Policy: A Review of Ten Nations and the European Communities," Technical Paper No. 160 (Washington, DC: World Bank, 1991), p. 39. 28. AEG-Telefunken v. Commission. 29. Richard Whish and Diane Wood, Merger Cases in the Real World: A Study of Merger Control Procedures (Paris: OECD, 1994), p. 173. 30. Bellamy and Child, Derecho de la Competencia, p. 49. 31. For example, in ECS/AKZO (no. 2) (Decision 62/86, ECR 1503 [1986]), the Court rejected a petition for the suspension of part of the decision by the Commission. 32. British Telecommunications L360 (1982). A period of two months was conceded for compliance. 33. Johnson & Johnson L377/16 (1980). 34. United Brands L95/1 (1976). 35. For example, in the case of Commercial Solvens v. Commission (ECR 223, 225 [1974]), the Court upheld the Commission's decision forcing a dominant firm to restart negotiations with a client it had refused to deal with, in violation of Article 86 of the Treaty of Rome. 36. Case Ford v. Commission (no. 1) ECR 223, 225 (1984). 37. Article 8(4) of Council Regulation 4064/89, O.J. L395/1 (December 30, 1989), corrected: O.J. L257/14 (September 21, 1990). 38. Decision 41/69, ACF Chemiefarma v. Commission, ECR 661, 733, and 769 (1970). 39. Decision 32/78, BMW v. Commission, ECR 2435, 2482 (1970). 40. Scherer, Competition Policies, p. 80. 41. Boner and Kreuger, The Basics of Antitrust, pp. 112-113. 42. Rosa Greaves, EC Block Exemption Regulations (New York: Chancery Law Publications, 1994), p. 29. 43. The Commission and the Court of Justice will take into account whether participants to an agreement might have become future competitors in a market if it had not been for the agreement in question. The Commission might allow for an exemption under Article 85(3) after it has negotiated with the parties the elimination or adoption (whichever the case might be) of certain conditions that it deems necessary to protect the competitive process (Whish, Merger Cases, p. 174). 44. Whish, ibid., p. 22. 45. Decision 14/68, Wilhelm v. Bunderkartellamt, ECR 1, 13-15 (1969). 46. Ibid. 47. Decision 33/76, Rewe-Zentralfinanz & G and Rewe-Zentral AG v. Landwirtschaftskammer fur das Saarland, ECR 1899 (1976). 48. Bayliss, "Competition and Industrial Policies," p. 217. 49. Alexis P. Jacquemin and Henry W. de Jong, European Industrial Organisation (New York: John Wiley, 1977), p. 206 50. Guillermo Cabanellas de las Cuevas, Derecho Antimonopolico y de defensa de la competencia (Buenos Aires, Argentina: Editorial Heliasta, 1983), p. 90. 51. Greaves, EC Block Exemption Regulations. 52. "It is axiomatic that in anti-trust matters the policy of one state may be to defend what it is the policy of another state to attack," Rio Tinto Zinc Corp. v. Westinghouse Elec. Corp., 1 All E.R. 434, 448 (1978). 53. Boner and Krueger, The Basics of Antitrust. 54. The United States, for instance, does not seem to discourage foreign attacks on its export cartels, and, in fact, sometimes seems to endorse them. See, for example, U.S. Department of Justice, "U.S.-E.C. Consultations on the EC's

244

Competition

Policy at the Global

Level

Proceedings Against Wood Pulp Producers," press release, quoted in Stark, A View of Current International Antitrust Issues (May 20, 1982). 55. See, generally, James R. Atwood, "Conflicts of Jurisdiction in the Antitrust Field: The Example of Export Cartels," Law and Contemporary Problems, 50 (1987): 153-164. 56. Scherer, Competition Policies. 57. See Ana Julia Jatar, "Implementing Competition Policy in Recently Liberalized Economies: The Case of Venezuela," (New York: Fordham Institute Annual Publication, 1994). 58. Scherer, Competition Policies, p. 78 59. Ibid. 60. Ibid. 61. See Marsha Cope Huie and Stephen D. Hogan, "The New European Community Merger Control Regulation and the Short-Term Horizon of United States Firms," American University Journal of International Law and Policy, 16 (1991): 325-346. 62. There is no consensus on the wisdom of applying a certain antitrust legislation to extraterritorial economic activity. See, for example, Pamela B. Gann, ed., "Symposium: Extraterritoriality of Economic Legislation," Law and Contemporary Problems, 50 (1987): 1; Eleonor M. Fox, "Extraterritoriality, Antitrust, and the New Restatement: Is 'Reasonableness' the Answer?" New York University Journal of International Law and Politics, 19 (1987): 565; and Donald I. Baker, "The Proper Role of Antitrust in a Not-Yet-Global Economy," Cardozo Law Review, 9 (1988): 1135.

11 Harmonization of Competition Policies Among Mercosur Countries José Tavares de Araujo, Jr. & Luis Tineo

The harmonization of competition policies has been on the agenda of the Common Market of the Southern Cone (hereinafter Mercosur) project since the signing of the Treaty of Asuncion in 1991.1 According to its first article, the treaty involves the coordination of macroeconomic and sectoral policies between the States Parties in the areas of foreign trade, agriculture, industry, fiscal and monetary matters, foreign exchange and capital, services, customs, transport and communications and any other areas that may be agreed upon, in order to ensure proper competition between the States Parties [and therefore] the commitment by the States Parties to harmonize their legislation in the relevant areas in order to strengthen the integration process. 2

Under this ambitious framework, Mercosur countries signed, in December 1996, the Protocol for the Defense of Competition, which indicates the guidelines toward a common competition policy in the region. 3 The implementation of this protocol will imply, among other institutional innovations, that all member countries will have an autonomous competition agency in the near future; that the national law will cover the whole economy; that the competition agency will be strong enough to challenge other public policies whenever necessary; and that the member countries will share a common view about the interplay between competition policy and other governmental actions. Following the Mercosur philosophy, the protocol does not create supranational organisms, and the effectiveness of the regional disciplines will rely on the enforcement power of the national agencies. This chapter analyzes the potential roles to be played by this protocol at the national and regional levels. The first section discusses the conflicting situations that can be engendered by the process of economic reform and examines the scope for enduring competition rules under such circumstances. The second section reviews the protocol, highlights the institution-

245

246

Competition Policy at the Global Level

al requirements for its implementation, and shows that the concept of competition advocacy is also relevant at the regional level. Finally, some concluding remarks are made in the last section.

Institutional Reform, Economic Integration, and Transparency The economic reforms and the preferential trade agreements launched by Mercosur countries in the recent past have, in principle, the same objective, which is the promotion of a new style of economic growth based on market transparency, industrial efficiency, and consumer welfare.4 Each reform has a particular role in this endeavor. Macroeconomic stabilization should reduce the uncertainty of market signals, including relative prices and government's credibility. Trade liberalization should expose domestic firms to international competition, thus inducing lower prices and better products and services. Privatization should cut down transaction costs by improving the supply of basic services such as telecommunications, energy, and transport. Competition policy should remove entry barriers and monitor business practices. Finally, regional integration should open new opportunities for industrial specialization and stronger international competitiveness. Despite these promising results, economic reform can also engender conflicting situations. For instance, the use of exchange rate anchors to stop inflation, combined with delays in the execution of the fiscal reform, creates trade deficits that bring protectionist pressures and eventual reversals in the trade liberalizing process.5 The shortage of tax revenues confuses the privatization process, by highlighting the government's cash flow problems and distracting the public attention from more important issues, such as the regulatory framework to be implanted. The réintroduction of protectionist mechanisms and the transformation of public enterprises into private monopolies are government-generated entry barriers that imply additional work for the antitrust authorities. These contradictions diminish the potentialities of the regional integration projects. Moreover, the process of economic reform inaugurates a transition period wherein the old rules have been abolished and the new ones are yet to be enforced. This is the ideal environment for rent-seeking activities oriented toward a one-shot gain. The most typical examples are the procedures used for selling state firms and the temporary changes of import tariffs. These practices provoke long-lasting distortions and stimulate the continual postponement of some reforms, in order to keep open the channels for attending special interests.6 Some examples from Mercosur are used here to illustrate the aforementioned issues: privatization and antidumping actions in Argentina, and tariffs swings and the automotive regime in Brazil. By the privatization

Competition Policies Among Mercosur

Countries

247

program implemented during 1990-1992, the Argentine government sold twenty public firms and transferred to the private sector the management of the country's most important turnpikes. This program has generated more than U.S.$10 billion, which corresponds to about 4 percent of gross domestic product (GDP) and 21 percent of current fiscal revenues. It included Aerolíneas Argentinas, one of the largest airlines in Latin America, the entire telecommunications industry, steel, oil, gas, and electricity.7 Due to their interindustry linkages, these sectors affect the productivity levels and the competition conditions of the whole economy. Because of economies of scale and scope, they are natural monopolies or oligopolies and, therefore, are submitted to stringent regulation in most countries. 8 A process of technological convergence is transforming several branches of activities into a unified information industry, encompassing telephone, television, computer, software, and consumer electronics. This convergence also creates new interindustry linkages for a variety of businesses such as newspapers, book publishing, advertising, data processing, and consultant services.9 From the point of view of competition policy, this process implies a continual review of the criteria for measuring relevant markets, entry barriers, economies of scope, productivity standards, and market power. For the regulatory agencies, it means an additional challenge, which is the establishment of accurate rules that circumvent the problems of capture and asymmetric information without hampering the rate of technical progress. In Argentina, like in most Latin American economies, the debate about regulatory reform is just beginning, but its results will delimit the enforcement power of competition law in the country. Another example of temporary tensions within the process of economic reform is the recent Argentine import policy.10 Following the regional trend, the government introduced a series of trade liberalizing measures in the period 1989-1993. These measures included the elimination of specific tariffs and several nontariff barriers and the introduction of a three-tier tariff structure (0 percent for raw materials, 11 percent for intermediate goods, and 22 percent for consumer goods). Although allowing room for tariff escalation, the new structure signified a generalized decline of protection rates throughout the economy. The only sector that had remained protected by quantitative import restrictions was the auto industry. However, the 1991 macroeconomic stabilization plan provoked exchange rate appreciation, trade deficits, and some additional exceptions to the trade opening process. Since 1992, the most relevant measures have been a 10 percent surcharge on imports, the so-called statistics tax quotas on selected products from the paper and food industries, the return of specific tariffs for a few apparel goods, and, most notably, the intense use of antidumping actions. As Table 11.1 shows, from May 1992 to May 1996, the Argentine government initiated 128 antidumping cases against 39

248

Table 11.1

Competition Policy at the Global Level

Argentina: Antidumping Actions, May 1992-May 1996 Target Country

Number of Actions

Brazil China United States Germany Korea Netherlands Belgium South Africa Spain Taiwan Japan Other Total

33 16 10 9 7 6 4 4 4 4 3 28 128

Source: Figures drawn from the database developed by the Organization of American States for the preparatory work of the Free Trade Area of the Americas Working Group on Subsidies, Antidumping, and Countervailing Duties.

different countries. From the viewpoint of competition policy, all trade barriers have a similar effect—namely, to strengthen the market power of domestic firms. Among the mechanisms that reduce contestability, antidumping measures are particularly efficient, because they hit only the most aggressive potential competitors. Thus, not by chance, Brazilian firms have been the priority targets for the Argentine cases, due to the free trade conditions created by Mercosur. The Brazilian import policy promoted by the Real Plan since July 1994 provides a complementary illustration of the peculiar situations engendered by economic reform. In the period 1988-1993, the government implemented a trade reform that radically changed the conditions of competition in the country.11 After six decades of economic growth based on import substitution policies, domestic industries were exposed—for the first time—to the competition of imported goods. The new tariff structure was supposed to grant a steady and homogenous level of effective protection to all industries. Accordingly, by July 1993, the average rate of effective protection was 14.5 percent, and only a few sectors were outside the 10-20 percent range. The outstanding exception was, again, the auto industry, which had a 130 percent protection rate. 12 However, after July 1994, import rules became volatile, in order to accommodate the amount of foreign trade to the short-run needs of the macroeconomic stabilization plan. In a first stage that lasted until December 1994, the government's objective was to impose a quick decline of domestic prices through currency appreciation and additional tariff reductions for goods that had significant impact on the inflation indexes.

Competition

Policies Among Mercosur

Countries

249

Food products and basic inputs were the preferred targets, and the immediate consequence was to amplify the range of effective protection, since lower tariffs on inputs imply greater protection for final goods. In 1995, the major macroeconomic problem was not price discipline anymore, but the trade deficit. And import restrictions were back, with the consequences reported in Tables 11.2, 11.3, and 11.4. Between July 1994 and September 1996, out of the 13,428 tariff lines that compose the Brazilian Harmonized System (HS), 11,183 items have been changed (see Table 11.2). As Table 11.3 shows, capital goods and intermediate inputs were among the most affected industries, wherein import rules have switched more than five times. Considering the forward linkages of theses industries, such changes signified unstable relative prices for the whole economy. 13 Table 11.4 gives examples of ad hoc swings that included such assorted goods as cars, telephone sets, detergents, pesticides, synthetic filaments, and packing machines. As Table 11.4 also shows, the import policy for autos has been highly unstable since 1994. After a brief attempt at reducing nominal protection to 20 percent in September 1994, the government raised the tariff to 70 percent five months later and, in December 1995, established a new set of incentives that went beyond those granted by the Argentine automotive regime. Brazilian Decree 1763 combined all types of import substituting mechanisms: import quotas, minimum levels of domestic inputs, export performance targets, tax rebates, and the like. 14 The automotive industry is an international oligopoly that has a long tradition of influencing trade negotiations and national policies. The 1965 auto pact between Canada and the United States, the export promotion policies implemented by the Brazilian government in the 1970s, the 1981 U.S.Japan VER (voluntary export restraint) agreement, and the tariff swings listed in Table 11.4 are just a few examples of that tradition. Due to the industry's size and production linkages, the investment decisions made by the assembly firms often generate macroeconomic consequences that affect not only employment and GDP growth rates, but also the balance-of-

Table 11.2

Brazil: Changes of Import Tariffs, July 1994-September 1996

Least Number of Changes Harmonized System 1 2 3 5

Tariff Lines

%

13,428 11,183 3,830 939 148

100.0 83.3 28.5 7.0 1.1

Source: Renato Baumann et al., "As Tarifas de Importa?ao no Piano Real," unpublished manuscript for (CEPAL), 1997.

250

Table 11.3

Competition

Policy at the Global Level

Brazil: Examples of Industries with 5+ Tariff Changes, 1994-1996

HS Chapter 15 29 34 54 76 83 84 85 87

Industry

Number of Products

No. of Changes

Fats and oils Organic chemicals Cleaning agents Synthetic filaments Aluminum Articles of base metal Mechanical appliances Electrical equipment Vehicles

1 1 12 7 2 1 1 11 61

6 7 6 6 6 6 6 5 5

Source: Baumann et al., "As Tarifas de Importaçâo no Piano Real."

Table 11.4

Brazil: Examples of Tariff Swings, 1994-1996

Product & SH Code

Tariff history (Date/Duty Rate [%])

Pesticides 29.26.90.02

7/94 15

9/94 14

12/94 2

5/95 4

11/95 8

2/96 10

4/96 2

8/96 12

Detergents 34.01.19.03

7/94 10

1/95 11

5/95 4

11/95 6

2/96 8

4/96 2

8/96 18

Synthetic filaments 54.02.49.02

7/94 20

9/94 16

11/94 2

4/95 0

5/95 6

2/96 10

4/96 6

8/96 16

Synthetic filaments 54.02.49.04

7/94 20

9/94 16

11/94 2

4/95 0

5/95 6

2/96 10

4/96 6

8/96 16

Packing machines 84.22.40.99

7/94 20

11/94 0

1/95 19

6/95 0

7/95 19

1/96 18

Telephone sets 85.17.10.99

7/94 30

1/95 19

3/95 70

5/95 63

1/96 56

4/96 30

Passenger cars 87.03

7/94 35

9/94 20

1/95 32

2/95 70

1/96 62

4/96 70

Source: Baumann et al., "As Tarifas de Importaçâo no Piano Real."

payments conditions and the national rhythm of technical progress. Since these economic figures can be easily transformed into political power, the auto industry has been able to extract privileges from governments worldwide for many decades. Besides the market distortions already illustrated by the preceding examples, the automotive regime implies an additional challenge to the enforcement of competition rules in Mercosur. Imagine that the Brazilian

Competition Policies Among Mercosur Countries

251

antitrust authorities have found convincing evidence of price-fixing among the industry's leading firms. The most immediate action for repressing such behavior would be to stimulate import competition, a solution that the government could not allow at this moment. An eventual surge of car imports would contradict not only the provisions of Decree 1761, but, more important, the current macroeconomic priorities of controlling the trade deficit and ensuring the credibility of the Real Plan. Under this awkward circumstance, the best strategy for the antitrust authorities would be the promotion of market transparency, as a first step toward enduring competition rules in the long run. This can be attained by a system of economic indicators that would keep the public informed about the current conditions of competition in the country. The system should include all the relevant industries and describe their evolution in terms of size, structure, efficiency patterns, entry barriers, and market power of incumbent firms. These indicators would provide answers for the three basic questions that can be raised about the current conditions of competition: Do they impose enough discipline on the established firms, thereby protecting the public interest, or leave open space for unfair practices? Do they allow domestic producers to follow the international rhythm of technical progress? Are the regulated industries meeting the international levels of productivity? 15 Among the Organization for Economic Cooperation and Development countries, publicity has proved to be the prime enforcement mechanism of antitrust law, and the most compelling case has been the Swedish experience since 1946. In that year, a new law was enacted with surprising provisions: the government was responsible for investigating restrictive practices and for announcing the findings, but it had no castigating authority. As Yves Bourdet commented: N o fines could be imposed on firms involved in restrictive practices with harmful effects and no legislative provision existed that gave competition authorities the power to force firms to terminate restrictive practices agreements. Making information about these firms and their behavior public was considered sufficient to convince them to respect the legislation and to adopt the competitive straitjacket. 16

That law was amended in 1953, 1956, and 1982, and certain enforcing rules were gradually introduced. But, as the antitrust authorities remained peaceful, very few cases have been taken to court. According to Bourdet, this reflects the government's view "that a more conciliatory policy of negotiating with firms who have violated the restrictive practices legislation will bring more positive effects for society than would court proceedings." 17 In sum, the foregoing evidence shows that the main problem faced by antitrust agencies in Mercosur, as well as in Latin America, is not to disci-

252

Competition Policy at the Global Level

pline the private sector, but to cope with inconsistent governmental actions. The only feasible instrument for this endeavor is competition advocacy, which promotes transparency and, consequently, the political conditions for abolishing the inconsistent actions.18 Competition advocacy also plays a similar role at the regional level, as the next section reports.

Toward Competition Policy in Mercosur: The Protocol for the Defense of Competition With the progressive elimination of tariffs and nontariff barriers, Mercosur countries have certainly improved market access and promoted trade and investment among its members. However, as regional markets expand, so do anticompetitive and rent-seeking practices, as domestic firms tend to cooperate to keep out new competitors. Besides, international firms looking for monopolistic profits and easy capture of export markets prefer those countries where competition laws do not exist or are weakly enforced. Finally, governments can also contribute to these trends, as the previous section described. To approach these issues, Mercosur countries passed Decision 17/96, containing the Protocol for the Defense of Competition in Mercosur, in December 1996 at a meeting of the Common Market Council held in Fortaleza, Brazil. 19 This document, part of a comprehensive agenda for common trade policies beyond the external tariff scheme, is pending congressional approval by each member country to be enforceable as national law. It was drafted by Mercosur's Trade Commission on the basis of the mandates set forth in Decision 21/94, which issued guidelines for harmonizing competition law in the subregion. The protocol's goals are threefold. First, it provides mechanisms to control firms' anticompetitive practices with Mercosur dimension. Second, it calls for convergent domestic laws in order to ensure similar conditions of competition and independence among firms regarding the formation of prices and other market variables. Third, it provides an agenda for surveilling public policies that distort competition conditions and affect trade among the member countries. Thus, the Mercosur competition protocol should be an instrument for abolishing obstacles to the enlargement of the regional market. From this viewpoint, the protocol cannot be seen as just a set of rules to be applied to anticompetitive practices with extraterritorial implications. It is more far reaching. It deals with both government and firms' interference with the competition process. Competition benefits, whether related to efficiency, consumer welfare, or deconcentration of economic power, are not expressly considered in the protocol. They are expected, however, as a result of a larger market with more participants. Like other Mercosur provisions, the protocol is not oriented toward

Competition

Policies Among Mercosur

Countries

253

supranational mechanisms. Rather, it is based on cooperation within the region and enforced at a national level. However, Mercosur institutions are expected to develop and enforce competition rules on cases of extraterritorial effects. In this regard, the protocol's approach shares many features of the antitrust accord between Australia and New Zealand. Mercosur institutions have a role in guiding the protocol's implementation by the member countries, as will be further examined, and the provisions may serve as instruments either for political mediation or for the enforcement of common rules. Since there is little experience in Mercosur on the use of competition law, the protocol identifies the issues of concern and provides instruments for solving them. Anticompetitive

Practices of Mercosur

Dimension

After the elimination of trade barriers, restrictive agreements are the most visible response to the pressures that the newcomers bring. The protocol seeks to prevent any concerted practice among competing firms or individual abuse of dominant position aimed at limiting competition in the Mercosur market. Its provisions apply to acts performed by any person, be it natural or legal, private or public, including state enterprises and natural monopolies, so long as such practices have extraterritorial effects. 20 The list includes price-fixing, restraints, reductions or destructions of input and output, market division, restriction of market access, bid rigging, exclusionary practices, tying arrangements, refusal to deal, resale price maintenance, market division, predatory practices, price discrimination, exclusive dealings, and abuse of dominant position. 21 The protocol is enforced by the Trade Commission of Mercosur and the Committee for the Defense of Competition. 22 The Trade Commission has adjudicative functions, while the Committee for the Defense of Competition is responsible for the investigation and evaluation of cases. Modeled after the Brazilian law, the proceedings and adjudication of cases are conducted on a three-stage basis. Proceedings are initiated before the competition authority of each country at the interested party's request. 23 Briefly, the competition agency, after a preliminary determination on whether the practice has Mercosur implications, may submit the case before the committee for a second determination. Both evaluations must follow a "rule of reason" analysis in which a definition of the relevant market and evidence of the conduct and the economic effects must be provided. Based on this evaluation, the committee must decide whether the practice violates the protocol and recommend that sanctions and other measures be imposed. The committee's ruling is submitted to the Trade Commission for final adjudication by means of a directive. As part of these procedures, the protocols establish provisions for preventive measures and undertakings of cessation. This mechanism allows the defendant to cease the investigated

254

Competition

Policy at the Global

Level

practice under compliance of certain obligations agreed upon with the committee. The monitoring of these measures and the enforcement of the sanctions bear upon the national competition authorities.24 Some problems may be anticipated with this system. As said before, the substantive and procedural provisions of the protocol apply only to practices with Mercosur implication. Given the fact that the national agencies, the Committee for the Defense of Competition, and the Trade Commission are independent in their judgments at each stage and that one can overrule the other at the following stage, the process of defining the Mercosur dimension of each case may be cumbersome under this system. At each stage, the agency may apply a different criterion to define the relevant market. For instance, the national agencies may well use a restrictive criterion for market definition and close the investigation. The reverse may happen if the applied criteria are more permissive. The same problems can be anticipated regarding the evaluation of the evidence and the economic effects of the practice. There is a large controversy about the limitations of applying economic analysis to anticompetitive practices. Nonetheless, assuming that each criterion is adequately defined by the national agencies, it does not ensure that other definitions and approaches may not be yielded by the committee. Likewise, although it is expected that the committee's rulings will be adopted by the Trade Commission, the latter has the power to overrule the former based on its own criteria. Furthermore, given the little experience developed by each country regarding these practices, both the preliminary and the committee analyses may lead to inconsistent results. If the bodies base their decisions on considerations other than technical ones, particularly in the analysis of the practices' effects on the market, this may well open doors for discretion and political influence at any stage. Thus, it remains to be seen how well the intergovernmental coordination mechanisms of the protocol work and how sound and politically neutral are the criteria applied to the practices investigated. These issues lead to consideration of a more preventive approach to practices of an extraterritorial dimension, since many of these practices are possible only when there is an imbalance regarding their treatment at each national level. To address this crucial area, the protocol contains provisions for the harmonization of domestic competition policy and law. Harmonization

of Domestic Competition

Law

Within any regional agreement, governments may still protect domestic firms after dismantling border controls, either by failing to provide (or to provide inadequately) proper competition regulations and institutions or simply by deliberate nonenforcement of them. These attitudes produce a new type of market "advantage" over countries with stricter competition rules. Two typical procedures performed by firms outside a country that

Competition Policies Among Mercosur

Countries

255

distort competition conditions in the domestic market may illustrate the need for harmonization: price discrimination and collusion. International price discrimination is the result of setting prices in the export market below those of the national market. Firms do this usually with the aim of penetrating new markets and, once there, eliminating competition in order to raise prices later in monopolistic circumstances. Such practices are feasible when the exporting firm enjoys a dominant position in its domestic market. This condition is acquired either by structural barriers that prevent market access to firms from other countries or by anticompetitive practices that prevail in the firms' market. In both circumstances, the exporting firm has the ability to impose prices and other commercial conditions into its market, which are sufficient to enable it to set lower prices in the foreign market or to enter into concerted action with the dominant firms in the foreign market. 25 Practices involving collusion are the result of agreements among competitors in the domestic market (export or import cartels) or between competitors of the domestic country and the foreign country (international cartels), with the purpose of increasing market power by dividing markets or fixing output and prices. This type of practice is difficult to counteract, basically because it is achieved by taking advantage of a position of impunity or immunity with respect to competition laws. Assuming the existence of competition laws in the countries involved, since such practices are detected within the foreign country, it will be difficult to enforce them because the competition agency has to verify the existence of monopolistic practices or market barriers in other jurisdictions. When monopolistic practices are not verified in the country where the distortion was created, firms may act freely. If, for example, discriminatory prices are detected in the importing country, competition laws are irrelevant—first, due to the jurisdiction problem, and second, because such prices have no anticompetitive impact on the domestic market of the exporting country. Indeed, the peculiarity of this kind of discrimination is to distort only the conditions of production in the importing country but not the trading partner's market, where the competition law could be applied. The case of collusion agreements is the same, and difficulties are greater if the practices in question are implemented by firms protected by rules of exception that exclude them from the sphere of competition law, that is, state monopolies, export cartels, or enterprises in sectors or activities that have been exempted. 26 The provisions of the protocol dealing with practices with extraterritorial effects touch upon these issues. They seek to solve problems the causes of which may well be attributed to a lack of competition enforcement in the countries where the investigated firms operate. As usual, it is more costly to remedy facts afterward than to prevent them. Relying exclusively on the protocol provisions may be risky. It would be more effective to apply com-

256

Competition

Policy at the Global

Level

mon standards where the practice is originated and leave only complex cases to the Mercosur institutions. By addressing anticompetitive practices with standards directed at the behavior of firms on their turf, governments eliminate a typical root of potential market fragmentation. The only successful experience reported on agreements for which application does not depend upon supranational organs has been that of the Australia-New Zealand Closer Economic Relations Trade Agreement (ANCERTA) of 1983, which established a mandate for the harmonization of restrictive commercial practices. 2 7 This mandate resulted in New Zealand's adoption, in 1986, of a new competition law in step with the terms of Australia's laws. In 1988, both countries adopted a protocol following which the application of antidumping measures was eliminated, and agreement was reached regarding the application of competition laws to conduct affecting trade between the countries. Furthermore, the powers of inquiry of the agencies were extended to jurisdictions in the other country by requiring companies subject to inquiry to provide information. The case of Australia and New Zealand exhibits many helpful analogies in treating the subject of integration agreements, as in the case of Mercosur.28 To this end, the Protocol for the Defense of Competition calls for the member countries to adopt within the period of two years, common rules for the control of acts and contracts, of any kind, which may limit or in any way cause prejudice to free trade, or result in the domination of the relevant regional market of goods and services, including which result in economic concentration, with a view to preventing their possible anti-competitive effects in the framework of Mercosur. 29

Furthermore, it also calls the countries to "undertake, within a two year period, to draft joint standards and mechanisms which shall govern State aid susceptible to limit, restrict, falsify or distort competition and to affect trade between the States Parties." 30 These provisions set up the basis for a comprehensive competition policy harmonization to be completed by the end of 1998. The process, as clearly stated, goes beyond the treatment of anticompetitive practices to include structure concerns and competition advocacy. For Mercosur countries, this means a long road of work. At present, competition is approached very differently by Mercosur countries. For instance, Uruguay and Paraguay do not have competition laws in place, leaving this process to be governed by the market following trade liberalization and deregulation. In Argentina and Brazil, although competition laws exist, their components, enforcement mechanisms, and policy goals differ greatly.31 In Argentina, the competition regime focuses only on preventing anticompetitive conduct. 32 The Argentine Congress is now working on a bill to improve the enforcement of the current law, clarify enforcement standards, introduce the evaluation of economic concentrations, and make the Competition Commission independent from the

Competition Policies Among Mercosur Countries

257

Ministry of Economy. 33 In Brazil, the amendments introduced to the law in 1994 made competition policy a critical complement of its trade and investment p o l i c i e s . 3 4 They raised C o n s e l h o A d m i n i s t r a t i v o de D e f e s a Económica (CADE) to a status independent of the Ministry of Justice, of which it had previously been a subordinate part. CADE was given competition advocacy powers to ensure that conditions encouraging competition would not be affected by other provisions connected with privatization and regulatory reform of natural monopolies. Regulations were introduced to control economic concentrations, anticompetitive practices were more broadly defined, and CADE was given more precise standards for analyzing and evaluating such practices. 35 This has made Brazil's policy contrast with that of the rest of Mercosur countries, being the only one showing initial signs of the coherent approach conceived by the protocol. At a Mercosur level, each country's approach also remains to be seen. It could be possible that countries will apply identical standards for both domestic and external trade restraints or different standards for domestic and external trade, restricting the protection of competition in favor of domestic consumers and permitting anticompetitive practices aimed at boosting the export capacity of domestic firms. In addition to the substantive differences in approach to the fostering of competition, countries may differ in their enforcement methods. It could be possible that some countries, though their laws may penalize the same practices, will differ in how to define them and measure their effects on competition. Similarly, in some countries, the laws may not be enforced or the agencies may not be sufficiently trusted. In some countries, industrial policies may be used to foster competition. In some countries, the focus is more on market structures than on the behavior of firms. In some countries, sizable sectors may be exempted from the competition regime, while in others, specific anticompetitive practices may be subject to administrative authorizations. These differences may be more likely to be encountered when certain practices are deemed to spur trade and lead to more efficient production, as is the case of mergers and other economic concentrations mentioned in the protocol as well. The quest for monopolistic profits based on each country's type of action or omission as regards competition triggers a number of practices that affect market integration. Since fostering competition conditions in integrated economies depends not only upon the observance of antitrust rules, but also upon the continual surveillance of trade and investment barriers, a competition advocacy component is included in the protocol. Regional Competition

Advocacy

The use of common competition rules to correct the imbalances of the integration process can lead to different styles of law enforcement. Two factors, advanced by A. E. Rodriguez and Mark Williams, among others, high-

258

Competition

Policy at the Global

Level

light the risks of an exclusive focus on prosecuting anticompetitive practices at any cost. First, the evidence linking trade growth to anticompetitive practices is yet to be gathered. Second, there is also a lack of data on the welfare costs from extraterritorial anticompetitive practices compared with the costs of prosecuting and sanctioning them. 36 It is true that price discrimination and cartels are harmful practices to the integration process that thus deserve scrutiny. However, consideration must be given to the costs and limited technical capabilities of both the Mercosur institutions and the national agencies in handling these cases. A more promising alternative is to promote regional competition advocacy, at least during the consolidation period of integration, for the reasons discussed above. As we saw, in a context of unfinished reforms, transparency is the main instrument for controlling both anticompetitive practices and inconsistent government policies. To this extent, a technical committee on public policies that distort competitiveness has been operating since 1995.37 Its goal is to identify government measures affecting competition and decide whether they are compatible with the operation of the custom union. The scope of measures examined includes exceptions granted under the Mercosur regime, taxes, government procurement, and other discriminatory policies. This committee has advanced little in its agenda, as there are many conflicting topics involved. However, there are two areas related to firms' performance not covered by any Mercosur instrument that deserve attention. The first is the harmonization of regulatory frameworks to natural monopolies run either by state enterprises or by privatized firms. The second consists of the treatment of dumping actions and the progressive elimination of the dual standard of analysis for export prices and domestic prices for one favoring the application of a harmonized competition regime. The protocol is particularly keen in regard to state subsidies that affect competition conditions. 38 If the Committee for the Defense of Competition is successful in identifying and eliminating the distorting fiscal incentives existing in Mercosur countries, it could turn this committee into a center forum to advance further initiatives in those untouched areas. The harmonization process of such diverse areas of competition requires the accomplishment of a number of prior subprocesses, for instance, those listed in Article 30 of the protocol. The program of cooperation therein described will allow countries to identify grounds of commonality and divergence regarding the goals and scope of competition and its implications for Mercosur integration. It will also lead to the identification of exceptions that might allow those anticompetitive practices that affect the market of another country, that is, state monopolies and import and export cartels. These efforts may engender a coherent set of regulations on conduct and structure, as well as common procedural rules and enforcement standards to be applied by independent agencies. The final outcome

Competition Policies Among Mercosur Countries

259

will be a common approach to the treatment of anticompetitive practices— namely, horizontal and vertical practices and abuse of dominant position, especially those of a discriminatory nature—and methodologies for merger evaluation. Although not explicit in the protocol, the above cooperation program includes four clear-cut stages of implementation at the national level. A crucial peculiarity of this process is that each stage can be developed only after the attainment of the preceding one. The first stage is the enactment of a national law containing the provisions required by the protocol. The second is the creation of an autonomous and properly staffed antitrust agency. The third is the establishment of transparent operational routines by the antitrust agency, such as the publication of annual reports, guidelines to orient the private sector, consistent enforcement criteria, and so on. The fourth is the consolidation of competition advocacy as the fundamental domestic task of the antitrust agency.

Conclusion As recently as the early 1990s, antitrust was just a domestic issue in some advanced economies. Nowadays, it has a new title—"competition policy"—and it has become a noteworthy topic on the international agenda. This change was provoked by several factors, such as the simultaneous trends toward globalization and regional integration, the rebirth of capitalism in Eastern Europe, the Latin American economic reforms, the creation of the World Trade Organization (WTO), and the new analytical instruments for dealing with regulatory reform in open economies. It is therefore a new subject everywhere. At the WTO, the debate about the effectiveness of a multilateral agreement on competition rules is yet to begin. As Bernard Hoekman observed, the possible outcomes may vary from doing nothing to a fully harmonized international law, and a consensus view is far from emerging.39 Within the scope of the Free Trade Area of the Americas (FTAA), a working group on competition policy was established in May 1996. Its mandate includes, among other initiatives, the exchange of views on the operation of competition policy regimes in the region, the identification of cooperation mechanisms among governments, and the elaboration of specific recommendations on how to proceed in this matter.40 In this context, if the institutional innovations discussed in this chapter are accomplished, the Mercosur protocol will turn into a basic reference on the harmonization of competition policy among trading partners. Otherwise, it probably will add complexity to an already intricate theme. Taken together, the essays in this book clearly demonstrate the importance not only of developing competition policies in Latin America, but

260

Competition Policy at the Global Level

also the imperative of making them both regionally and nationally sensitive. While analyses of the U.S. and European experiences can provide helpful models for designing competition policies, Latin American policymakers will ultimately have to devise policies appropriate for countries that are not fully industrialized, or that do not yet have stable, democratic governments in place, or that are still struggling to control both state-centered and private corruption and crime. While we can point to many similarities in the development of Latin American nations, Latin America as a region does not have the unity or economic stability of the United States or the European Union. Constructing national competition policies will undoubtedly be an important first step toward regional integration and effective supranational policies that will enable Latin American enterprises to compete at the global level.

Notes The views presented here are the authors' own and should not be attributed to the Organization of American States (OAS) or the World Bank. An earlier version of this paper was presented at the Organization for Economic Cooperation and Development/World Bank/CADE conference "Competition Policy and Economic Reform," held in Rio de Janeiro, Brazil, July 10-13, 1997, and in Antitrust Bulletin (spring 1998): 45-70. 1. Tratado para la Constitución de un Mercado Común entre Argentina, Brasil, Paraguay y Uruguay, March 26, 1991 (hereinafter Treaty of Asuncion). Mercosur makes up a market of 200 million people with a gross domestic product per capita of U.S.$3.168. This subregional area also includes 44.3 percent of the population and 53.7 percent of Latin America and the Caribbean. The Treaty of Asuncion encompasses two main instruments: one, a four-year trade liberalization program; and two, a commitment to have implemented a common external tariff by January 1, 1995. On December 17, 1994, the presidents of the Mercosur countries met at Ouro Prèto, Brazil, to sign a protocol containing the common external tariff (CET). The CET ranges from 0 percent to a maximum of 20 percent. The Ouro Preto Protocol also established basic institutions to oversee the integration process. The Common Market Council is Mercosur's policymaking body and is composed of the foreign and economic ministers. The Common Market Group is the executive body in charge of implementing the treaty. The Mercosur Trade Commission is the executive body in charge of enforcing the common external trade policy. The Secretariat of Mercosur is in Montevideo, Uruguay. For further analysis of the Mercosur integration project, see, for example, José Tavares de Araujo Jr., "Industrial Restructuring and Economic Integration: The Outlook for MERCOSUR," in Werner Baer and Joseph S. Tulchin, eds., Brazil and the Challenge of Economic Reform (Washington, D.C.: Woodrow Wilson Center Press, 1993), p. 195, and Martin Arocena, "Common Market of the Southern Cone: MERCOSUR," in Ana Julia Jatar and Sidney Weintraub, eds., Integrating the Hemisphere: Perspectives from Latin America and the Caribbean (1996). For a version of the Treaty of Asuncion and the Ouro Prèto Protocol in English, see OAS, Trade and Integration Arrangements in the Americas (Washington, DC: General Secretariat of the Organization of American States, 1997). See also Sistema de Información al Comercio Exterior-OAS (SICE-OAS) webpage http://www.sice.oas.org/trade/mrcsr.

Competition Policies Among Mercosur Countries

261

2. Treaty of Asuncion, Art 1. 3. Protocol for the Defense of Competition, Decision 17/96, December 17, 1996. For a version of the protocol in English, see OAS, Inventory of the Competition Policy Agreements, Treaties, and Other Arrangements Existing in the Western Hemisphere (Washington, DC: OAS, 1998). 4. For a discussion of the long-term growth perspectives generated by the recent Latin American economic reforms, see, for example, Sebastian Edwards, Latin America and the Caribbean: A Decade After the Debt Crisis (1993). 5. On the conflicts that can emerge throughout the process of economic reform, see Guillermo Calvo and Enrique G. Mendoza, "Trade Reforms of Uncertain Duration and Real Uncertainty: A First Approximation," IMF Staff Papers, (1994); and Rudiger Dornbusch and Alejandro Werner, "Mexico: Stabilization, Reform, and No Growth," Brookings Papers Economic Activity, (1994). 6. See, for example, A. E. Rodriguez and M. D. Williams, "The Effectiveness of Proposed Antitrust Programs for Developing Countries," North Carolina Journal of International Law and Commercial Regulation, 19 (1994): 209. 7. See Comisión Economica para America Latina (CEPAL), "La Crisis de la Empresa Publica, las Privatizaciones, y la Equidad Social," Serie Reformas de Política Publica, 26(1994): 125. 8. Regulatory reform is a sensitive issue everywhere. In the United Kingdom, the rules for the telecommunication industry have been on the public agenda since 1981, when British Telecom was split from the post office; the privatization process lasted until 1993, when the final tranche of the company's shares was sold. According to Mark Armstrong and colleagues, policy in this area is still far from settled. In the United States, the debate that led to the 1996 Telecommunications Act has been alive since 1982, when the local telephone companies were separated from AT&T, and, apparently, it will not be concluded soon. For instance, Richard Klinger argues that the act is focused on competition problems that were relevant in the past and does not address the current structural changes of the information industry. See, respectively, Mark Amstrong, Simon Conan, and John Vickers, Regulatory Reform: Economic Analysis and the British Experience (Cambridge, MA: MIT Press, 1994); and Richard Klinger, The New Information Industry: Regulatory Challenges and the First Amendment (Washington, DC: Brookings Institution, 1996). 9. For a lively account of this process, see Klinger, ibid. 10. For an extensive analysis of the economic and trade reform process in Argentina, see Daniel Chudnovsky and Fernando Parta, ed., Los limites de la Apertura: Liberalización, Restructiración Productiva y Medio Ambiente (Buenos Aires: Alianza Editorial/CENIT, 1996). 11. Recent analyses of the economic and trade reforms implemented in Brazil are found in Pedro da Motta Veiga, "Brazil's Strategy for Trade Liberalization and Economic Integration," in Jatar and Weintraub, eds., Integrating the Hemisphere; and Albert Fishlow, "Is the Real Plan for Real?" in Susan Kaufman Purcell and Riordon Roett, eds., Brazil Under Cardoso (Boulder, CO: Lynne Rienner, 1997). 12. Homorio Kume, "A Política de Importa§äo no Plano Real e a Estrutura de Protegäo Efetiva," Instituto de Pesquisa Económica Aplicada, (1996). 13. It should be noted that, in most cases, the first tariff change was due to the establishment of the Mercosur CET in January 1995. Since then, subsequent changes have been made through continual restatements of the list of exceptions to the common tariff. 14. Decree 1763, December 26, 1995 (setting an import levy of 70 percent and

262

Competition Policy at the Global Level

other trade restrictions on autos, trucks, motorcycles, and bicycles as of January 1, 1996). See Kume, "A Politica de Importalo." 15. For a discussion about the use of economic indicators as competition policy instruments, see, for example, José Tavares de Araujo Jr., "Contestability and Economic Integration in the Western Hemisphere," OAS Trade Unit study, 1995; and "The Use of Economic Indicators as Competition Policy Instruments," OAS Trade Unit study, 1996. 16. Yves Bourdet, "Policy Toward Market Power and Restrictive Practices," in Yves Bourdet, ed., Internationalization, Market Power, and Consumer Welfare (New York: Routledge, 1992), p. 301. 17. Ibid., p. 314. 18. "Competition advocacy" commonly refers to the role of the antitrust authorities in removing trade distorting barriers in the economy beyond the traditional prosecution of anticompetitive practices. For the most part, this component focuses on identifying either public policies promoted by other authorities within the government or rent-seeking activities by interest groups aimed at obtaining protectionist gains to the detriment of the consumer welfare and economic efficiency pursued by trade liberalization and competition policies. It has been increasingly recognized among experts and enforcers that most of the expected benefits from trade liberalization and regulatory reforms have been subverted during the transition period from the government distributive model to a market-oriented one. Interest groups have handled enormous resources to influence governments to switch back open market policies to protectionism. Therefore, the number of firms and the level of prices have remained the same, even in the absence of government controls. In this environment, free trade and deregulation have not been able to properly foster competition despite the passing of competition laws. For deeper analyses and further arguments supporting competition advocacy efforts, see A. E. Rodriguez and Malcom B. Coate, "Competition Policy in Transition Economies: The Role of Competition Advocacy," Brooklyn Journal of International Law, 23 (1997): 454; and "Limits to Antitrust Policy for Reforming Economies," Houston Journal of International Law, 18 (1996): 311. See also Shyam Khemani, "The Role and Importance of Competition Advocacy in Promoting Competition," paper presented at the Emerging Market Economy Forum Conference on Competition Policy and Enforcement, Buenos Aires, October 1996; and William E. Kovacic, "Getting Started: Creating New Competition Policy Institutions in Transition Economies," Brooklyn Journal of International Law, 23 (1997): 403. 19. Protocol for the Defense of Competition; see note 3 above. 20. Ibid., Art 4. 21. Ibid., Art 6. 22. Both bodies are composed of representatives from each member country. However, in the case of the Trade Commission, countries' representatives must come from the respective competition agencies (ibid., Arts 8-9). 23. The entire investigation procedure is outlined in chapter 5 of the protocol. 24. Protocol for the Defense of Competition, chap. 6. 25. International price discrimination is a practice rarely combated by means of competition laws. Both the antitrust analysis and the enforcement mechanisms available have not led countries' authorities to come up with sound criteria to judge these cases. Rather, the treatment of this practice has been addressed by trade remedy laws, specifically by antidumping laws. The use, goals, and benefits of antidumping laws compared to competition laws are the subject of a well-known debate on whether antidumping laws should be replaced by competition laws. Within Mercosur, this discussion has just started. Although the protocol does not

Competition Policies Among Mercosur Countries

263

replace antidumping mechanisms, it does provide tools to approach the problem from a competition policy point of view. For a discussion of these issues, see, for example, Jorge Miranda, "Should Antidumping Laws Be Dumped?" Law and Policy in International Business, 28 (1996): 225; Clarisse Morgan, "Competition Policy and Anti-Dumping: Is It Time for a Reality Check?" Journal of World Trade, 30 (1996): 61; and Bernard H o e k m a n and Petros C. Mavroidis, " D u m p i n g , Antidumping, and Antitrust," Journal of World Trade, 30 (1996): 27. 26. For a general discussion of competition policy issues in integration schemes, see Bernard Hoekman, "Trade and Competition Policy in Regional Agreements," paper presented at the conference "Private Practices and Trade Policy: The Future of International Rules on Antidumping and Competition," (Washington, DC, November 1997). See also Gabrielle Marceau, Antidumping and Antitrust Issues in Free Trade Areas (New York: Oxford University Press, 1994). 27. Australia-New Zealand Closer Economic Relations Trade Agreement, 22 I.L.M. 948 (March 28, 1983). 28. For an account of ANCERTA's competition policy harmonization component and developments, see Rex J. Ahdar, "The Role of Antitrust Policy in the Development of Australian-New Zealand Free Trade," North Western Journal of International Law and Business, 12(1991): 317. 29. Protocol for the Defense of Competition, Art 7. 30. Ibid., Art 32. 31. For a comprehensive study on Mercosur countries' domestic regulations on trade, investment, and competition, see Malcolm Rowat et al., "Competition Policy and Mercosur" Technical Paper 385 (Washington, DC: World Bank, 1997). For a summary of decisions from Mercosur competition agencies, see OAS, Report on Developments and Enforcement of Competition Policies and Laws in the Western Hemisphere (Washington, DC: OAS, 1997). 32. Law for the Protection of Competition, No. 22.262, July 7, 1980. Argentina passed the region's first competition law in 1919, being amended in 1947 and 1980. For literature on the Argentine law, see Guillermo Cabanellas and Wolf Etzordt, "The New Argentine Antitrust Law: Competition as an Economic Policy Instrument," Journal of World Trade, 17 (1983): 34. For an analytical version of the Argentine law in English, see OAS, Inventory of Domestic Laws and Regulations Relating to Competition Policy in the Western Hemisphere (Washington, DC: OAS, 1997). 33. See Rowat et al., "Competition Policy and Mercosur." 34. Law for the Prevention of Practices Against the Economic Order, No. 8.884, June 11, 1994. Prior to this law, Brazil enacted its first law on competition in 1962, being amended in 1990, 1991, and 1994. For literature on the Brazilian law, see Dallal Stevens, "Framing Competition Law Within an Emerging Economy: The Case of Brazil," Antitrust Bulletin, 40 (1995): 929; and Rowat et al., "Competition Policy and Mercosur." CADE has an Internet home page with information related to Brazil's competition law available at: http://www.mj.gov.br/cade/. For an analytical version of the Brazilian law in English, see OAS, Inventory of Domestic Laws. 35. See Rowat et al., "Competition Policy and Mercosur." 36. A. E. Rodriguez and Mark Williams, "Do We Need Competition Policy in an Integrated World Economy?" Working Paper No. 4 (Monterrey Institute of International Studies, 1997). 37. Mercosur, Decisiones del Consejo del Mercado, Decision No. 20/94 on "Políticas Publicas que Distorsionan la Competitividad." See Inter-American Development Bank, Mercosur Report, 1(1997): 26. 38. Protocol for the Defense of Competition, Art 32.

264

Competition

Policy at the Global

Level

39. Bernard Hoekman, "Harmonizing Competition Policy in the WTO System," World Economic Affairs, 1 (1997): 41. 40. Information on the developments of the preparatory work for the FTAA, particularly in the area of competition policy, is available at: http://www.alcaftaa.oas.org.

Part 4 Conclusion

12 Regulatory Regimes and the Consolidation of Democracy in Latin America Joseph S. Tulchin

The chapters in this volume make a powerful argument for the need in Latin America to create, or in some cases re-create, the legal, regulatory, and statutory framework complementary to modern global capitalism. These reforms are not only the key to determining Latin America's economic future, but they also play a fundamental role in consolidating democracy in the region. The studies in this volume remind us that establishing rules of the game—rules that are acceptable to the citizens of the nation and to the community of nations of which the country wishes to form a part—is an aspect of the social compact that determines the identity of a community. The first round of reforms in Latin America was undertaken in an environment of severe economic crisis. Privatization, trade liberalization, deregulation, and fiscal restraint were widely accepted as rapid solutions necessary to tame macroeconomic instability. The governments of the region have been lauded for their progress toward open market economies. Now the region faces the challenge of implementing a second stage of institutional reforms that will encompass and permit the construction of frameworks and jurisprudence to restrict anticompetitive practices and to prevent their consequences. Without these second-stage reforms, the sacrifices of restructuring will be wasted and the democratic regimes will be subjected to excruciating pressures to retreat from the market. The case studies within this book examine the various degrees of success with which modern regulatory systems have been deployed in Latin America, drawing lessons from the experience with competition policies in the United States and Europe. While we recognize that regulatory mechanisms are deeply rooted in the history of each society and in the political culture of each nation, and that the U.S. and European approaches to competition policy can not be transplanted to Latin America, they nevertheless are well-established and important models that deserve study. As the chapters in this volume trace the developments of economic 267

268

Conclusion

policies in the region, they illustrate how historical, political, and cultural factors, as well as external forces, have shaped anticompetitive practices in Latin America. Years of import substitution policies, building on habits that go back to the Spanish and Portuguese colonial past, have fostered old networks that rely on collusion and clientelistic behavior. The contributors to this volume find consensus around the need to level the economic playing field as a necessary measure to engage Latin America in the global economy and to extend the benefits of reform more broadly and equitably to all citizens of the region. These changes will require considerable political skill and time. We still find considerable opposition to such economic reforms in Latin America. Small firms and workers accustomed to state protections argue that reforms have resulted in a concentration of industry and a dramatic rise in unemployment. As societies adjust to the rules governing the new game of competition, popular opinion holds that deregulation has hurt the middle class and increased inequality. It is the challenge of policymakers to respond to these public perceptions with better information and with policies targeted toward ameliorating the painful dislocations brought on by structural reform. Competition is one way to assure the consumer-citizen that the emerging market system is equitable, at least with respect to access and to rules of the game. Economic reforms must be accompanied by social policies that are equally deep reaching. Effective antipoverty programs, as well as health and social security reforms, can complement competition policy, ensuring that the demands of the most vulnerable segments of society are met. Education policies play a fundamental role in any program of economic reform by preparing a country's workforce for global competition. Finally, judicial reform must be undertaken to guarantee equal access to market systems and to protect the socioeconomic rights of all citizens. Ultimately, competition policy has to do with citizenship; it is an integral part of the emerging democracies in Latin America. In the long run, competition policies will provide transparency and accountability to the relationship among the individual, the market, and the state. Effective regulation protects consumers from predatory behavior of firms and markets and brings them higher-quality products and services. Better pricing will result in a fair allocation of resources, with a positive effect on income distribution. As documented by the cases studies in this volume, liberalization and deregulation have lowered costs, increased investments, raised profit margins, and contributed to stability in many sectors of the economy. Such trends lay the groundwork for investment and growth. They also open the way to citizen well-being and a sense of belonging or participation. Regulatory policy or competition policy is a challenge for all the democratic regimes in Latin America. In Argentina, for example, where the Peronist government of Carlos Menem has been among the region's most

Regulatory Regimes and the Consolidation of Democracy

269

fervent advocates of restructuring and market opening, the very success of the first-stage reforms has directed a spotlight at the judiciary and the police, and it has raised in higher profile the deficiencies of a conflict-resolution system that does not win the confidence of the citizens or foreign investors. Further economic progress in Argentina is hampered by the failure of judicial and regulatory reform. In Mexico, it is the opposition party Partido de Acción Nacional (PAN) that is spearheading the drive for competition policy. So long as the drive is linked tightly to openness and the fight against corruption, it is supported by the left-wing opposition to the government, the Partido de la Revolución Democrática (PRD). But where it is associated with open markets as an end in itself, the PRD and PAN part company. In the interim, the voices of opposition raise valid concerns. The initial stages of economic restructuring and reform programs centered on the withdrawal of the state from the market and from many of its responsibilities for the delivery of goods and services to the public. Entities that had been in the hands of the state since colonial days were privatized before the proper mechanisms for control or dispute mediation were put into place. It is precisely these regulatory controls that are necessary to guarantee that the rights of individual citizens are protected. Regulatory systems are complex webs of legislative, judicial, and executive measures that tie the consumer-citizen to the entity providing the service and to the state—local, regional, and national—as the arbiter of differences between public service and consumer. While the role of the state in Latin America is being redefined, the success of economic reforms and competition policies ultimately hinges upon a strong and engaged government with capable and independent institutions. The formation of national regulatory frameworks is a crucial step in the consolidation of democracy in Latin America. It is also a vital step in creating viable international roles for the nations of the region. Establishing a sound regulatory framework is part of the international code of good behavior. To compete effectively in the international markets—for goods, for capital, and for services—it is necessary to demonstrate that the rules of the game are clear and that they will be upheld. That is why these studies are so important in understanding the success or failure of the Latin American countries in the post-Cold War world.

Selected Bibliography

Alé, J. Estado empresario y privatización en Chile. Santiago, Chile: Facultad de Sciencias Económicas y Administrativas, Centro de Desarrollo, Universidad Nacional Andrés Bello, 1990. The Antitrust Bulletin. Vol. 43, No. 1. Spring 1998. Areeda, Phillip E. Antitrust Law Analysis: Problems, Text and Cases. 4th ed. Boston: Little, Brown, 1988; Supplement, 1994. Armstrong, George M. Jr., Law and Market Society in Mexico. New York: Praeger, 1989. Armstrong, M., S. Cowan, and J. Vickers. Regulatory Reform: Economic Analysis and British Experience. Cambridge, Mass.: MIT Press, 1994. Artwood, James. "Conflicts of Jurisdiction in the Antitrust Field: The Example of Export Cartels." Law and Contemporary Problems. Vol. 50, pp. 153-164. 1987. Banco Central de Chile. Monthly bulletin, various issues. Baumol, W., J. Panzar, and R. Willig. Contestable Markets and The Theory of Industry Structure. New York: Harcourt Brace, 1982. Baumol, W. and J. Ordover. "Use of Antitrust to Subvert Competition." Journal of Law & Economics. May 1985. Bayliss, B. T. "Competition and Industrial Policies." The Economies of the EC. 2nd ed., Alim El-Agraa, ed. New York: St. Martin's, 1982. Bellamy, Christopher and Graham Child. Derecho de la competencia en el Mercado Común. Madrid: Editorial Civitas, 1992. Best, Michael H. The New Competition: Institutions of Industrial Restructuring. Cambridge, Mass.: Harvard University Press, 1990. Bitran, E. and E. Saavedra. "Algunas reflexiones en torno al rol regulador y empresarial del Estado." Despues de las Privatizaciones, Hacia el Estado Regulador. Oscar Muñoz, ed. Santiago, Chile: CIEPLAN, 1993. Boner, Roger Alan and Reinald Krueger. The Basics of Antitrust Policy: A Review of Ten Nations and the European Communities. World Bank Technical Paper No. 160. Washington, D.C.: The World Bank, 1991. Bork, Robert. The Anti-trust Paradox: a Policy at War with Itself. New York: The Free Press, 1978. Boyd, Gavin, ed. The Struggle for World Markets: Competition and Cooperation Between NAFTA and the European Union. Cheltenham, U.K.: Edward Elgar, 1998.

271

272

Selected Bibliography

Boza, Beatriz. Peru's Experience in Market Regulatory Reform. Lima: Indecopi, 1998. Brooklyn Journal of International Law. Vol. 23, No. 2. 1997. Cabanellas de las Cuevas, Guillermo. Derecho antimonopolico y de defensa de la competencia. Buenos Aires, Argentina: Editorial Heliasta, 1983. Cini, Michelle and Lee McGowan. Competition Policy in the European Union. New York: St. Martin's Press, 1998. Coate, Malcolm, Rene Bustamante, and A. E. Rodriguez. "Antitrust in Latin America: Regulating Government and Business." University of Miami InterAmerican Law Review. Vol. 24, pp. 37-85. 1992. Comisión Federal de Competencia. Annual Report. Mexico City: 1994. (Publisher?) Cortés H. and De la Cuadra S., "Recesión económica, Crisis cambiaría y ciclos inflacionarios." Unpublished manuscript. Pontificia Universidad Católica de Chile, 1984. Dahl, Robert A. A Preface to Economic Democracy. Berkeley: University of California Press, 1985. Dewey, Donald. The Antitrust Experiment in America. New York: Columbia University Press, 1990. Doern, G. Bruce and Stephen Wilks, eds. Comparative Competition Policy: National Institutions in a Global Market. New York: Oxford University Press, 1996. Dutz, M. and S. Suthiwart-Narueput. "Competition Issues Beyond Trade Liberalization." Mimeo. Washington, D.C.: The World Bank, 1994. El Mercurio. Santiago, Chile: May 29, July 22, July 25, August 5, and August 16, 1995. Encina, Francisco Antonio, and Leopoldo Castedo. Historia ilustrada de Chile y de su literatura. Santiago, Chile: Zig Zag, 1984. Estrin, S. and M. Cave. Competition and Competition Policy, a Comparative Analysis of Central and Eastern Europe. London and New York: Pinter, 1993. Etzioni, A. The Moral Dimension: Towards a New Economics. New York: The Free Press, 1988. "Europe's great mail robbery." The Economist. Vol. 334, No. 7896. January 7, 1995. Fingleton, John, et al. Competition Policy and the Transformation of Central Europe. London: Centre for Economic Policy Research, 1996. Fischtak, Claudio. Regulatory Policies and Reform in Industrialized Countries. Washington, D.C.: The World Bank, 1995. Fontaine, J. A. "Los mecanismos de conversión de deuda en Chile." Estudios Públicos, No. 30, pp. 137-157. 1988. Fontaine, J. A. "Observaciones sobre la experiencia macroeconomica Chilena: 1985-1989." Estudios Públicos, No. 40, pp. 195-214. 1990. Foxley, A. Experimentos neoliberales en América Latina. Mexico City: Fondo de Cultura Económica, 1988. Frances, A. and M. Nairn. The Venezuelan Private Sector: From Courting the State to Courting the Market. Paper presented at the conference, "The Lessons of Venezuela." Washington, D.C.: The American University and the Woodrow Wilson Center, October 19-20, 1992. French, R. D. Políticas económicas en Chile: 1952-1970. Santiago, Chile: Nueva Universidad, Pontificia Universidad Católica de Chile, 1973. Gellhorn, Ernest and William E. Kovacic. Antitrust Law and Economics. St. Paul, Minn.: West Publishing, 1994. Godoy, O. A. "Surgimiento del Liberalismo Económico en Chile." Ideas económi-

Selected Bibliography

273

cas en Chile ayer y hoy, Revista Universitaria. No. 19, pp. 46-52. Pontificia Universidad Católica de Chile, 1986. Gómez-Lobo, A. and J. Jiles. "La experiencia chilena en regulación pesquera." Despues de las privatizaciones hacia el estado regulador. Oscar Muñoz G., ed. Santiago, Chile: CIEPLAN, 1993. Graham, Edward M. and J. David Richardson, eds. Global Competition. Washington, D.C.: Institute for International Economics, 1997. Graham, Edward M. and J. David Richardson. Competition Policies for the Global Economy. Policy Analyses in International Economies. No. 51. 1997. Hachette, D. "Librecambismo o proteccionismo en el siglo XX: El pensamiento precede a la acción?" Ideas económicas en Chile ayer y hoy, Revista Universitaria. No. 19, pp. 59-65. Pontificia Universidad Católica de Chile, 1986. Hirsch, W. Law and Economics. London: Academic, 1988. The International Review of Law & Economics. Vol. 11, No. 3. December 1991. International Energy Annual 1993. Washington, D.C.: Energy Information Administration, 1995. Jatar, A. Rivalry, Competition and Public Policy. Caracas, Venezuela: IES A, 1993. Jatar, A. Implementing Competition Policy in Recently Liberalized Economies: The Case of Venezuela. Annual Publication. New York: Fordam Institute, 1994. Jorde, T. and D. Teece, eds. Antitrust, Innovation, and Competitiveness. New York: Oxford University Press, 1992. The Journal of Latin American Competition Policy, Kahn, A. The Economics of Regulation. Cambridge, Mass.: MIT Press, 1991. Khemani and Dutz. The Instruments of Competition Policy and Their Relevance for Economic Development. Washington, D.C.: The World Bank, 1994. Larrain, F. "El comportamiento del sector publico en un país altamente endeudado: la contrastante experiencia chilena, 1970-1985." El sector público y la crisis de la América Latina. F. Larrain and M. Slowsky, eds. Lecturas No. 69. Mexico City: Fondo de Cultura Económica, 1990. Larrañaga, O. "Pobreza, crecimiento y desigualdad: Chile 1987-92." Revista de Análisis Económico. Vol. 9, No. 2, pp. 69-92. 1994. Larroulet, C. Soluciones Privadas a Problemas Públicos. Santiago, Chile: Instituto Libertad y Desarrollo, 1991. Lawrence, Robert Z. and Albert Bressand. A Vision for the World Economy. Washington, D.C.: The Brookings Institution, 1996. Lawrence, Robert Z., et. al. Emerging Agenda for Global Trade: High Stakes for Developing Countries. Policy Essays, Overseas Development Council, No. 20, 1996. Letwin, William. Law and Economic Policy in America. New York: Random House, 1966. Levinsohn, James. Competition Policy and International Trade. Working Paper No. 4972. National Bureau of Economic Research, December 1992. Lucas, R. "On the size distribution of business firms." Bell Journal of Economics. Pp. 508-528. 1978. Marshall, J. and F. Montt. "Privatization in Chile." Privatization in Less Developed Countries. P. Cook and C. Kirkpatrick, eds. Hertfordshire: Harvester Wheatsheaf. 1988. Matte, P. L. and A. M. Sancho. "Sector Educación Básica y Media." In Larroulet, ed., Soluciones Privadas a Problemas Públicos. McChesney, Fred S. and William F. Shughart II, eds. The Causes and Consequences of Antitrust. Chicago: The University of Chicago Press, 1995.

274

Selected Bibliography

Ministerio de Hacienda, Dirección de Presupuestos. Estadísticas de Finanzas Públicas. 1990-1994. Ministerio de Justicia. Código de Comercio. 13th ed., Santiago, Chile: 1995. (Publisher?) Morandé, F. "Developments in Chile: Some Facts and Thoughts." Working Paper E-14. Santiago, Chile: Ilades-Georgetown University, July 1993. Organization of American States, Inventory of Domestic Laws and Regulation Relating to Competition Policy in the Western Hemisphere. Washington, D.C.: Organization of American States, January 1998. Pittman, R. "Merger Law in Central and Eastern Europe." The American University Journal of International Law and Policy. Vol. 7, Spring 1992. Posner, R. Antitrust Law: An Economic Perspective. Chicago: Chicago University Press, 1976. Prieto, C. L. Aspectos Negativos de la Intervención Económica. Santiago, Chile: Zig-Zag Press, 1955. Pro-Competencia: Síntesis de Actividades 1992-1993. Caracas, Venezuela: Superintendencia para la Promoción y Protección de la Libre Competencia, 1993. Rashid, S. "Quality in Contestable Markets: A Historical Problem?" Quarterly Journal of Economics. February 1988. Ratliff, J. and Wright, Elisabethann; "Belgian Competition Law—The Advent of Free Market Principles." World Competition Law and Economics Review. Vol. 16, pp. 33-51. 1992. Ris, Martin. "The European Community Rules on Competition: The Concerted Practices Doctrine." Boston College International & Comparative Law Review. Vol. 13, pp. 465^481. 1990. Roett, Riordan. Mexico's Private Sector: Recent History, Future Challenges. Boulder, Colo.: Lynne Rienner, 1998. Saez, R. "Las Privatizaciones en Chile." Despues de las Privatizaciones Hacia el Estado Regulador. Oscar Muñoz, ed. Santiago, Chile: CIEPLAN, 1993. Saunders, C. The Role of Competition in Economic Transition. New York: St. Martin's, 1993. Scherer, F. M. Competition Policies for an Integrated World Economy. Washington, D.C.: The Brookings Institution, 1994. Scherer, F. M., ed. Monopoly and Competition Policy. 2 Vols. Hants, U.K.: Edward Elgar, 1993. Scherer, F. M. and David Ross. Industrial Market Structure and Economic Performance. 3rded. Boston: Houghton-Mifflin, 1990. Shenefield, John H. and Irwin M. Stelzer. The Antitrust Laws: A Primer. 2nd ed. Washington, D.C.: AEI, 1996. Spiller, P. "Condicionantes para la desregulación de los servicios públicos: una visión conceptual." Experiencia Internacional en la Desregulación de los Servicios Eléctricos y Telecomunicaciones. Santiago, Chile: Asociación de Empresas de Servicio Publico (ASEP), 1994. Stark, Charles S. "International Antitrust: Looking Ahead." Address Before the Antitrust and International Sections of the American Bar Association. August 9, 1993. Stopford, et. al. Rival States, Rival Firms: Competition for World Market Shares. New York: Cambridge University Press, 1991. Sunstein, Cass R. After the Rights Revolution: Reconceiving the Regulatory State. Cambridge, Mass.: Harvard University Press, 1990. Uribe, H. A. Reforma de la legislación Minera Chilena. Santiago, Chile: Editorial Jurídica de Chile, 1966.

Selected Bibliography

275

Utton, M.A., Market Dominance and Antitrust Policy. 1995. Williamson, O. Anti-trust Economics. New York: Basil Blackwell, 1987. White, L. "Anti-trust in a Developing Economy: the Case of Venezuela." Mimeo. Washington, D.C.: The World Bank, 1990. World Bank. Colombia: Industrial Competition and Performance. Washington, D.C.: World Bank, 1990. Valdés, S. P. "Orígenes de la crisis de deuda: ¿nos sobreendeudamos o nos prestaron en exceso." Estudios Públicos, No. 33, pp. 135-174. 1989. Valenzuela, F. Manual de Historia de Chile. Santiago, Chile: Zig-Zag Press, 1992. Villalobos, S. R. "Proteccionismo económico en el siglo del liberalismo." Ideas económicas en Chile ayer y hoy, Revista Universitaria. No. 19, pp. 53-58. Pontificia Universidad Católica de Chile, 1986. Villalobos, S. R. Historia de Chile. Santiago, Chile: Editorial Universitaria, 1995. Viscusi, W. Kip, John M. Vernon, and Joseph E. Harrington Jr. Economics of Regulation and Antitrust. Lexington, Mass.: D.C. Heath, 1992. Warverman, L., W. Comanor, and A. Goto, eds. Competition Policy in the Global Economy. New York: Routledge, 1997. World Trade Organization Annual Report: 1997. Vol. I. Geneva: World Trade Organization, 1997. Zajac, E. Political Economy of Fairness. Cambridge, Mass.: MIT Press, 1995.

The Contributors

Barry M. Hager is president of Hager Associates, a legal and consulting firm founded in 1990, specializing in international finance and trade. Based on his previous years of work for the U.S. Congress and representation of clients in the private sector, Hager has expertise in U.S., European, and Japanese policies in banking, trade, foreign policy, and economic development. He is the author of Limiting Risks and Sharing Losses in the Globalized Capital Market, published in 1998 by the Woodrow Wilson Center Press. He serves as counsel to a number of projects promoting legal reform and judicial training in Asia and Latin America. Rudolf Homines is a partner of Violy, Byorum, and Partners, a New York investment bank. He has extensive policymaking experience, most notably as minister of finance of Colombia from 1990 to 1994. He has also served as president of the Universidad de los Andes in Bogotá and as editor of Estrategia, a financial monthly. He writes a weekly article for the Bogotá daily El Tiempo and a syndicated column that appears in several Colombian newspapers. Hommes wrote the chapter included in this book while he was spending a year as a consultant for the Office of the Chief Economist at the Inter-American Development Bank in Washington, D.C. Ana Julia Jatar, who is now a senior fellow at the Inter-American Dialogue in Washington, D.C., was head of Venezuela's antitrust agency from April 1992 to January 1994. In addition to broad policymaking experience, she has an extensive background in working with the private sector, having been manager for economic planning at Cervecería Polar and a financial analyst at Valinvenca, an investment bank. She received her doctorate in industrial and business studies at the University of Warwick and has written extensively on competition policy. Nicolás Majluf is a professor in the Industrial and Systems Engineering 277

278

The Contributors

Department at Pontificia Universidad Católica de Chile in Santiago. He received his doctorate at the Massachusetts Institute of Technology. He has had extensive experience as a process consultant in the areas of strategic management and organization design, working with the financial, mining, oil, electric utilities, telecommunications, and building materials sectors in Chile. Moisés Nairn is editor of Foreign Policy. He served as Venezuela's Minister of Industry and as an Executive Director at the World Bank. He received his doctorate from the Massachusetts Institute of Technology. Ricardo Raineri is the director and an associate professor of the Industrial and Systems Engineering Department at Pontificia Universidad Católica de Chile in Santiago. He received his doctorate in economics at the University of Minnesota and his current areas of research include industrial organization, utilities regulation, and business strategy. He has served as a consultant in the fields of telecommunications and energy, including work with the Chilean National Telecommunications Commission and the National Energy Commission. Armando E. Rodriguez is a senior manager with KPMG's Economic Consulting Services based in Short Hills, New Jersey. Prior to joining KPMG, he was a senior economist with the U.S. Federal Trade Commission. He has served as an adviser to various Latin American competition policy agencies, the Inter-American Development Bank, and the U.S. Agency for International Development and as a consultant to numerous private firms on antitrust and competition policy matters. He specializes in domestic and international competition policy; among his publications is a book on the antitrust treatment of mergers titled Economic Analysis of Mergers. Dr. Rodriguez has a Bachelor of Sciences in Chemical Engineering and a Ph.D. in Economics, both from the University of Texas at Austin. F. M. Scherer is a professor of business and government in the John F. Kennedy School of Government at Harvard University and former chief economist of the U.S. Federal Trade Commission. José Tavares de Araujo, Jr., now a consultant in the Trade Unit of the Organization of American States, is a former economist for the InterAmerican Development Bank and a former trade economist for the Economic Commission for Latin America and the Caribbean. He has written extensively on international trade, regional integration, regulatory reform, competition policy, and industrial organization, with an emphasis on Latin American economies.

The Contributors

279

Luis Tineo is a specialist on competition policy in the Private Sector Development Department of the World Bank in Washington, D.C. He received a Law degree from Andrés Bello Catholic University in Caracas, a Master's in Administrative Law from the University of Madrid, and another in Law and Economics from George Washington University Law School. Prior to joining the World Bank, he was a trade specialist at the Organization of American States and a researcher at the Inter-American Development Bank. In Venezuela, he was general counsel for the Ministry of Economic Planning and adviser to the Ministry of Industry and Trade. Joseph S. Tulchin is the director of the Latin American Program of the Woodrow Wilson International Center for Scholars in Washington, D.C., where he conducts research, supervises study groups, and coordinates international meetings on issues of concern to the academic and policy communities. Before moving to Washington, he was professor of history at the University of North Carolina at Chapel Hill for twenty years and, before that, at Yale University for seven years. Dr. Tulchin served as associate editor and then editor of the Latin American Research Review. He is author or editor of over one hundred publications; his most recent monograph is Argentina: The Challenges of Modernization. Enrique Zuleta Puceiro teaches at the Law School of the Argentine National University in Buenos Aires and is president of the firm SofresIbope, which specializes in applied social research. During the years 1987 to 1991, he taught in the Government Department of Harvard University.

Index

Abuse approach, active, 38 Accountability, 67-69 ACES, 159 Acquisitions. See Mergers and acquisitions Administradoras de Fondos de Pensiones (AFP), 84-85 Administrative control, 66-67 Advocacy, competition, 4, 108-109, 128-129, 257-259 Aerolíneas Argentinas, 247 Agrícola de Seguros, 159 Agriculture, 63, 64, 155, 160 Airline industry: Argentina, 56; Colombia, 155, 186-187; Mercosur countries, 247; prices, 43; United States, 207, 209 Alfonsín, Raúl, 51-52, 54 Allende, Salvador, 73-75 American Economic Association, 36 Anglo-Saxon concepts and instruments of antitrust legislation, 153 Anticompetitive behavior, 2, 3, 123-125, 253-254. See also Competition policies for an integrated world economy; Latin America and competition policy; individual countries/regions Antidumping action, 26, 236-237 Antitrust law: aims of, 17; historical background, 96-97; mergers going around, 126-127; motivation of the antitrust enforcement, 101-102; Reagan administration, 44; Sweden, 251; Western principles, 18, 117, 118. See also Competition policies

for an integrated world economy; Latin America and competition policy; Mexico's antitrust initiative; United States, antitrust experience of the; individual countries/regions Antitrust Paradox, The (Bork), 210 Apertura, 168-169, 182-183 Arbitrational function of public authorities, 65 Areeda, Phillip, 196-197 Argentina, state reform and deregulatory strategies in: Alfonsín and Menem, the reforms of, 51-52; Austral Plan of 1985, 52; challenge for democratic regimes in Argentina, 268-269; Comisión Nacional de Comercio Exterior, 26; control, the new problems of, 64-69; Convertibility Plan of 1991, 22, 52, 56-58; deregulation policy, 58-64; institutional and economic implications of deregulation, 60-64; privatization, 23; public and private, distinguishing between, 52-54; reform, the original meaning of, 54-58. See also Mercosur countries, harmonization of competition policies among Argentine Airlines, 56 Aristotelian conception of the state, 110 Asch, Peter, 210 Asia's tiger economies, 2-A, 26, 42, 80, 212 AT&T, 43, 207 Attitudes/conduct and competition policy, 107 Australia-New Zealand Closer

281

282

Index

Economic Relations Trade Agreement (ANCERTA) of 1983, 256 Automotive industry, 24, 249 AVIANCA, 155, 186-187 Banco Cafetero, 159 Banco Central Hipotecario, 174 Banco Comercial Antioqueno, 155 Banco de Bogotá, 160 Banco de Colombia, 160, 174 Banco Ganadero, 174 Banco Popular, 174 Banking: Chile, 82, 83; Colombia, 155, 157, 160-161, 174; regionalization, 24; United States, 207 Bell System, 43 Betancur, Balisario, 153 Bilateral monopoly, 104 Bittlingmayer, George, 210 Bork, Robert, 210 Bourdet, Yves, 251 Brazil, 22, 24, 26, 96-97, 223. See also Mercosur countries, harmonization of competition policies among Bretton Woods agreements, 26 Budgets, foreign exchange, 99 Bush, George, 44,210 Caldera, Rafael, 98 Canada, 34 CANTV, 23 Capital: direct investment, 4, 18, 22, 25, 81; flows, 81-82; laws governing capital markets, 207; lending practices, 20; market sector, 4, 62-63; public offerings on international capital markets, 24; raising capital in international markets, 24; value of, use and the, 124-125. See also Banking CARBOCOL, 158, 174 Cartels, 37, 38, 102, 234-235. See also Monopolies Carter, Jimmy, 209 Cassagne, J. C., 61 Cavallo, Domingo, 52, 56 Cementos Argos, 154-155 Chicago School, 193-194, 202, 209-210 Chile and competition through liberalization: Brazil, partnerships with,

24; capital flows, deregulation of financial markets and foreign, 81-82; Central Bank, 83; Chicago School, 73; conclusions, 89-92; Corporación de Fomento de la Producción (CORFO), 77; economic reforms, 79-84; electricity, 87-88; energy, 86-87; exchange rates, 80-81; foreign investment, 81; gas, 88; globalization of the Chilean economy, 82-83; government participation in the economy, 74-79; joint ventures, 24; labor market, deregulation of the, 83-84; military regime, 75-76; mining, 88-89; modernization, 78-79, 89; oil, 88; prices, deregulation of, 79; privatization, the process of, 73, 76-78; sectoral transformations and new regulations, 84-89; Social Security, 84-85; tariffs, 80; taxes, 84; telecommunications, 85-86 China, 23, 26 Citibank, 155 Clientelistic behavior, 2 Clinton, Bill, 44, 209, 210-211 CODELCO, 88-89 Coffee, 158-159 Cold storage industry, 62 Collusion, 2, 99, 105, 106-107, 255 Colombia, regulation/deregulation in: antitrust law, 96; apertura, 168-169, 182-183; concentration of the industrial sector, 163-167; conclusions, 179-182; constitutional reform and derived legislation, 169-171, 183; ethical considerations, 178; financial-sector reform, 171-172; Gaviria administration, 182-188; historical perspective of regulation, 151-157; Mexico, similarities with, 137; political environment of regulation, 175-178; price controls, 171; private-sector development, 157-163, 173-174; public services, regulation of, 172-173, 186; reforms and their impact on competition, recent, 167-175; superintendency of industry and commerce, 152, 185-186; telecommunications, 174-175 Colonial roots of international trade in the Americas, 33-37

Index Common Market of the Southern Cone. See Mercosur countries, harmonization of competition policies among Communication. See Telecommunications Communism, 75 Companhia Vale do Rio Doce, 22 Competition policies for an integrated world economy: advocacy, competition, 4, 108-109, 128-129, 257-259; colonial roots of international trade in the Americas, 33-37; conclusions, 44-46; economic development in the new world, 35-37; Europe, divergence and convergence in, 37-39; laws in liberalizing economies, 97; obstacles to international competitiveness, 4, 16, 19, 22; rationale, the economic, 39-42; recommendations, policy, 112-114; regulation revisited, 42-44. See also Latin America and competition policy; individual countries/regions CONCASA, 159 Concentration as consequence of economic liberalization, 3, 102-104, 163-167. See also Monopolies Conglomerates, 3, 165-167. See also Monopolies Conselho Administrativo de Defesa Economica (CADE), 257 Continuity in reforms, 69 Control, the new problems of, 64-69 CORPAVI, 174 Council of Ministers, 222 Countervailing duty action, 26 Court cases: Continental Can Company, 238; Darcy VJ. Allen (1603), 34 Court of Justice, 222 Creolization of antitrust, 120 Cuba, 75 Customer-provider relationships, 65 Dead-weight losses attributable to monopolistic resource misallocation, 40 Debt debacle of the early 1980s, 1, 82, 117 Debt relative to equity, 27, 81 Decisions and the idea of control, 65 Delgado, Ricardo, 61 Democracy, 3, 67, 68, 267-269

283

Democrats, Congressional, 209 Deregulation, 27. See also Regulation and the geopolitics of regulatory policies Developing countries, 25-28 Disclosure demanded by foreign investors, 24 Distribution policies, 230, 235-236 Diversification within the home market, 25 Domestic competition law, harmonization of, 254-257 Dominance, the concept of, 128, 226-228

DVA, 109 East India Company, 35 Economic Report of the President (1995), 120 ECOPETROL, 158, 174 Eisenhower, Dwight D., 208 Electricity and power, 87-88, 174, 207 Elizabeth I (Queen), 34 Ely, Richard T., 36 Emergency powers, 101 Emergency school, 65, 66 Emerging Markets Data Base, 29 ENDESA, 87 Energy, 86-87 England, 34-39, 153, 234. See also European Economic Community (EEC) ENTEL, 56, 57 Erhard, Ludwig, 38 Ethics, 110-112, 178 Etzioni, Amitai, 111 European Coal and Steel Community (ECSC), 220-221 European Commission (EC), 64, 222, 223, 228-231,233 European Common Market (ECM), 39 European Economic Community (EEC), 26; agriculture, 64; bigness, unrealistic appreciation of, 27; Chile, 80; Community Competition Law, 223-229; conclusions, 239-241; distribution agreements, 235-236; divergence and convergence in Europe, 37-39; enforcement, competition policy, 229-231; export cartel exemptions, 234-235; historical background, 220-223; industrial and

284

Index

competition policy, 239; lessons on competition and international trade, 233-239; mergers, 238; parallel imports, 236-237; price discrimination and antidumping, 237-238; relevance to Latin America, 219-220; supranational competition law, 231-233 Exceptionality, hypothesis of, 6566 Exchange rates: Chile, 80-81; Colombia, 159; Mexico, 122; multiple exchange rate systems, 20; overvalued, 21; Venezuela, 98-99 Exports: Argentina, 62; European Economic Community, 234-235; improvements in, 16; Mercosur countries, 26; Mexico, 121-122; serendipitous nature of, 21 Exxel Group, 24 Exxon, 158 Family-owned businesses, 19-20, 111 Fascism, 155 FEDECAFE, 177 Federal Communications Commission, 207 Federal Competition Commission (FCC), 118, 119-120, 133-135 Federal Trade Commission (FTC), 44, 103, 133, 200, 203 Finance sector, 104, 160-161, 171-172, 183-184. See also Banking Flota Mercante Grancolombiana, 159 Fondo de Garantías de Instituciones Financerias, 160 Ford, 24 Ford, Gerald, 43 Foreign investment, 4, 18, 22, 25, 81 Fragmentation of control, 66 Free Trade Area of the Americas (FTAA), 220, 259 Freiburg School, 38 Fuel market, 58 Galán, Luis C., 167-168 Gas industry, 88, 124 Gaviria, Cesar, 153, 167, 168, 171, 176-177, 182-188 General Agreement on Tariffs and Trade (GATT), 63-64,213 Germany, 36-39, 212, 221. See also

European Economic Community (EEC) Gingrich, Newt, 209 Global economy, the emergence of a, 24, 82-83,211-214 Government intervention, 21; arbitrational function of public authorities, 65; Aristotelian conception of the state, 110; Colombian Constitution of 1886, 151; misguided, 4; parastatals, 122; pervasiveness of, 16; state-ownership approach, 36; trade liberalization, frustrating, 129-130. See also Competition policies for an integrated world economy; Latin America and competition policy; individual countries/regions Grundig, 236 Guasch, J. Luis, 20-21 Hadley, Arthur, 36 Hager, Barry, 17 Hallberg, Kristin, 163-164 Hamilton, Alexander, 41 Hirschman-Herfindhal concentration index (HHI), 103, 202-203 Holmes, Oliver W„ 196 Horizontal agreements, 236 Horizontal restraints, 126 Human capital, 125 Hungary, 108 IDEM A, 160 Immigration and Colombia, 155 Imports, 98-99, 121, 236-237, 249250 Import substitution industrialization (ISI) model: anticompetitive consequences of, 123-125; Colombia, 155; infant industry protection, 41; Mexico, 118, 119, 121; protectionism, 26; small economies, 102 Industrial development, 161-163 Industrial policy, 239 Inequality of condition/wealth/opportunity, 40 Infant industry protection, 2, 41, 154, 156 Inflation, 107 Institutional frameworks and competition standards, 1, 4, 107-110, 246-252

Index Instituto de Fomento Industrial (IFI), 157 Interest rates, 20 International Competition Policy Office (ICPO), 213 International Finance Corporation (IFC), 29 Interstate Commerce Commission, 36-37, 209 Investment, direct capital, 4, 18, 22, 81 Italy, 157 Japan, 38, 80, 212 Jatar, Ana J., 120 Jeffersonian concerns, 193 Jewish immigrants, 155 Joint ventures, 18, 24 Journal of Law and Economics, 210 Jurisprudence, 1, 3, 34, 65-66, 238 Justice Department, U.S., 103, 203 Kerosene sales, 37 Keynes, John M., 74 Keynesian macroeconomic theory, 38 Korea, 80,212 Krugman, Paul, 212 Labor market, deregulation of the, 83-84 Laissez-faire policies, 36, 37 Latin America and competition policy: advocacy, competition, 4; antitrust law, 96-97; building economic institutions of contemporary capitalism, 25-30; capital markets, development of stronger/deeper local, 4; chapter by chapter overview, 5-11; collusive practices, 2; Comisión Económica para América Latina y el Caribe, 75; complex/cloudy picture of competition, 21; conclusions, 30-31; conglomerate supervision, effective, 3; exchange rates, 20-21; exports, 21; family-owned businesses, 19-20; foreign investment, borders open to, 4; historical context and the new dilemmas, 15-19; infant industry protection, 2; institution builders, development/training of, 4; interest rates, 20; lending practices, 20; macroeconomic reforms, 21; obstacles to international competitiveness,

285

4, 16, 19, 22; opposition, voices of, 269; quality of life, improving the, 5; reformers, 1; stabilization/reforms and regionalization, 22-25; World Trade Organization, 2. See also Competition policies for an integrated world economy; individual countries/regions Latin America Enterprise Fund of Miami, 24 Laws in liberalizing economies, 97, 100-101. See also Legislation Legal framework in conflict with competition standards, 107-110 Legislation: (Argentina) Consolidation of Liabilities and Social Pension Laws, 62; (Argentina) Decree 2.284/91, 61, 62; (Argentina) Decree 817/92, 62; (Argentina) Economic Emergency Law 23.697, 55; (Argentina) Law of Supplies, 59; (Argentina) State Reform Law 23.696, 55-56; (Chile) Decreto Ley 600, 81; (Colombia) Decreto 2153/1992, 170; (Colombia) Ley 55/1959, 151-152; (Columbia) Ley 35/1993, 184; (Columbia) Ley 45/1990, 184; (England) Statute of Monopolies, 34; (Europe) Community Competition Law, 223-229; (Mexico) Federal Law of Economic Competition, 118, 120; (USA) Clayton Act of 1914, 200-203, 213; (USA) Federal Trade Commission Act of 1914, 200; (USA) Glass-Stegall Act, 207; (USA) Hart-Scott Rodino Amendments, 203, 204-205; (USA) National Environmental Policy Act, 208; (USA) Restrictive Trade Practices Act of 1956, 38-39; (USA) Robinson-Patman Act of 1936, 203-204, 237-238; (USA) Securities and Exchange Act, 207; (USA) Sherman Act of 1890, 41, 197, 198-200, 213; (Venezuela) Agricultural Marketing Law, 110; (Venezuela) Anti-Dumping Law, 99-100; (Venezuela) Banking Law, 110; (Venezuela) Capital Markets Law, 110; (Venezuela) Consumer Protection Law, 99-100; (Venezuela)

286

Index

Insurance Law, 110; (Venezuela) Pharmaceutical Profession Law, 110; (Venezuela) Pro-Competition Law, 97, 99-100,103, 104, 107-108, 110 Lending practices, 20 Liberalization, economic, 3, 22. See also Competition policies for an integrated world economy; Latin America and competition policy; individual countries/regions List, Friedrich, 41 Local capital markets/firms, development of stronger/deeper, 4, 15-16 Lopez, Alfonso, 151 Macroeconomic conditions/reforms, 17-18,21,38,246 Macropolitical sphere of symbolic representation, 66 Madrid, Miguel de la, 117 Management structures, modifying, 25 Market capitalization, 29 Market power, 126 Marx, Karl, 75 MCI, 43 Medellin drug organization, 167 Menem, Carlos, 51-52, 54, 96, 268-269 Mercosur countries, harmonization of competition policies among: anticompetitive practices of Mercosur dimension, 253-254; conclusions, 259-260; domestic competition law, 254-257; institutional reform/economic integration and transparency, 246-252; politics and, 223; Protocol for the Defense of Competition in Mercosur, 252-259; regional competition advocacy, 257-259; trade, intraregional, 26; Treaty of Asuncion in 1991,245 Mergers and acquisitions: anti-trust laws, bypassing, 126-127; big companies in small economies, 102-103; European Economic Community, 230, 238; joint ventures, 18; Standard Oil, 36; supranational competition law, 213-214. See also Monopolies Mexico's antitrust initiative, 96; acquisitions and mergers, 126-127; advocacy, competition, 128-129; austerity program, 117; challenge for

democratic regimes in Mexico, 269; Colombia, similarities with, 137; conclusions, 136-137; economic legacy, 121-125; Federal Competition Commission, 108; horizontal restraints, 126; import substitution industrialization model, 118, 123-125; Institutionalized Revolutionary Party, 117; liberalization process, role of antitrust within the, 119-120; Partido Acción Nacional, 269; Partidodela Revolución Democrática, 269; patronage, institutional, 117; political economy of competition policy, 129-135; second phase in reform process, 68; traditional antitrust policies unsuited for Mexico, 118; United States/European Economic Community, competition policies modeled after, 117-118; vertical agreements, 127-128 Microsoft, 213 Military authority, 38, 75-76 Mining, 22, 88-89, 157-158 Modernization, 25, 78-79, 89,112 Monopolies: bilateral, 104; Chicago School, 209; dead-weight losses attributable to monopolistic resource misallocation, 40; East India Company, 35; enemy to good management, 40; fears of, 27; macroeconomic conditions influencing the dismantling of, 17-18; Mercosur countries, 247, 255; Monopolies and Restrictive Practices Commission, 38; nationalization of, 36, 75; natural, 27, 35, 36, 79, 247; obstacles to building institutions for curbing, 4; oligopolies, 35; public becoming private, 23; Statue of Monopolies, 34; supervision, effective conglomerate, 3 Motivation of the antitrust enforcement, 101-102 Multinational companies, 21-22, 24 National Coffee Fund, 159, 177 National Federation of Coffee Growers (FEDECAFE), 158-159 Nationalization of monopoly industries, 36, 75

Index National Securities Board, 59 Natural monopolies, 27, 35, 36, 79, 247 New Zealand, 256 Nike, 24 Nixon, Richard M., 208 Nontradable sector, highly protected, 104, 112 North American Free Trade Agreement (NAFTA), 26, 64, 117, 123, 133 Office of the Differential Rate Regime (RECA-DI), 98-99 Oil industry, 88, 98, 157-158 Oligopolies, 35 Operational structures, modifying, 25 Organization for Economic Cooperation and Development (OECD), 251 Ownership patterns, 165-167 Pan Am, 155 Parallel imports, 236-237 Parastatals, 122 Parliament, European, 222 Paternalism, 107 Patronage, institutional, 117 PEMEX, 135 Pension funds, 83-85 Perez, Carlos A., 98 Peso, devaluation of the, 123 Petrochemical industry, 62 Pharmaceutical sector, 108-109 Pinilla, Rojas, 151 Policy recommendations for implementing competition policy, 112-114. See also Competition policies for an integrated world economy Politics and competition policy: Colombia, 175-178; European Economic Community, 239; macropolitical sphere of symbolic representation, 66; Mercosur countries, 223; Mexico, 129-135; United States, 208-211 Portfolio investors, 30 Port regulation, 187-188 Portugal, 27, 33 Postliberalization, 124 Postprivatization, 67 Prebisch, Raúl, 75 Predatory pricing, 107, 203-204, 209-210 Prices: airline industry, 43; Chile, 79;

287

Colombia, 171; European Economic Community, 237-238; horizontal restraints, 126; Japan, 38; Mercosur countries, 251, 255; Mexico, 126; price-fixing agreements, 36, 38; rationale for competition, economic, 39—40; social policy and price controls, 105-106; United States, 203-206, 209-210; Venezuela, 105-107 Private sector, developing a competitive: challenges for Latin America, 17; public and private, distinguishing between, 52-54, 67, 111-112; regional stability and structural reforms through privatizations, 22-23. See also Competition policies for an integrated world economy; Latin America and competition policy; individual countries/regions Production methods, efficient, 40 Protectionism, 2, 26-27, 41^*2, 64, 161 Protocol for the Defense of Competition in Mercosur (1996), 252-259 Public and private, distinguishing between, 52-54, 67, 111-112 Public funds, management of, 159 Public offerings on international capital markets, growth in, 24 Public services, regulation of, 172-173, 186 Quality of life, improving the, 5 Quasi-nontradable products, 112 Railroads, 35, 36,43, 187 Rajapatirana, Sarath, 21 Reagan, Ronald, 44, 208, 210 Redistribution of wealth, 40 Reforms/reformers, 1, 16-17, 54—58, 268. See also Competition policies for an integrated world economy; Latin America and competition policy; individual countries/regions Regionalization, 3, 22-24, 26, 257-259. See also European Economic Community; Mercosur countries, harmonization of competition policies among Regulation and the geopolitics of regulatory policies, 36-37, 4 2 ^ 4 , 267-269. See also Colombia, regula-

288

Index

tion/deregulation in; Competition policies for an integrated world economy; Latin America and competition policy; United States, antitrust experience of the; individual countries/regions Resource allocation and price controls, 105-106 Restructuring, reform-induced, 2224 Rockefeller, John D., 36 Rodriguez, A. E., 44 Rubin, Paul, 210 Russia, 75 Salinas, Carlos, 117 Scale economies, relevant, 40-42 Scherer, F. M., 213 Schumpeter, Joseph A., 42 Securities and Exchange Commission (SEC), 110 Seneca, Joseph, 210 Servan-Schreiber, J. J., 212 Services, regulation of public, 172-173, 186 Service sector, financial, 104 Sguiglia, Eduardo, 61 Sherman, John, 40 Shipping sector, 187-188 Shocks, external, 78 Shughart, William, 210 Small markets, 40-^tl, 102-104 Smith, Adam, 16, 35, 40 Social agenda, 67 Social change. See Venezuela, social change and competition policy in Social Security, 84-85 Sourrouille, Juan, 52 Sovereignty at bay view, 212 Spain, 33, 74, 153, 157 Spanish Civil War, 155 Specialization, 41 Stabilization, 22-25, 65, 67, 246 Stagflation, 43 Standard Oil, 36, 37 State-ownership approach, 36. See also Government intervention Stock markets, 27-30, 153, 174 Subsidiary principle, 75-76 Subsidies, distortionary effect of sectoral, 122 Subsidy reductions, 15

Sugar industry, 109 Summit of the Americas in 1994, 220 Sunk capital, 124,125 Supranational competition law, 213-214,219, 231-233 Suramericana firms, 167 Sweden, 251 Symbolic representation, macropolitical sphere of, 66 Taiwan, 80 Tariffs, 23, 80, 98, 121, 249-250 Taxes, 63, 84 Technological convergence, 247 Technological innovation, 42, 43 TELECOM, 174, 175 Telecommunications, 85-86, 124, 174-175, 207, 209, 247 Telephone communications system, 43, 56, 57 Telmex, 23 Tollison, Robert, 210 Trade: Argentina, 62; barriers, lowered trade, 15, 16; China, trade deficits with, 23; colonial roots of international trade in the Americas, 33-37; competition policy harnessed to increase benefits of trade liberalization, 120; government frustrating trade liberalization, 129-130; imports, 98-99, 121, 236-237, 249-250; Mercosur countries, 26, 246; powerful tool for promoting competition, 18; regional accords, 3, 26; tariffs, 23, 80, 98, 121, 249-250. See also Competition policies for an integrated world economy; Exchange rates; Exports; Import substitution industrialization model; Latin America and competition policy; individual countries/ regions Transportation sector, 62, 155, 186-187 Treaty of Asuncion in 1991, 245 Treaty of Paris in 1951, 221 Treaty of Rome in 1957, 39, 221, 224-228, 231,233 Trucking industry, 43 Turbay, Julio, 153 Underdevelopment, 21 Unions, 83

Index

United Fruit, 155 United States, antitrust experience of the, 193; conclusions, 214-215; executive summary, 194-195; historical review and statement of U.S. antitrust law, 198-206; interaction with other U.S. economic/regulatory law, 206-208; introduction to, 195-198; modern era of, 208-214 Uruguay Round of the General Agreement on Tariffs and Trade, 63-64, 213 Venezuela, social change and competition policy in, 95; advocacy, competition, 108-109; collusion, 106-107; concentration, 102-104; crisis of institutions and competition, 109; ethics, 110-112; historical background, 97-101; legal/institutional framework, 107-110; motivation of

289

the antitrust enforcement, 101-102; nontradable sector, highly protected, 104, 112; price controls and resource allocation, 105-106; vertical integration, 104-105 Venture capital firms, 23-24 Vernon, Raymond, 212 Vertical agreements, 127-128 Vertical integration, 104-105 Villa, Hernando, 151 Volkswagen, 24, 38 Wal-Mart effect, 16 Western antitrust principles, 18, 117, 118 World Bank, 22, 68 World Trade Organization (WTO), 2, 213,259 World War I/II, 155, 221 Zedillo, Ernesto, 117

About the Book

Economic reforms in Latin America since the 1970s have focused first on economic stabilization, later on liberalization and deregulation, and only recently on creating, or in some cases re-creating, the legal, regulatory, and statutory institutions complementary to modern global capitalism. This book addresses a central element of the newest round of reforms: the restriction of anticompetitive practices. Providing one of the first studies to explore the topic, the authors trace the development of competition policy in Latin America, where that policy stands today, and how it may be reconceptualized and deployed as a tool for consolidating the region's economic future. Moisés Nairn, editor of Foreign Policy, is senior associate at the Carnegie Endowment for International Peace. Joseph S. T\ilchin is director of the Latin American Program of the Woodrow Wilson International Center for Scholars.

291

The Woodrow Wilson International Center for Scholars Lee H. Hamilton, Director

Board of Trustees Joseph A. Cari, Jr. Esq., Chair. Steven Alan Bennett, Esq., Vice Chair. Ex Officio Members: Secretary of State, Secretary of Health and Human Services, Secretary of Education, Chair of the National Endowment for the Humanities, Secretary of the Smithsonian Institution, Librarian of Congress, Director of the U.S. Information Agency, Archivist of the United States. Private Citizen Members: Daniel L. Doctoroff, James H. Billington, John W. Carlin, Penn Kemble, William R. Ferris, Paul Hae Park, Thomas R. Reedy, S. Dillon Ripley. Designated Appointee of the President: Samuel R. Berger. The Center is the living memorial of the United States of America to the nation's twenty-eighth president, Woodrow Wilson. The Congress established the Woodrow Wilson Center in 1968 as an international institute for advanced study, "symbolizing and strengthening the fruitful relationship between the world of learning and the world of public affairs." The Center opened in 1970 under its own board of trustees. In all its activities, the Woodrow Wilson Center is a nonprofit, nonpartisan organization, supported financially by annual appropriations from the Congress and by the contributions of foundations, corporations, and individuals.

293