IPD Industrial Policy Task Force Competition Policy and Industrial Development Mario L. Possas Heloisa L.

Borges** (Fourth draft) Introduction This study as a whole is about industrial policy, and competition policy especially antitrust is not usually seen as part of an industrial policy framework. On the contrary, they are usually seen as conflicting with each other. Some effort should thus be spent to define what role should be ascribed, under a nonliberal and unorthodox framework, to competition policy within, or at least related to, industrial policy. This will be done in the first section, where the main objectives and scope of competition policy in such a framework will be briefly discussed. Basic theoretical issues will be addressed, which we hope may shed some new light on what is usually seen as conflicts between these policies. In the second section, the experience of selected developed economies, as well as newly industrialized ones, with both competition and industrial policies along their process of industrial development, will be examined. It will focus on the unequal emphasis given to one or the other policy through time by different countries and their specific institutional means of enforcing each one and of linking them. It should be noted that, when addressing developing economies, special concern will be given to newly industrialized ones; economies still in early stages of industrial development will not be discussed. The third section will deal with the implications of the general framework introduced before, as well as of from industrialization experiences, for the design of competition policy in relatively advanced developing economies. An issue to be raised is the changing role of both industrial and competition policy along the process of industrial development. A brief conclusion will follow. It should be underlined, though, that this is a qualitative study that is, limited to identifying and describing patterns of interaction between competition and industrial policies in selected countries. No attempt is made to measure these policies impact quantitatively. 1. Objectives and scope of competition policy as related to industrial policy Although other objectives can be argued, the main goal of competition policy is to sustain or increase competition within a market environment with a view to preserve or enhance economic efficiency and social welfare. Both productive and allocative efficiency are expected to increase with the degree of competitiveness of markets, with the usual exception of natural monopolies or activities considered to need regulation for some reason. It should be kept in mind that competition policy has a much broader scope than antitrust policy, important as the latter may be (and usually is). While antitrust is mainly defensive, being

**

Institute of Economics (IE), Federal University of Rio de Janeiro (UFRJ) Graduate student and researcher, IE/UFRJ.

able to preserve to some extent competitive market structures and conducts, both through prevention and punishment of abuses of market power, competition can be stimulated by many other means, ranging from trade policy ( v.g. reducing tariff and non-tariff protection) and industrial policies to specific technology policies (v.g. R&D and innovation incentives). 1.1. Theory and normative issues Competition policy, in general, and antitrust, in particular, may be viewed as part of a regulatory framework, since they involve some kind of systematic market intervention. On the one hand, what is usually called regulation as such could be seen more precisely as a kind of regulatory policy where intervention measures are continuously active let us call it active regulation -, while antitrust may be seen as another kind of regulatory policy where intervention is not permanent, but only triggered by some specific cause, whether structural or behavioral, and whose means are less pro-active let us call it reactive regulation. For mainstream economists i.e. almost all - the rationale for both kinds of intervention is market failure. From our unorthodox standpoint this is thought to be essentially misleading 1. Markets do not fail because they stand far from the ideal of perfect competition, not the least because the static model of perfect competition is in no way a theoretical or normative ideal, as Schumpeter has shown long ago. The basic reason to support market intervention through active and reactive regulation is to promote competition on normative grounds, i.e., not because competition does not work, but because it could and should, from a public policy standpoint work under greater pressure and with better results in terms of costs, prices and innovative drive. Instead of replacing markets with direct state intervention, which does not work in most instances, a better policy toward markets would be to drive them through appropriate incentive structures, by means of regulation and other competition policy instruments, so as to extract from regular market working, when possible, more than their profit seeking drive would deliver by itself. In other words, to align private incentives with public interest, acknowledging that this is by no means guaranteed in capitalism, as assumed since Adam Smith by liberal economists. In order to reach this target, to search simply for more competition usually will not do, since in many cases this is hard to define, apart from the conventional structural assumptions of a large number of competitors, absence of information asymmetries, etc. A better theoretical approach seems to be to associate the degree of competition of a particular market with better efficiency (including innovative) results from existing competitive structures, regardless of its static morphology. Following Schumpeter, this can be accomplished even in oligopolies if not mostly in oligopolies; and this can only be assessed as well as promoted dynamically, both through time and with dynamic analytical tools. From this standpoint, one can say that liberal economists support free markets for the wrong reasons. They idealize perfect competition for its supposed spontaneous ability to maximize static allocative efficiency, while markets should be seen, since Schumpeter, as powerful mechanisms under appropriate incentives and regulation - to foster economic progress through innovation, which could be understood, from an evolutionary perspective, as a kind of dynamic efficiency that could be called selective efficiency.2 Briefly, it could be defined as an assessment of the extent to which a market, as a selective environment, induces the evolution along any innovative trajectory to be as close as possible to an objectively defined progress along such trajectory. Although there is no room here to go further - and this concept perhaps could
1 2

See the leading paper on this volume, by Cimoli, Dosi, Nelson and Stiglitz, section 1. This could be seen as a suggested normative counterpart of NELSON & WINTER (1982) classical evolutionary perspective.

merit a deeper consideration -, at least the basic idea should be kept in mind: selection is in principle what markets can do best, provided some competition policy is not absent. Normative theory is always at need when dealing with economic policy. And an evolutionary/neoSchumpeterian normative theory needless to say, directed towards dynamic and selective issues, instead of static Pareto-like allocative theorems - has never been carefully addressed, let alone developed. Maybe it is time to put it seriously in the unorthodox agenda. 1.2. Competition policy as industrial policy Competition policy may conflict and often does mainly with two other ones: trade policy and industrial policy. Given that trade policy is designed to protect local industries against foreign competition, not to protect local competition or consumers, some degree of conflict is inevitable and the problem is simply how to manage it when it happens, as long as trade policy is a permanent national policy everywhere. As to industrial policy, it seems that such conflicts are to some degree overestimated, as discussed below. In any case, some of the most conspicuous sources of conflict are already being given much attention and acceptance by antitrust policies, such as interfirm agreements towards knowledge transfer and R&D sharing, provided they are expected to generate substantial efficiency gains and few competition losses for the markets involved. To put it more generally, to the extent that competition is desirable, and to enhance competition in the market environment as well as to increase competitiveness of firms are legitimate goals of any contemporary industrial policy - especially for countries that are already industrialized -, any possible conflicts should be dealt with carefully, trying to take competitive matters into serious account, and not to dismiss them as less relevant. Otherwise, as will be more extensively argued in the last section, serious policy mistakes and even failures may not be prevented. In short, competition policy should be seen as part of, instead of as opposed to, industrial policy, at least in the case of industrialized economies including newly industrialized ones (NICs), but excluding those still in early stages of industrial development, in need of some kind of significant infant industry protection. It should be kept in mind that the latter cases will be left outside the scope of this chapter. T. Jorde and D. Teece (1997:12) give a good general definition of industrial policy, wide enough to encompass competition policy, as suggested above: (...) the aggregate of policies that directly and indirectly affect industrial performance through its impact on microeconomic variables. It seems to be high time to abandon the traditional identification of industrial policy with sectoral policy and/or with protectionism. First of all, a much wider concept is required if one intends to bring into the frame of industrial policy strategic policy attempts to influence the transformation of an existing industrial structure into a more dynamic and innovative one through learning and capability accumulation, as recorded in several cases of successful industrial and technological catch up, e.g. the case of Japan.3 Second, the traditional scope is also too narrow for present concerns with competitiveness in a global context, and at the same time the so-called horizontal policies are in some cases too important for good or for evil - to be left exclusively to liberal economists. The problem with conventional sectoral policies is not that they are wrong or useless, but, first, that they are surely not enough, and, besides, that sometimes they may be very expensive and inefficient as compared

See, for example, JACQUEMIN (1987), ch. 6, for illustrations and some analytical discussion.

to horizontal ones (when the comparison is feasible), and more specifically, to competition policy. Competition policy should be seen, at the very least, as a necessary complement to sectoral industrial policies. But it is arguably more than that - an integral part of it. To improve firms capabilities - v.g. through industrial and technology policies - so that they may succeed in being more competitive in some market environment cannot work by itself, so to say from the supply side, unless the corresponding demand side involves a competitive market environment be it international or even domestic or regional. In short, competitive pressures on individual firms must be hard enough not only to dissipate monopolistic rents, as in the traditional allocative approach, but, more importantly, to induce them to adopt active competitive strategies in order to succeed, instead of just profiting from the incentives provided by industrial and technology policies, with no significant social welfare counterpart. Conflicting issues between competition and industrial policies can also be viewed under the light of the Schumpeterian tradeoff referred to by Nelson and Winter (1982, chap. 14), i.e., the widely accepted fact that aspects of the structure that are conducive to innovation may be detrimental to the achievement of Pareto optimality in the short run (p. 329). This may be particularly relevant for industrial development - our main concern here -, for at least two reasons. For one, since firms in industrializing economies usually face higher risks, from several sources, that may hinder efforts to innovate, to learn or to keep pace with technical progress, and therefore seem to be more sensitive to incentives and resistant to profit margin constraints due to more competition or less protection. A second, and most important, reason is that to increase innovative capabilities of local industries in developing economies usually requires some intensive learning by firms, and this may involve some degree of protection against free competition, especially from potential (local or foreign) entrants, and therefore some degree of conflict with competition policies, at least in the short run. But market structures and innovation are related in many complex ways, and there probably is no straightforward solution to this tradeoff for industrial and competition policy making. Not only is it theoretically doubtful whether an optimal tradeoff level could ever be devised, but any policy designed to substantially change a given industry structure in a predetermined way could be expected to fail, since structure is essentially endogenous to a regime of Schumpeterian competition (loc. cit., p. 333). In this way, antitrust policy as practiced today and as further discussed ahead -, while clearly not sufficient in itself to promote competition, steps on a relatively safe ground when it limits itself to structural intervention to prevent mergers and acquisitions so to say, artificial forms of concentration - from gathering market power and monopoly rents with few or no efficiency gains, as well as to prohibiting anticompetitive behaviors. In any case, market power and monopoly rents as such are accepted and usually not considered illegal when resulting from normal competition, but only when based upon or propitious to abuse of market power or dominant position. Curiously, since the old rigid structuralist approach ceased to rule in antitrust (by the late 1980s), not only neoclassical micro theory, but even the Schumpeterian tradeoff have been to some extent embodied in antitrust law and practice, although the latter, of course, only implicitly. In other words, in the last two decades or so, industry concentration and market power as such have been losing their former prominent place in antitrust policies in favor of a more flexible, analytically oriented, view toward efficiency-enhancing mergers and acquisitions, as well as a greater concern with anticompetitive behavior. It should be noted, however, that this change did not go far enough to encompass typical industrial policy (or trade policy) targets or instruments within antitrust policy. In particular, either protectionist barriers or learning incentives, arguably functional for industrialization, in the 4

former case, or for catching up tecnological frontiers, in the latter, remain outside the scope and objectives of antitrust, although not necessarily (or not always) incompatible with them. After all, this is what one could expect from a complementarity of these policies. Such limits to antitrust policy and instruments may also imply that it may be more difficult to implement or fully enforce them in a context of industrialization or, to a lesser extent, of technological catching up. This kind of timing tradeoff is part of the story told by the experience of many countries in implementing antitrust policy and its relation to existing industrial policies, as described in next section. Anyway, there seems to be no simple answer to such a tradeoff, either. 2. Industrial policy and competition policy: some lessons from international experience Prior to discussing the relationship between competition policy and industrial policy in different countries, a distinction should be made between al least two different scopes under which the label industrial policy has been applied. In a narrower sense, industrial policy refers to a subset of economic policies that seek to provide special advantages or assistance to particular industries or firms. These may include direct or indirect subsidies as well as preferential government procurement and tariffs or other forms of trade protection4. This is the first definition that comes to mind when one refers to industrial policy measures, but it is too narrow to comprehend the present range of policy measures that a government may adopt regarding its national industry. In a broader sense industrial policy involves the formulation of goals for specific sectors or industries as well as a set of coordinated efforts to achieve them. In this sense, the term should be viewed as encompassing the full range of measures that governments employ to promote an efficient industrial structure. These may include the provision of direct support for R&D, training programs, tax policies or other measures directed to facilitate some desired structural adjustment. What is, then, the role of competition policy in the broader approach for industrial policy? Focusing on the economy-wide concept, competition law and policy can themselves be viewed as a key element of an effective industrial policy, as they strengthen incentives for continual innovation and the systematic upgrading of products and production processes that may enhance economic efficiency. Moreover, even under the narrower concept countries usually seen as benchmarks of competition enforcement, such as the U.S., have experienced the more traditional industrial policy instruments sometime along their histories, and it is not uncommon to find debates among policy makers regarding some form of industrial policy when the countrys economic performance was less than satisfactory5. Current thinking on industrial policy and its practice in most countries is quite different now from what it used to be in the past decades. Industrial policy today often means, more than a particular policy, issues that involve the best way to address long-term (or structural) industrial problems of a particular country. This includes the role of government in addressing such problems and whether special programs complementary to fiscal, monetary, competition and macroeconomic policies would be appropriate. In this context, competition policy, instead of an obstacle, should be seen as an integral part of any well-succeeded industrial policy.
4 5

See McFETRIDGE (1985). One example is the intense debate that took place in the U.S. during the first half of de 80s, when U.S. industries were losing competitiveness against the Japanese industry (especially in the technology intensive and automobile sectors). As the public opinion claimed for some kind of government action, the Reagan Administration presented an industrial policy plan, later discarded.

The problem for both academicians and policy makers is that most of the mainstream economic theory fails when applied to industrial policy. Stylized historical wisdom holds that over remarkably different scenarios, completely different levels of integration between competition and industrial policies - varying from no competition policy along with a strong interventionist industrial policy, to a strong competition policy combined with the absence of industrial policies, and all in between -, may have led to essentially similar industrial development results. A good old example is the development of railroads in the XIXth century 6. In the U.S., a policy centered in autonomous local communities was the formula for success. Railroads were built in response to local demand and heavily subsidized by local governments. Federal action was almost null, except for a brief period (1862-1872) of land-grant subsidization, and for the antitrust measures that came in by the turn of that century. In this case, free initiative and competition, with the help of local state subsidies, was responsible for the expansion of railroads. In France, by contrast, prevailing economic and political beliefs were that a centralized public administration could produce more rational and effective development. The state agency Corps des Ponts et Chausses planned a Paris-centered network and closely regulated private interests to eliminate competition and ensure a state directed development. In the midway are British railroads. While U.K. was closer to U.S. for her liberal acceptance of economic progress relying on strong individual initiative under a noninterventionist state, the primary duty of the state has been to prevent rough competition from undermining the viability of private business. Neither the central state nor the local government initially had much to do with railroads. But when the state finally came into the business, most of its effort was toward supporting small firms by fixing prices and encouraging cartels that would allow weaker companies to survive through cooperative arrangements - i.e., putting aside competition concerns in favor of a desired path for the development of the industry. This particular example shows that in developed countries, different combinations of industrial and competition policies were able to lead to similar results in implementing a nationwide major innovation which was at that time crucial for their economic development. Supporters of an activist industrial policy usually choose the path of a more interventionist role for the government in solving industrial problems and rationalizing policy toward industry. On the other hand, supporters of a more pro-competitive, free-market policy argue that government intervention is already excessive and that it may be part of the problem. They often hold that industrial policy is inappropriate because economic growth can be achieved through pro-competitive tools and the enforcement of antitrust rules, among others. Nevertheless, it is hard to find a single developed country that has adopted strictly one of these policy directions to the complete exclusion of the other in its development. Industrial development paths have consistently been characterized by the interaction (on different levels) between competition and industrial policies, and this relationchip has changed over time. Taking into account roughly stylized levels of industrial and competition policies adopted for different countries, it is possible to suggest a taxonomy, as shown below. Industrial development paths could thus be classified in four broad types, according to the prevailing relationship between industrial and competition policies7.

6
7

See DOBBIN, F. (1997). One must keep in mind, however, that this taxonomy is not a very rigid one. Most countries pattern of interaction between competition and industrial policies changed over time, and according to the focus of the analysis.

Table 1: Types of Interactions between Industrial and Competition Policies

I DESCRIPTION Predominance of Industrial Policy. Direct state intervention (as a rule), market protection and incentives to national companies. EXAMPLES France, Portugal, Spain, Italy (before the E.U.), Korea, China, India and Asia in general. Also most Latin American countries until the 1970s. US, Canada, Germany, Australia.

II

III

IV

Predominance of Competition Policy. Absence of direct state intervention (as a rule), and development of an industrial sector in a competitive environment. Emphasis in Industrial Policy. Japan, Korea, China, India. There are antitrust rules and a structured competition policy, but for some industries (less developed) there is a non-official exception from the rules (whose enforcement grows in time). Coexistence of Industrial and Competition Policies. United Kingdom and There are mechanisms of legal exemption for particular European Union. sectors.

Source: Own research.

Differences in patterns of competition and industrial policies can be observed both across time and across jurisdictions, illustrating divergences in policy objectives underlying the application and enforcement of economic policies over time. It should be stressed that no single experience exactly corresponds to any other, so that differences can be found inside each class. For instance, in Japan competition rules are now enforced in the industry as a whole, while in the U.S. there still are exemptions to antitrust rules or government direct actions towards specific sectors. For this study a few countries were selected. As the objective was to identify different patterns of interaction between the two policies, as well as to present experiences both from developed and developing countries, an additional effort was made to select countries from different regions which had already gone through some industrialization process8. As expected, Differences differences in competition and industrial policies were observed both across time and across jurisdictions, illustrating divergences in policy objectives underlying the application and enforcement of economic policies over time. It should also be borne in mind, that the differences in the framework in which competition and industrial policy interact in developed and developing countries are rather contrasting. Most industrialized developing economies built their industrial structure under interventionist regimes and circumstances of high liquidity in the international financial markets. 9 Competition laws, when existent, were not enforced, and only rarely there were coordinated competition policies as such; usually, competition regulations were restricted to protection of
8

As mentioned before, it is assumed, for the purpose of the present analysis, that there is room for interaction between competition and industrial policies. Economies in very early stages of industrial development were therefore discarded. 9 See STUDART, R. Dollarization: right issues, wrong questions and dangerous answers. Paper prepared for the Seminar Dollarization in the Western Hemisphere at the North-South Institute; available at http://www.nsiins.ca/ensi/pdf/10_studart.pdf

consumer rights or the punition of illegal commercial practices. Industrialized developing countries, therefore, were led to the implementation of competition policies in rather different conditions than developed economies, and even among them there are particularities that influenced the nature of the competition laws and the character of the policy implementation. Often they were part of the IMF or the World Bank conditionalities, which pushed most developing economies to pass competition statutes during the last 10-15 years 10, a phenomenon that was simultaneous to the deregulation and liberalization of domestic trade as part of a global reform agenda for these economies. Finally, as in developed countries both industrialization and competition policy implementation began earlier, it is sensible to draw conclusions mostly from their experience. In most developing countries, neither the industrialization nor the introduction of competition have been completed, so it can be too soon to get conclusions from their preliminary results11. 2.1. Industrial and competition policies in the U.S. The United States are the most obvious example of a highly developed economy adopting antitrust legislation as a prominent part of its national economic policy framework. U.S. antitrust laws have been a centerpiece of the countrys economic policy for over a century, and its competition policy is often taken as a benchmark for assessing policies in other countries. When considering U.S. market policies attention is necessarily drawn to its well established tradition of free market and strong enforcement of antitrust rules. However, there were instances in the XXth century when industrial policy mechanisms have been used, even though they were not always presented under this particular label. Since the Sherman Act was passed in 189012 and the current institutional structure was created in 1914, competition policy in the U.S. has been lying mostly on two federal antitrust agencies, FTC (Federal Trade Commission) and DoJ (Department of Justice) Antitrust Division , each with its own functions: the latter with criminal enforcement power (price fixing and cartel behavior) and playing an active role in shaping competition policy, and the former more focused on structural issues and their implications for consumers13. In part due to its long history, competition policy in the U.S. is far from uniform. In short, U.S. competition policy has changed, mainly through attitudes towards the relationship between the state and the markets, shifting coalitions behind or against specific policies and changing economic environment and theory14. The strong tradition of competition policy in U.S., however,
10

According to SINGH (2002), until 1990 only 16 developing countries had formal competition policies. During the 1990s, with encouragement and technical assistance from international financial institutions and the WTO, 50 countries have completed their competition legislation, and another 27 are in the process of doing so. 11 According to SCHERER (1994), it takes about ten years for countries to acquire the necessary expertise and experience to implement competition rules effectively. Some experiences shown in here have just now completed this period, as others (the Indian experience, for instance) have just been implemented. Therefore, there is plenty information about policy designs and very little information about policy implementation on some countries. This paper has not, then, very precise evalutations on the policy implementation on Latin America and Asia. 12 See FOER, A., LANDE, R. (1999). 13 Competition policy is also strongly influenced by private enforcement of the Sherman Act and the Clayton Act, through the advices that private bar and economic consultants do to firms on how to accomplish business strategies within an antitrust and competition policy environment. Besides, within a Common Law system as in U.S., competition policy is also influenced by judges, usually federal and most importantly Supreme Court justices, as they sit in judgment of specific cases. 14 Towards the early 1970s it was focused on supervising big corporations and preventing the rise of cartels as a way to protect consumers and small firms - see McCRAW, T. (ed.) (1997). Their action, though more pragmatic than

did not prevent the active implementation of industrial policies from time to time particularly in the building of industries, during depressions15 or whenever economic development was considered more important than competition in some particular market. Nowadays, the U.S. does not have a coherent, comprehensive industrial policy 16. To the extent that the government engages in some economic planning, it undertakes it with a relatively small executive office staff of the Presidency, but nowhere is there a sizeable group of people, having real authority, who make policy regarding the long-term pattern of economic (particularly industrial) performance17. Nonetheless, the country does have an industrial policy in the broader sense mentioned before the government pursues many policies that together strongly influence the course of industrial performance18. U.S. has, in fact, a long history of industrial policy, which is easily confirmed by the extent to which the state variously supported the growth, development, and sustenance of the aircraft, airline, railroad, motor carrier, shipping, agriculture, oil, and banking industries. One of the most impressive examples of how the U.S., besides competition being the general rule, does soften it a little in order to implement industrial policies is the technological policy implemented through national defense. The defense industry, and the R&D policy implemented through it, can hardly be considered competitive: it is both an oligopolistic and a monopsonistic market, and yet it differs significantly from the traditional corresponding theories, since in this case buyer and sellers have a mutuality of interest19. To stimulate R&D the U.S. government has, more than once, proposed R&D tax breaks and looser antitrust laws that permit more pooling of efforts among companies20.
most academics would prefer, was based in a strong belief in the so-called Structure-Conduct -Performance model, and guided by the two corresponding main indicators, market concentration and profit margins. Antitrust authorities directed their actions towards two main objectives: to promote, whenever possible, market de-concentration and to fight commercial practices that resulted in prices above competitive levels. From the late 70s there was a major change in the direction of antitrust policy, when critics from the Chicago School to the former model heavily influenced government action. The focus now was directed to distortions in the competition process, generated by barriers to entry, information asymmetries and market power. Protection of small firms are no longer relevant, and consumers were now supposed to protected by efficiency and transparency of the markets. In the beginning of the 90s
another change took place, when antitrust enforcement became a topic in U.S. multilateral agenda. As a result, a broader normative scope was introduced into traditional competition policy concerns, so as to encompass virtually any government action that could affect competition, like trade and investment policies, regulation, and tax incentives. Present competition policy is also concerned with the coherence of different public policies.
15

The National Industrial Recovery Act, for instance, was central to the New Deal recovery effort. It was an attempt to promote economic stability by means of an integrated regulatory framework governing production and pricing across sectors. Antitrust was largely eclipsed during this period.
16

The absence of a comprehensive industrial policy is not an accident, but a policy choice, since U.S. economic tradition is known for its emphasis on free markets and competition. But occasionally the intervention of the government in a particular industry has been a contentious political issue.
17

There are no institutionalized means of coordinating economic programs in more than a cursory way and comprehensive coverage of all industries, localities, and technologies (but along history one can find a patchwork of policies intended to fix specific problems). 18 A recent example of this kind of government activism was the Clinton economic program, that used taxes, subsidies, and credits to induce changes in the private sector behavior. 19 Defense demand is created basically from military requirements for more advanced weapons systems or from new technological opportunities, usually developed by a contractor; and the amount purchased is determined by the Congress. 20 In the U.S., this kind of government action towards technological advances is mostly (but not exclusively) handled by the Department of Defense, and in particular by the Defense Advanced Research Projects Agency (DARPA). There are also other agencies, as the Department of Commerce and Department of Energy, which also play important roles in the promotion of new technologies e.g. the research for a highly fuel-efficient automobile or high-

The general policy view of industrial problems is one of managing aggregate levels of investment, employment, and economic growth and guaranteeing competition. There are, however, a large number of programs, such as those mentioned above, that provide support to specific forms of industrial development21. It should be emphasized that these options are not incompatible with solid competition policies. In the United States, actually, the state action doctrine allows the states to displace competition policy when there exists a clearly articulated state policy (transparency) that is exercised under strong state supervision22. In sum, there is little interaction between industrial and competition policies in the U.S. Competition policy prevails over industrial policy, but there are also examples (although not many) of how this country has been able to adopt industrial policies by softening competition policy if necessary through building or aiding specific industries, either in order to overcome current difficulties, as in New Deal, or to catch up with other countries industries, as did policies for the automobile industry in the 1980s, or even to guarantee technological supremacy, as is the case of current R&D policies. 2.2. Industrial and competition policies in the European Union Europe has had different experiences with industrial and competition policies. Before the European Union (E.U.), most of its countries already had a complete industrial structure, but far from a homogeneous one. In many countries such as Italy, France and U.K. - governments decided to nationalize their basic industries to protect them from crises. A quarter of a century ago, present E.U. member states were still characterized by country-specific patterns or models of economy relations, including the role of the State 23. Some of them (e.g. the French one) were rather distant from the U.S. model of a modern market economy, while others (e.g. the German) were closer. Since then, a major change has taken place in Europe as a consequence of (i) the extension of E.U.-wide economic legislation within the framework of the Common Market, (ii) the delegation of some major policy functions such as competition policy and monetary policy to E.U. institutions, and (iii) softer forms of intra-E.U. convergence through harmonization and community pressure in fields such as privatization and fiscal policy24. As a general overview of the E.U. case, we will highlight very briefly some aspects of two opposite experiences, the French and the German 25, concluding with an outline of the current framework from the standpoint of the interaction between the different policies. 2.2.A) The German experience
temperature superconductivity (HTS) as does the Office of Science and Technology Policy. The Congress has also supported research through a variety of tax subsidies and funding programs and through building facilities and testing prototypes, particularly in defense and energy projects. Support for R&D is usually justified on the grounds that private firms tend to underinvest in these activities. Federal support has played a major role in the development of the agriculture, aerospace, communications, nuclear energy, and computer industries. 21 This country still retains a large margin for discretion: although it has moved away from industrial policy, instruments are still in place. Defense and Research budgets are far more significant than those of the E.U., Japan, or other countries considered to be traditionally interventionists. 22 LIANOS (2002). 23 See COHEN, E., PISANI-FERRY, J. (2002). 24 DOBBIN (1997).
25

These experiences are extreme positions of the multiple combinations of industrial and competition policies that were put in practice in Europe. Most of the others can be, with some adaptation, viewed as combinations thereof.

10

More than any other Western European country, industrial development in Germany has been marked by political, economic, and social upheavals. The years between 1914 and 1990 included the First World War, inflation, the Weimar economic recovery, the Great Depression, National Socialist re-armament, the Second World War, the post-war occupation, the emergence of the Federal Republic of Germany, and the nation's reunification. With so many economic turnarounds, one would think the government would have a very active role in the economy. However, Germany is probably the only country in Europe where competition policies are the most important aspect of economic policies in general. In that country, an effective competition policy is believed to contribute positively to industrial competitiveness, and among European governments, the German one was the least interventionist since the post-war reconstruction. There is very little interaction between industrial and competition policy in Germany. While the national government has occasionally played a developmental role in the economy, this type of industrial policy intervention has always been the exception rather than the rule. One may find very few examples of targeting sectors and building large companies (national champions) in its case - common practices in countries such as France or Japan. German competition law the Act against Restraints of Competition [ARC] was adopted in 1958. It initially focused on dealing effectively with the threat posed by cartels, other affiliated groups of firms and trusts to Germany's economic recovery and reconstruction. From its very beginning, exempting sectors from competition rules in the name of industrial interests was not accepted. In 1973, the scope of the ARC was broadened to include statutory provisions to control anticompetitive mergers, and competition has been the rule in there since then.26 As to institutional structure, the German system is based primarily on bureaucratic and judicial rather than on Ministerial authority. This may explain the relatively small political intervention found in Germany27. The Bundeskartellamt (Federal Cartel Office) is the main authority, and within it the authority is extensively decentralized28. As for German industrial policy, there is no consensus on the role of the national state. One view is that successful experience is attributable to the capacity of industrial companies to coordinate through intercorporate linkages (particularly with banks); the state, then, would have played only a secondary role in subsidizing the costs of adjustment. A second interpretation is that the successful industrial development was based on the development of regional economies in which local and regional government are key actors. Finally, some scholars hold that the German success is owed to the increasingly competitive environment and the gradual reduction of the role of national government. Although no one contests the fact that government played some role, how big it was is the main issue here, but it is undeniable that the German state had at least an enabling role through the support of institutions and policies with a generalized impact on industry as a whole, particularly by providing public support for industrial finance and influencing the credit allocation process.

26

Traditionally, behavioral concerns such as the control of exclusionary and discriminating practices of dominant firms have been given less emphasis in German competition law and policy (see Industry Canada, 1995). 27 But there are exceptions. In some cases, explicit Ministerial control is allowed, such as the authorization for the Minister of the Economy to override particular decisions by the Cartel Office prohibiting a merger. 28 Decisions respecting individual enforcement matters are normally taken at the level of Decision Divisions. Such decisions can be appealed to the Court of Appeals or further to the Federal Supreme Court (as matters of law).

11

In Germany, with the excuse of reconstruction 29, state targeting of credit to specific sectors has been limited to low interest loans and loan guarantees for financing restructuring plans, such as in the shipbuilding and steel industries. Also, the state has actively supported the development of the banking system's capacity to supply long-term finance to a broad spectrum of companies30. In these cases, competition policy was neither left aside nor relaxed the recovering industries are subject to it in all its extension. In Germany, then, it is observed a predominance of competition policy mechanisms over industrial policy mechanisms. I.e., as a general rule, direct state intervention is not observed on the German industrial development, as the industrial sector was established in a competitive environment. Thus, in the taxonomy proposed in the beginning of this section, Germany could be a type II country31. 2.2.B) The French experience The French ordinarily claim precedence in inventing the concept of industrial policy, so important it is in the perspective of economic policies the French government has applied. Competition policy, on the other hand, was not a very strong aspect of the French economic environment until it became an imposition from the E.U. Among its countries, even now France is one that gives the least importance to competition policy, with many sectors, industries or even particular companies exempted (officially or not) from the competition rules. In order to grasp the basics of French industrial policy model one must not disregard two critical features of its environment: the very powerful nationalist ideology, which explains many protective policies until the present time; and the particularities of its capitalism: as private investment was less than required to launch big companies or new technologies, whenever the French government wanted to ensure the countrys presence in key industries it had to finance that choice. In the post-war period, industrial policy in France was conducted largely within the framework of indicative planning, with emphasis in the construction of a modern industrial basis32. During the 1960s it strongly engaged in targeting, focusing its favors to few companies in a few industries, corporate national champions. More recently, industrial policy moved away from targeting, trying to substitute horizontal for selective policies. According to the French government official speech, competition policy is now an important aspect of national economic policy. Prior to 1975, however, it was largely displaced by interventionist economic policies that included price controls, extensive subsidization of key industries and centrally planned restructuring of firms. Since then, competition has been playing

29

According to S. VITOLS (1997), the German state had a crucial role in the postwar reconstruction, through the allocation of Marshall Plan funds as loans for the reconstruction of key sectors. 30 The German state created a number of institutions and programs to boost the supply of long-term finance.
31

It should be noted, however, that while nowadays competition policies are extremely important among the German policies, during the countrys industrial development, although the government did not intervene directly in the economy, it acted in close association with banks, labor unions, and the local municipalities ( see ZYSMAN, 1983, and STREECK, 1992). 32 Even before the War there were sectors in the French economy that relied mostly in the government for their development, like automobiles and aircraft - both developed during World War I in response to massive government subsidies.

12

an increasingly central role in French economic policy, and is now well established in the law and policy frameworks. Frances competition authority is the Competition Council33, an independent administrative authority founded in 1986. A new competition law was published in 2001 - the New Economic Regulations Act - that, together with the Code of Commercial Law, set the competition rules in the country. This Council has only consultive and litigating powers, being responsible for the final decisions on competition matters. Competition policy guidelines are set by the Direction Gnrale de la Concurrence, an office of the Ministry of Economy, whose chairmen represents the French government in the Council meetings. Broadly speaking, the French approach to competition policy seeks to provide for appropriate control of anti-competitive mergers and other arrangements, but shows greater acceptance to arguments regarding their dynamic benefits than is evidenced in other jurisdictions. Alternatively, the country has not abandoned government direct intervention on the economy, having still several state companies and a clear government orientation towards industry promotion (through the Ministry of Economy, Finance and Industry)34. France, then, chose a pattern of interaction of industrial and competition policies characterized by the predominance of industrial policy and by direct state interventions combined with mechanisms of market protection and incentives to national companies to develop its industrial sector. This behaviour, however, has been changing in the last two decades notably in order to adjust to the E.U. competition rules. France would thus be a type I country, with national champions in many sectors benefiting from the non-application of any kind of competition policy while they were promoted. The interaction has been changing in the last two decades in order to adjust the French pattern to E.U. rules. 2.2.C) Industrial and competition policies in the European Union Regarding competition and industrial policies as instruments of economic policy, the European Community provides a model which differs from the ones adopted by its member states. The state aids control in the European Union can be viewed as a combination of competition rules and industrial policy regulation, placed in the hands of a single agency, the European Commission (EC)35. As to competition policy, it shows an extremely high degree of integration with broader economic policy goals. From its inception, EC competition policy has been deliberately employed as an important instrument to foster the integration of the European market. EC competition policy has a wider scope, encompassing state aids to industry that distorts competition as well as business practices 36. In addition, the Commission publishes regular reports on the incidence and effects of these aids. E.U. competition policy aims at preventing excessive market power and other distortions applying to intra-E.U. trade. In practical terms, no attempt is made to interfere with national competition policies as long as they relate only to domestic competition and do not have an appreciable impact on actual or potential trade between E.U. member states.
33

Before it there was the Competition Commission ( Commission de la concurrence ), which was created in 1977 as a replacement for the Technical Committee on Cartel Agreements and Dominant Positions. 34 This pattern is gradually changing to adapt the E.U. rules. The transition, however, is not yet completed. 35 LIANOS (2002).
36

Articles 90 and 92 of the Treaty of Rome deal with state ownership and aids to industry. In principle, state aids and subsidies are prohibited by the Treaty, but many derogations were allowed by the Commission since 1988.

13

The EC has also industrial policy powers, granted for the first time by the Maastricht Treaty. In 1989, the role of the Commission in the control of industrial concentration was significantly enhanced by a new Council regulation. At that time, there was a discussion on how industrial policy concerns could be taken into account in competition policy decisions. However, the Commission case-law has consistently refused to consider potential trade-offs between competition and industrial policy concerns. Over the years, the predominance of concerns relating strictly to the competitive functioning of markets has been confirmed by a series of cases, although there are some exceptions. At the national level, industrial policy in the E.U. is subjected to the mandatory competition rules of the Community. These rules dictate neither goals nor instruments to domestic industrial policies, but define some preconditions to such policies. The rules for industrial policy in the E.U., then, act in a prohibitory way: they dictate what countries cannot do, and therefore the EC uniformized to some extent national industrial policies. Taking Europe as a whole, the EC aims simultaneously to ensure full competition within the member states while also trying to promote European companies to compete in the global market. In fact, industrial policy is not explicitly dealt in the E.U. treaties, although there are some examples. Direct E.U. subsidies tend to go mainly to R&D, through various programs designed to increase the level of technological collaboration and co-ordination across member states. An explicit commitment to encouraging R&D became one of the foundations of the Single European Act (SEA) in order to narrow the perceived technology gap between E.U. countries and US and Japan. Industrial policy in the E.U. also tends to favor certain sectors, with specific policies for areas such as textiles and aircraft. The guidelines for state aids to particular industries are also determined through a negative approach: article 87 of the Treaty of Rome determines the incompatibility of state aids with the common market principle, but it also defines the exceptions allowed - among them, authorizations for incentives to particular regions or economic activities. In practice, most of them are given to regional incentives, and although competition is the rule, there are also authorizations for horizontal industrial policies (incentives for sectors are uncommon, but they also exist). This kind of discussion, however, is not held inside the Competition Commission; documents dealing with industrial policy directives are often found in other departments37. A conclusion could be that there is some interaction between industrial and competition policies within E.U., but one in which competition delimits the scope of industrial policy. In E.U., industrial policies are not a discarded practice there are still a great number of documents referring and discussing its implementation, and most of them do not put industrial and competition policies in antagonistic sides, but rather present them often as complementary policies towards a particular countrys development38. 2.3. Industrial and competition policies in Asia The Philippines were the first Asian country to introduce a competition law (under U.S. rule in 1925), followed by Japan in 1947. Most countries, however, enacted competition laws in the 1980s and 1990s, adopting antitrust rules as a combined set of competition and unfair competition laws regulating business behavior.39
37 38

Some examples are CCE (1994), CCE (1994a) and CCE (1998). This particular approach is presented in the Commission Paper CCE (2002).

39

See Symposium on APEC Competition Policy, Washington U. Global Studies L. Rev., V. 1, Nos. 1 & 2, Winter/Summer 2002; individual articles available at http://law.wustl.edu/Publications/WUGSLR/

14

The first Asian experience to be examined is Japan. This country has an interesting experience both for its successful industrialization and growth strategy as for its singular type of policy interaction. Then, the Chinese and the Korean experiences will be briefly examined, as well as the infant Indian competition policy. The four Asian experiences have distinct patterns of interaction between industrial and competition policies. In Japan the industrial development was characterized by the emphasis on the Industrial Policy associated with the existence of antitrust rules and a structured competition policy that comprised non-official exceptions for some industries. Today, however, the country seems to have chosen a pattern based on the coexistence of industrial and competition policies. China and India, on the other hand, have shown a predominance of industrial policies based on the direct state intervention, with some (recent) competition concerns. Finally, Korea seems to be going through a changing process towards the Japanese path of interaction between competition and industrial policies. As will be shown, Japan would be a type III country in our taxonomy, while China and India are type I and Korea seems to be approaching a type III interaction, where antitrust rules and a structured competition policy co-exist with non-official exemption for some industries. 2.3.A The Japanese case Japan had coherent and systematic industrial policies over many decades. National government has played a critical role in formulating and implementing policies, but such role has changed over time according to each stage of industrialization. Early in the twentieth century Japanese government took the initiative to develop key industries and to build an infrastructure to foster industrialization, being an active part in introducing advanced technologies, setting up modern industrial plants and infrastructure, as well as educational systems and training centers. As industrialization proceeded, the private sector began to take risks and initiatives, and the economic policies towards industries changed with it. For most of the post-war years, the chief goal of Japans economic policy has been development and growth, and free competition has sometimes been seen as inconsistent with that goal. Indeed, although Japan has had a competition law since 1947 (Act Concerning Prohibition of Private Monopolization of Fair Trade, known as the Anti-Monopoly Act AMA) throughout the 1960s, 1970s and 1980s, its competition policy was largely subordinated to policies promoting industrial and trade objectives40. Important sectors of the Japanese economy were dominated by officially accepted cartels. It is widely known that most of the credits for the miracle of Japans post-war recovery and its rise to the status of an economic superpower go for the Ministry of International Trade and Industry (MITI) and its interventionist industrial policies. Competition policy was assigned to a separate agency, independent of the government but politically not strong enough to promote its policies effectively the Fair Trade Commission (FTC) as compared with the ministries that regulate industry and investments. Despite fostering its national industry by suspending the

40

According to OECD (1999), while antitrust legislation existed since 1950, it went essentially unenforced. Many sectors had centrally guided investment and there was a proliferation of explicit exemptions and implicit guidance. It was not until the end of the 1960s that the FTC tried to block a merger that another ministry promoted, and only in the 1970s that it applied the laws criminal punishments against price fixing (in response to the oil shocks). In general, FTC actions were an exception in the Japanese economic development: in the 1970s, it took an average of 34 formal actions per year, and 11 in the 1980s.

15

competition law effectiveness, however, Japan adopted alternative policy measures aimed at preventing rent-seeking behaviors41. Nonetheless, the Japanese system of competition law and policy and its relation to broader economic objectives have changed considerably in the last decade. Mostly in response to international pressure - particularly in trade disputes with the U.S. 42 -, Japan adopted several measures to strengthen its competition law and enforcement capabilities, adopting explicit commitments to increase the resources and the visibility of competition enforcement. As a result, in 1991, the FTC made a formal cartel prosecution for the first time in seventeen years. The Antimonopoly Law now looks rather similar to the Western model, and the FTC has improved its enforcement record. Industrial policy in Japan, at the same time, changed its focus from protective policies to policies toward competitiveness enhancement thus more compatible with competition rules 43. Until now, however, although there is no general exemption from the competition law, the latter cannot reach effectively most of the governments actions, as competition authorities only deal with voluntary action (so, if a specific statute governs an industry, conduct in accordance with it or an order properly issued under it does not violate the law). A recent development worth noting is the limit set by FTC to potential anti-competitive effects of administrative guidance through guidelines indicating which conducts violate competition and suggesting Ministries to consult with the agency before adopting sector specific measures. Japan may now be heading to a type IV kind of interaction between industrial and competition policies. 2.3.B Industrial and competition policies in China Chinese economic policy can be characterized by high levels of intervention and the intense use of control mechanisms by the government, and until now central planning mechanisms can still be identified. An industrial policy has been formulated at the national level and implemented both at the national and local levels in almost all sectors of the Chinese economy44. As a socialist economy and also as a result of its central planned economic policies, China did not have a competition policy until the early 1980s. Even nowadays, the country has no antimonopoly law: provisions controlling monopolies and anticompetitive conducts are distributed among different laws, rules and regulations 45. Nevertheless, even a cursory look at the Chinese competition policy (or the absence of it) reveals that what the government calls competition rules are, in fact, an assemble of illegal commercial practices prohibitions only in some cases
41

AMSDEN, A., SINGH, A. (1994) argue that the Japanese government pragmatically managed competition during the 1950s and 60s in domestic key industries. Additionally, according to EVENETT (2005) most of MITI policies during this period were characterized by a bias against competition, implemented through the agencys use of administrative guidance to firms and industry associations. 42 The perceived laxity of the enforcement of competition law in Japan was a major concern pursued by the U.S. in the Structural Impediments Initiative (SII) a set of bilateral negotiations initiated in 1989 to address outstanding obstacles to trade and investment between the two countries. 43 Its industrial policy evolved from sector promotion, thus excluding the application of competition policy, toward policies focused on innovation issues, where competition policy is better applied and accepted by other government agencies. 44 See LUI, Ling, Chinas industrial policies and global business revolution: the case of the domestic appliance industry. Asian-Pacific Economic Literature 19(1), 86-106, May 2005. 45 LIN (2002). The most important are the 1980 Regulations on Development and Protection of Competition, the 1993 Unfair Competition Law and the 1998 Price Law.

16

related to competition. There is no single bureau accountable for competition in China, and there is also no evidence of an active competition policy as defined here. Chinese government has been discussing a Monopoly Act for years now, even though there is no consensus about how to introduce further competition46. In sum, there is no interaction between industrial and competition policies, but rather a complete suppression of competition rules under a strongly interventionist central planned industrial policy, replacing the former role of central economic planning. 2.3.C Industrial and competition policies in Korea The Korean experience, both in industrial and in competition policy, is highly similar to the Japanese one. Korea had a strong, active industrial policy which dominated competition policy as the government encouraged and subsidized the growth of large corporations, the chaebol47. As the national goal was fast economic growth, industrial and trade policies targeted towards maximizing local firms investment and market share in the global market took priority over other policies. On the other hand, although Korea has had for a considerable period of time an official competition policy, as well as competition laws, as a result of its lax enforcement the country has reached one of the highest levels of industrial concentration in the world48. As the official government discourse concerning Korean economic policy began to shift in the early 1980s, Koreas competition policy began to evolve. Its goals were, nevertheless, broad enough to encompass programs like those of the previous period (structural intervention and regulation) as well as those of market-based reform. The current antimonopoly law is the 1980 Monopoly Regulation and Fair Trade Act (MRFTA), and the responsibility for its enforcement was given to a new agency, the Korea Fair Trade Commission (created within the Economic Planning Board) 49. Even though it was designed to mark a significant departure from the tradition of a government-led economy to a market economy based on private initiative and competition 50, the price control tradition and experience engulfed the MRFTA early application, as price stability was still a strong policy concern.51 In 1990, decision-making in competition law-related matters was shifted from the Minister of the Economic Planning Board to the KFTC Chair, and in 1994 the government abandoned the five-year plan system and abolished the Economic Planning Board, merging it with the Ministry of Finance into a new Ministry of Finance and Economy, from which the KFTC emerged as an independent body reporting directly to the Korean Prime Minister. At present cartels are still tolerated and exceptions to the competition laws and regulations are current practices in the Korea 52. In addition, several aspects of Korean competition policy are
46

XIAOYE (2002). CHANG (1994). 48 SINGH (1999) holds that in the era of state-led economic growth, several markets in Korea were controlled, directed, and protected by the government. 49 The MRFTA covers all traditional issues of competition policies, like anti-competitive M&As, cartels, resale price maintenance, monopolization, attempt to monopolize and exclusive transactions. In addition, the law addresses unfair trade practices, undue subsidies/debt guarantees/equity investment among affiliates of large business groups (Korea Fair Trade Commission - http://www.ftc.go.kr/eng/laws/statutes.php). 50 Ibidem. 51 According to WISE (1993), the government paid special attention to prices in concentrated industries, where market leaders were to report price changes in advance pursuant to informal administrative guidance, not legal obligation. The Economic Planning Board monitored prices until 1993, and reportedly used the process to stabilize prices. 52 In 1999, the Omnibus Cartel Repeal Act eliminated the statutory authority for 20 cartels that were excepted from the KFTC actions, but although some of these were effective immediately, others will be phased in over a period of
47

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designed not to promote competition, but to protect the interests of small and medium sized businesses53. Furthermore, while in principle the MRFTA applies to all industries, and exceptions for a few industries were abolished in 1999, some cartels remain protected by particular statutes. In 2003 the Korean government made another attempt to enforce competition by laying a Three-Year Market Reform Roadmap as a proposal for a more transparent market economy. In order to help the implementation of the Roadmap, the MRFTA and its Enforcement Decree were revised and entered into force on April 1, 2005 with three main objectives: promotion of market competition, improvement of regulation on large business conglomerates and strengthening of market self-regulation. The Korean competition policy at present is a mix of competition concerns and other 54 ones . Mechanisms guaranteeing competitive markets are still being implemented, which leads one to conclude that there are no identifiable competition policy results to analyze in the Korean experience, since market competition has been the exception and prices (as the economy in general) were strictly controlled by the government. The country seems, however, to be now following the path Japan has chosen, i.e. to enforce competition rules selectively through time. 2.3.D Industrial and Competition Policies in India Like Korea and China, India had its government traditionally taken a significant part in industrialization, trying to guide industrial development through centralized planning and industrial policy measures, such as protecting and/or subsidizing some industries55. The 1951 Industrial (Development and Regulation) Act (still in force) empowers the State to control the direction and pattern of public and private investments.56 Trying to reach the economic results achieved in East Asia, in 1991 India introduced an economic reform the New Economic Policy, or the New Industrial Policy that covered a wide range of areas57, adopting a late import substituting industrialization strategy and traditional industrial policy measures which were afterwards softened by the increase of competition, introduced by trade reforms that enhanced import competition 58. Nowadays the countrys industrial policy objectives are mostly reduced to economic growth59. India had a competition law the Monopolies and Restrictive Trade Practices (MRTP) Act that was applied by the MRTP Commission ultimately as a barrier to import competition 60.
years. 53 A justification often presented for the controls on the chaebols is to protect small business. Also, among the many exemptions from the MEFTA application, the most important ones regard the programs to protect small and medium sized businesses (not related with an explicit industrial policy). 54 Such as consumers rights, development for small-and-medium-sized enterprises, and controlling unfair commercial practices. 55 See SHARMA, JANSSON and SAQIB (1991). 56 CHAKRAVARTHY (2004). 57 There were measures seeking the withdrawal of the state from several economic activities, the gradual privatization of public companies, the implementation of open-door policy measures e.g. the elimination of import quotas on raw materials (characterizing a shift away from the protective industrial policy) and policies concerning foreign trade, foreign investment (relaxation of the restrictions on the inflow of foreign capital), and technology transfer (PARK, 2002). 58 BHATTACHARJEA (2004). 59 According to the Department of Industrial Policy & Promotion website (http://dipp.nic.in/), the objectives of the Industrial Policy are: i) to maintain a sustained growth in productivity; ii) to enhance gainful employment; iii) to achieve optimal utilization of human resources; iv) to attain international competitiveness and v) to transform India into a major partner and player in the global arena. 60 BHATTACHARJEA (2003).

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In 2002 a new Competition Bill was passed61 which created a Competition Commission. From an antitrust standpoint the new law seems rather incoherent, as it gives the Commission powers to take action against restrictive trade practices (such as cartels) by restraining imports, and expressly allows firms that contributes to economic development to cause adverse effects on competition62. The same argument is considered when examining the criteria for determining whether mergers or acquisitions have adverse effects on competition. Furthermore, since development (like the public interest) can be considered a matter of subjective assessment, these provisions allow the Indian government to circumvent the Competition Bill by arguing the contribution to economic development as a justification for allowing anti-competitive actions. Finally, the Competition Bill introduced exceptions/justifications into Sections 3 and 4 that can also bring anti-competitive interpretations: for instance, in section 4 it excludes from its enforcement unfair or discriminatory conditions or pricing, including those considered predatory prices, if they are adopted to meet the competition, i.e. to match rival offers. When the 2002 Competition Act was published, the question of whether or not it was similar to the old law in substance (though not in form) was raised, so not-so-pro-competition it seemed. The publishing of the Competition Act was preceded by intense discussions on its form and content, including the subject of the protections to the domestic industry as well as the relationship of industrial policy, competition policy and the economic development objectives 63, and it was determined that there ought to have a transition period during which the implementation of competition policy/law was done gradually. The Indian Government decided that the Competition Act would be introduced in phases: during its first year (2003), the Competition Commission would carry out only competition advocacy functions (and the old Competition Law would remain effective); on the second year some provisions would become effective, and that process would continue until all the Competition Acts provisions became effective. The interaction between competition and industrial policies in India, as briefly shown, has been very limited64. Industrialization and growth have been major policy goals in the country. As a result, industrial policies have been predominant over competition policies until recently. In the 1990s this position began to soften, as trade and competition policies became part of the official economic concerns. Presently, the results of the 2002 Competition Bill are not clear, but the existence of active industrial policy mechanisms combined with the laws exceptions to anticompetitive practices indicate that competition does not seem to be considered a priority by the Indian government, thus putting the country in a type I interaction between industrial and competition policies. 2.4 Industrial and Competition Policies in Latin America Although legal prohibitions of monopolies and anticompetitive conducts can be found in many Latin American countries since the late 1850s 65, competition policy was not a government policy in these countries. Competition regulations were regarded only as a means to ban some anti-commercial practices, while state monopolies and price controls were widely used as
61

The Indian Parlament enacted the new Competition Act in December 2002. The Act, however, received presidential assent on January 13th, 2003 (CHAKRAVARTHY, 2004). 62 Ibidem. 63 CHAKRAVARTHY (2004). 64 CHAKRAVARTHY (2004) states that Too much of the economy is still denied access to free market principles: command and control is still too prevalent (page 276). 65 Mexico passed a statute that prohibited monopolies and monopolistic practices in 1857.

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mechanisms of both industrial and macroeconomic policies. Until recently competition was not part of any structured policy, and had very little enforcement in Latin America. Since the late 1980s and along the 90s a transition not yet concluded - took place in Latin American NICs from import substitutive industrial policies towards horizontal industrial policies, compatible with the conditions imposed by the IMF and other multilateral organisms 66. These countries had similar development paths during the last decades: most of them adopted import-substitution industrial policies, went through macroeconomic crises during the 1980s and directed government policy efforts to stabilizing the economy. Coordinated industrial policies were abandoned and among the reforms that were implemented was the creation of a wellequipped competition system. In the following pages we will briefly examine the experiences of Brazil, Argentina, Chile and Mexico. These experiences show, from the interaction between competition and industrial policies point of view, a more homogeneous pattern than the Asian one. These countries had their industrial development until de end of the 1970s based on the predominance of industrial policy over the competition policy (inexistent in most cases), with state investments, market protection and incentives to national companies. Nowadays Latin America seem to They were all type I countries67 until the end of the 1970s and seem now to be in a transition process path towards the development of na industrial sector in a competitive environment.to type II countries68. 2.4.A Mexico Although prohibition to monopolies and monopolistic practices was introduced in Mexico in the late 1850s, as noted before, it was nothing like an effective competition law. As virtually every other Latin American NIC, Mexicos economic policy was marked by traditional protectionist industrial policies from the end of World War II to the 1980s, directed at building an industrial structure by means of import substitution, until severe macroeconomic restrictions paralyzed the state coordinated intervention in the late 1970s. After the 1982 debt crisis, economic policy changed and the country adopted new economic policies 69 from the middle of the 1980s. Industrial policy since then benefited from the growth of export oriented maquilas (mostly in the automobile and electronic industries), shifting towards an export specialization mostly related with multinationals that integrated their manufacturing to the U.S.70. Competition policy was introduced in Mexico as part of these reforms. The starting point was the adoption, in 199371, of the Federal Law of Economic Competition (LFCE) and creation of the Federal Competition Commission (CFC), an agency attached to the Ministry of Economy
66

Many countries in Latin America had, for a period, military governments adopting the industrialization through industrial policy path. Redemocratization occurred simultaneously to legal and institutional changes which eventually included a new set of competition laws as part of a widespread movement of privatization, deregulation, and financial liberalization (SINGH, 1999) which reinforced the need of a competition policy. Some of the trade agreements signed by the Latin American governments have very precise considerations about competition policies. Given this, it should be noticed that many changes were driven by the opening up of the economies and the pressure of international competition. 67 Predominance of industrial policy, with direct state intervention in key sectors, market protection and incentives to national companies. 68 Predominance of competition policy, with little or no direct state intervention and development of the industrial sector in a competitive environment. 69 Including trade and financial liberalization, industrial deregulation and privatization. 70 RUBIO (1992). 71 It should be noted, however, that although the Competition Law was published in 1992, its regulation was only published in 1998.

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but with technical and operational autonomy72. After the recovery from a financial crisis and economic recession, in 1995, a National Development Plan was set together with sector exceptions to the trade and competition reforms. In addition, an Industrial Policy and Foreign Trade Program was created aiming at the coordination of public and private measures onto selected industries73, focusing on specific issues requiring government intervention, such as small and medium sized companies and regional development. Industrial policy in Mexico is now in charge of the Secretary of Economy, and its aim is to enhance industry competitiveness, under NAFTA and WTO constraints. It is devised not to conflict with the competition policy objectives acknowledged in the LFCE 74, namely: the protection of the competitive process and of free market access by preventing monopolies, monopolistic practices75 and others. A particular feature of Mexican competition regulations is that the Competition Commission is responsible for determining which economic agents may participate in any privatization procedure. Specific powers are granted to the Commission regarding competition conditions in these markets76. There are no explicit exclusions in the competition law, even for sectors subject to industrial policy incentives (as they are not, in principle, incompatible under the Mexican law). According to the OECD (2004), however, there is not a strong general support for competition policy either. Certain deficiencies in statutory authority and judicial review processes 77 constrain the CFCs ability to address anticompetitive conditions effectively. Besides, the absence of financial autonomy subjects to some extent its decisions to the government. Until the 1970s, Mexico was, in sum, a type I country, while after the reforms it seems to be driving to a type II interaction between policies. 2.4.B Brazil From the end of World War II until the 1980s Brazil adopted an import substitution industrial policy that was able to build an almost complete industrial structure. Particularly during the military governments, this strategy led to very high average growth rates. Economy was tightly controlled, through mechanisms including price and wage controls. In addition, major industrial firms either belonged to the state or were private monopolies or at least very concentrated oligopolies accepted or even induced by the government. Although there was a law concerning competition (as well as a Competition Commission - the Administrative Council of Economic Law, CADE) since 1962, it mainly dealt with unfair commercial practices. As the law was not applicable either to state controlled industries or to regulated sectors the core of the industry, in a word -, competition provisions were not enforced except for very few cases of abusive pricing. In the 1980s, however, Brazil went through severe macroeconomic problems, reaching extremely high inflation rates. Economic policies since then concentrated on stabilizing the
72 73

CFC website: http://www.cfc.gob.mx/ Secretary of Commerce and Industrial Promotion: http://www.secofi-siem.gob.mx/portalsiem/ 74 http://www.cfc.gob.mx/contenedor.asp?P=Results.asp?txtDir=http://xeon2/cfc01/Documentos/ 75 Anticompetitive practices are classified as either absolute (prohibited per se) or relative (requiring an efficiency analysis). But neither monopoly nor abuse of dominance are dealt with expressly. 76 In regulated infrastructure sectors, a favorable opinion from the Commission is necessary for those interested in concessions or licenses issued by regulators. The Commission can also determine whether or not the regulators may impose price regulations and access controls (as well as defining if and when, due to market changes, effective competition may be restored and end the regulatory controls) and to address possible competitive effects of proposed changes to federal policies or new laws proposed by the government. 77 CFCs decisions can always be subject to judicial review.

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economy, and other policies, such as industrial policy, were unable to succeed. From 1990 on, Brazilian industrial policy switched towards a more liberal and less state-led direction, based mainly on horizontal policies, enhancing competition, a trade reform cutting severely import barriers, and promoting competitiveness (which was not fully accomplished). Price stabilization finally succeeded in 1994, but by then all attempts at implementing a coordinated industrial policy had been virtually abandoned, while economic policy was reduced to sustain economic stability, mostly through restrictive fiscal and monetary policies. At the same time, a new competition law was passed (Law n. 8.884/9478). Competition Law enhanced CADEs powers and made it an independent agency. It also defined the forbidden anticompetitive conducts, imposing far more severe penalties than before. Additionally, two additional agencies were created: the Secretary of Economic Law 79 (SDE), and the Secretary of Economic Monitoring80 (SEAE). Not even regulated sectors are exempted from the competition law81, while there is no case yet of an industrial policy explicitly conflicting with competition rules82. Along with such changes in the competition institutions, adjustments were also made in government competition policies over time. When traditional (sector-specific) industrial policy mechanisms were abandoned, competition was presented as part of combined policy tools to promote innovation and competitiveness in industry, and therefore competition policy gained importance. According to HAY (1998)83, industrial policy now aims to correct market failures with policies which operate to facilitate the functioning of markets, rather than to substitute nonmarket methods of allocating resources, mostly through financing mechanisms. In 1995, the Cardoso government issued a policy document 84 delimiting a new pattern of growth for the industry, which is adopted until the present, whose intention is to create the conditions that will enable Brazilian firms to make the transition from the defensive strategies dominant in the initial phase of trade liberalization to more assertive strategies based on increased productivity and technological innovation85. Brazil, thus, also directed its policies from a type I (until early 1980s) arguably to a type II interaction. 2.4.C Argentina Argentina, as its neighbors, adopted import substitutive industrial policies similar to those of Brazil and Mexico, including strong state intervention, the protective barriers and subsidies, that lasted until the 1980s.

78

Further information on the Brazilian Competition System can be found in the CADEs website: http://www.cade.gov.br/ 79 The SDE is an agency of the Ministry of Justice responsible for the preliminary investigations and procedures before submitting cases to CADE, which take final decisions in all competition matters. 80 SEAE is an agency of the Ministry of Economics that assists SDEs investigations in economic issues. 81 In case of anticompetitive conducts in regulated sectors, the specific agency contributes with technical opinions to the investigations. 82 Probably because, as will be shown, the former is designed in a pro-competitive way. 83 See also the website of the Ministry of Industry and Commerce, www.mdic.gov.br 84 Industrial, Technological and External Trade Policy, 1995. Interestingly, the present government so much opposed to the former - published a similar document entitled Guidelines of Industrial, Technological and External Trade Policy in November 2003. Both documents are available in www.mdic.gov.br. 85 MELO (2001).

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There was no competition policy and no competition law until the 1980 Competition Act n. 22.262, that created the CNDC - National Commission for Competition Defense 86, under the Ministry of Production. During the 1980s Argentina also went through a period of high inflation and macroeconomic instability, when the state could no longer sustain its expenses and most industrial policy objectives were abandoned, while competition was still not regarded as relevant and the law were not seriously enforced. In the 1990s a stabilization plan was adopted based in the indexation of its currency to the US dollar, while all public companies were privatized and public utilities were subjected to regulatory agencies. Trade and financial barriers were abandoned and the economy experienced a period of growth above its peers in the region. In 1999, after the consolidation of the reforms and apparent price stabilization, the former competition law was replaced by a new one, n. 25.156, which introduced ex ante review and authorization of mergers and acquisitions, gave CNDC full jurisdiction on competition issues in every sector of the economy and created an autonomous Competition Court to replace the CNDC which, however, still remains to be created87. The government at that time was not giving signs of a coordinated and explicit industrial policy in the country; the official speech implied that the country would no longer adopt industrial policies other than those enhancing competitiveness by market rules. KOSACOFF et al. (1998) identified, however, a two-year period (1994-1995) in which several measures affecting industrial activities were implemented, including changes in trade policy and specific sector promotion policies. In 2001, once more, the country faced severe macroeconomic problems that culminated in a general default of its external debt. The crisis that followed started a new set of reforms. Since 2003 the CNDC reports to the Technical Co-ordination Secretariat of the Ministry of Economy and Production, which takes the final decisions in competition matters 88. CNDC is responsible for investigating cases or conducts that might violate the law, and produce reports and recommendations to the Secretariat. The agency also advocates for competition, issuing non binding recommendations on competition matters to other governmental agencies. According to the CNDC website89, their final decisions regularly follow CNDC`s recommendations90. As to industrial policy, presently in Argentina there is no systematic program for any specific industrial policy; one can assume the absence of any coherent industrial policy from the government. From this standpoint it is, among Latin American NICs, the one that most resembles at first the U.S. type of interaction between policies, although, on the other hand, its competition policy and institutions are also far from systematic or consolidated. 2.4.D Chile Chile also took basically the same model and, as Mexico and Brazil, had a Competition Law before the macroeconomic reforms of the 1980s, dating from 1959 91. Besides its deficiencies, which led it to take action only in a few cases 92, price control mechanisms effective
86 87

http://www.mecon.gov.ar/cndc/institucional.htm http://www.mecon.gov.ar/cndc/home.htm. However, this tribunal is yet to be created. 88 See CNCD website: http://www.mecon.gov.ar/cndc/home.htm. 89 OECD (2003). 90 On 17 August 2005 the Argentine Government submitted to the National Congress a draft bill for the amendment of the Competition Law, under which the secretariat of the Ministry of Economy will have a veto right over economic concentrations that require prior approval (http://competition.practicallaw.com/jsp/multiJurisUpdates.jsp) 91 Law n. 13.305 ruled about several subjects, not only competition. 92 According to WINSLOW (2004), from 1963 to 1972 the agency had only seven cases, all minor.

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at the time were kept, and the state controlled the majority of the key industries, thus excepted from the application of the law. During the military dictatorship that took power after 1973, a major economic liberal reform program was conducted. By 1982, the government had abandoned its prior industrial policy, eliminated price control mechanisms, liberalized capital markets and privatized most of the state companies of tradable goods and some services, including banking. Competition policy was given little importance during this stage of the privatization program, but so was the former industrial policy. A Law for the Defense of Free Competition was adopted in December 1973 as part of the military governments program93. Its enforcement was initially small, as the governments efforts were centered in a reform program that emphasized trade liberalization, privatization, and deregulation. The 1973 Law created new mechanisms and a new institutional system 94, but until the end of the 1990s its enforcement was still not a priority, and very few resources were allocated to it95. When the military government was replaced by elected civilian ones, Chile had already privatized electricity, telecommunications, and steel production, and eventually the competition institutions began playing a more important role in some infrastructure sectors. Law n. 19.610 of 1999 changed the competition institutions, replacing the former Commissions by a new independent Antitrust Tribunal, and in 2003, Law n. 19.911 amended the prior rules by introducing a new Competition Tribunal and a number of other reforms. Recently the Ministry of Economics (Decree n. 1/05) further changed and systematized the text of the competition law. The Tribunal, responsible for the final decision involving competition issues, is now an independent entity with judicial powers. In addition, the competition enforcement agency had extended its powers to investigate and to intervene in every action or agreement that may affect competition. Present industrial policy focuses mainly, as the other countries, on promoting competitiveness rather than protecting or giving incentives to particular industries. Financial and fiscal incentives are granted to exports and to production and investment in the way usually labeled as horizontal industrial policy. Chile, therefore, also was a type I country, and seems to have changed, recently, to a type II interaction of industrial and competition policies. The path this interaction will take, however, will be perceived only in time. 3. Implications for industrial development The last section identified the presence of different patterns of interaction between competition and industrial policies, consolidating the ideas that (i) such patterns have been widely varied, and that (ii) these policies are not necessarily conflicting 96;but also strongly suggesting that (iii) there may be, as a historical stylized fact, a tradeoff between antitrust policy and industrial policy in early stages of industrial development and/or catchup. In such context industrial policy usually performs a leading role, while antitrust law, if existing at all, may not be fully enforced or may have been partially replaced by surrogate mechanisms of competition.
93
94

The Decree-Law no 211 de 1973, modified by the Law no 19.610, from 1999. The chronology of the Chilean competition rules can be accessed in the website http://www.fne.cl/ 95 WINSLOW (2004). 96 It is useful to reinforce, at this point, the idea that we are dealing with countries that are already industrialized. We are not referring here to countries that have no industry, or that are still building an industrial structure, but to countries that have already experienced a successful industrialization process. In almost every experience briefly exposed before, competition policies were eventually introduced. It is in this context that we argue that competition and industrial policies are not necessarily conflicting.

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Particularly as to developing countries, it is our contention that an additional basic distinction should be made between industrial policy, firstly, as an industrialization policy, at early stages of economic development, in which its social costs and benefits are of secondary importance as compared with the performance of import substitution and other policies towards industrial sectors building; and, secondly, as a policy oriented towards increasing industrial competitiveness and innovativeness in relatively advanced developing-but-industrialized countries basically, countries which used to be covered by the old NICs label. In the latter case, competition policies do not need to differ radically from those adopted by developed economies although a large technological gap may persist and a corresponding catching up policy would be required, which implies that industrial policies could still differ considerably from those of fully developed economies. In this sense, which seems more in line with the problems of NICs like Brazil, Mexico and Argentina, in Latin America, as well as most Asian NICs, competition policy - in the broader sense defined above, not only antitrust - deserves much more space within industrial policy; or, at least, explicitly to be made more compatible and less conflicting with it than usually acknowledged by industrial policy makers and scholars97. In these economies, once industrialization as such has been completed - in the sense that basic import substitution stages are finished and an integrated (though incomplete) modern industrial structure is established -, the goals of industrial policy naturally move towards greater emphasis on static and dynamic efficiency of the existing structure. This means, respectively, lower costs and prices to the detriment of monopoly rents and to the benefit of consumers and social welfare, but also of exports and thus of keeping trade balance under control, as well as higher innovative capabilities. In short, to increase competitiveness together with innovativeness. While the latter may be accomplished only in the long run through policies mainly, but not only industrial policy focused on catching up technology frontiers, the former may be arguably reached at a faster pace through policy efforts focusing competition and competitiveness also by means of, but not only, industrial policy. To achieve these results, competition policy tools can be much more convergent and helpful to industrial policy in a relatively advanced stage than in earlier stages of industrial development of a given economy, as shown by many country experiences described in the preceding section.98 The idea, often found among supporters of industrial policy in NICs, that it should necessarily involve creating national champions, which in turn would oppose to competition policy or at least require less antitrust enforcement on mergers, is a dangerously misleading extrapolation from Asian experiences, such as Japan and Korea. Larger scales and/or higher market concentration are static attributes which may not lead to greater efficiency and competitiveness, since this result depends mainly on the strength of systemic, not individual, competitive forces the competitive pressures imposed by a more or less dynamic market environment in which firms compete. In the absence of such pressures toward innovation and dynamic competitiveness, market shares easily turn into market power and monopoly rents accruing to large - domestic or multinational firms, without any significant welfare or growth benefit.99
97

A somewhat similar distinction among developing countries is suggested by SINGH, A., DHUMALE, R. (1999), where advanced NICs are clearly distinguished from less developed economies, although an equally sharp distinction is not made as to the appropriate competition policy to follow, as we suggest here. 98 See also AMSDEN, A., SINGH, A. (1994) and SINGH, A., DHUMALE, R. (1999), in particular on the cases of Japan and Korea. 99 As neatly put by PORTER, M. (1990), pp. 662-64: When faced with trade-offs, we should weigh progressiveness higher than static efficiency or a snapshot of price-cost margins, because innovativeness is by far the most important source of growth and welfare, greatly outweighing price-cost margins (allocative efficiency), and even static

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In a broad sense, competition policy may be seen to cover policies ranging from the macro level, directed to create and sustain a competitive market environment which, besides antitrust, may even include trade policies used in the reverse direction, i.e., to reduce tariff protection (as in the 80s in Latin American NICs and elsewhere) - to the micro level, directed to increase competitiveness of firms by means of different tools, e.g. R&D and export incentives, reducing infrastructure costs, etc. But competition policy still means, first of all, antitrust. And it should be borne in mind that not only antitrust policies are spreading throughout the world in the last two decades, but also that it has changed to a large extent in roughly the same period, under the influence of the transition in U.S. from a rigid structurally oriented (under the S-C-P heuristic model) static posture, according to which, to some extent to give a popular picture , small is beautiful, to a more laxing one, as mentioned in the preceding section. As a first result, most antitrust laws and policies nowadays involve basically the same main components in all jurisdictions, v.g.: (i) structural preventive controls, i.e. of merger and acquisitions; and (ii) conduct repressive controls, i.e. of horizontal and vertical anticompetitive strategies and behavior. And secondly, in both cases, the so-called antitrust efficiency defenses are increasingly being accepted everywhere, as they already are to a good extent in the U.S. At the same time, arguments in the courts have been increasingly supported by technical (economic) tools, instead of by common place beliefs (small is beautiful) or even ideological assumptions, as was often the case many decades ago. It means that not only in merger cases, but also in cases of business practices that used to be considered anticompetitive and therefore condemned per se in the past, a rule of reason criterion, strongly dependent on economic analysis, is now in force. Specifically, the possible efficiency enhancing effects of a merger or conduct are now being more carefully analyzed and balanced against the welfare and/or competition losses expected to result from a given merger or conduct, before producing a final verdict. It should be stressed that this is the current mainstream antitrust doctrine and practice already being applied in most countries where antitrust law and institutions are in place.100 Under the efficiency enhancing effects label, on its turn, different contents may usually be accepted. In the case of mergers, for example, they include not only the usual static allocative welfare gains which they may be expected with reasonable certainty to generate more often, cost reducing scale effects -, but also pro-innovative effects stemming from asset complementarity, R&D risk sharing and similar synergies that may be expected with reasonable confidence as a future outcome of the operation, provided these are not too speculative. In such context, the usual concern of industrial policy supporters with excessive restraints coming from antitrust enforcement against mergers, upscaling and other forms of market concentration, at least in developing industrialized countries, may be to a good extent disregarded. In other words, provided a given merger is reasonably capable of producing significant pro-efficiency effects that may exceed the expected increase in market power which by no means is always the case of mergers in developing economies , chances are that it will be approved, maybe with a few restrictions. However, some other concerns are found in the literature which seem not covered by current antitrust doctrine and practices, and therefore could possibly require specific changes in competition policies for developing economies. One of them is the idea of a trade-off between productivity growth and investment, on the one hand, and competition, on the other, which would lead to optimal levels of competition - especially for developing countries, in need of fast economic growth below the maximum, as opposed to the conventional view of as much competition as possible being an end in itself. Since high productivity growth needs high
efficiency. 100 See, for example, the handbook provided by WORLD BANK & OECD (1998).

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investment rates, and this needs at least reasonable, if not high, profit rates, there may at times be too much competition rather than too little.101 The concept of a higher or lower degree of competition, however, seems to have been caught in the same static trap that we are trying to avoid. Where is to be found a benchmark for maximum competition would it be perfect competition? And how is its degree to be assessed would a lower one correspond to higher market concentration, achieved through permissive antitrust rules? If we take a dynamic concept of competition, v.g. a Schumpeterian view, as in section 1 above, then higher competition should mean a higher pressure on several competitive attributes, especially innovative drive, no matter the degree of market concentration; and so there cannot be such a thing as too much competition. Besides, the causal link between investment and profit rates is also very doubtful, on similar grounds. If more competition implies a higher innovative drive, then it also leads ceteris paribus to more, not less, investment and productivity growth (v.g. through innovation). Higher investment rates require many conditions, not only (or necessarily) current profitability; of which, besides financing, market growth which is probably related to more competition, not less, as already commented is paramount. Conversely, less competition usually implies lower pressure on competitive attributes by firms, whatever the degree of market concentration, and therefore more accomodation to existing market positions and possibly (although this may be difficult to generalize) to less dynamism and lower investment rates. Another concern is that competition policy in late industrializing countries, and even some kind of multilateral cooperation initiative, should be devised to cope specifically with local harmful effects of mergers and acquisitions promoted by large multinational corporations which are usually overseen by their home or even international antitrust agencies -, often increasing their market dominance and threatening domestic firms that are building up capabilities to compete in international markets.102 But these claims are somewhat speculative and difficult to assess empirically. In advanced NICs, relatively large local companies facing multinationals and possessing significant market power in domestic markets are far from uncommon, no matter how large their differences in international market shares and even dominance. In antitrust jargon, what really matters for local market power exercise is not their more or less global presence and strategy, but the relevant geographic market where they compete which is, more often than not, the domestic (or regional) rather than the global one, due to remaining tariff and non-tariff protection. Thus, in our view, stronger empirical evidence on the real significance of such claims should be provided before major changes in antitrust rules, especially for relatively advanced developing countries, can be justified such as removing antitrust restrictions to mergers among large local firms.103 As a final remark, one should note that, particularly - but not only - in developing countries, the economic environment to which competition policy should be addressed cannot be reduced to pure markets, and therefore competition policy should not be reduced to market policies, such as antitrust, regulation and trade policies, important as they are. To improve physical as well as social infrastructure, reducing general costs and negative externalities to domestic firms, continues to be an extremely critical goal to be addressed by competition policy in developing economies, since it accrues to the competitiveness of local firms from a national more than sectoral - standpoint. At the same time, macro policies affect essential variables for a firms competitiveness, such as exchange rate, interest rate and credit availability. In other words, to improve the so-called systemic factors of competitiveness of local firms should be a crucial
101 102

SINGH, A. (2002), p. 16; see also AMSDEN, A., SINGH, A. (1994). SINGH, A. (2002), pp. 12-15; also SINGH, A., DHUMALE, R. (1999), p. 5. 103 SINGH, A. (2002), p. 20.

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goal for competition policy in developing countries, not the least because they usually require considerable amounts of public investments and/or some care with micro tradeoffs of macro policies, thus leading to strong opposition from macroeconomic policy makers, as well as requiring support against the highly conservative fiscal policies now adopted everywhere as if they were the only possible socially responsible policies to follow. 4. Concluding remarks Once a dynamic view of competition is assumed, in which competitiveness is related more to innovativeness of firms and to systemic pressures from the market environment than to the number of competitors and to static allocative efficiency effects, industrial and competition policies are more easily seen as complementary rather than as opposed to each other. National industrialization experiences point basically to the difficulty of trying any generalization. There are many different combinations of industrial and competition policies, for which at most a tentative taxonomy could be suggested, instead of a general and unequivocal tradeoff between them. Moreover, to some extent, a possible stylized fact is that such tradeoff, in cases it was very sharp in early stages, turned softer through time, until an almost complementary coexistence. In the same way, such tradeoff tends to be much lower at present, in relatively advanced NICs, than it apparently was in their earlier industrialization stages. Antitrust law and policy, although far from being the only issue in competition policy, remains its core. It also suffered significant changes in the last 20 years, following U.S. steps, turning more flexible towards mergers and acquisitions, more concerned with anticompetitive conducts (such as cartels) and more analytically oriented. This means in practice that credible not only alleged - efficiency defenses for mergers highly affecting market concentration, of various sources (including innovative ones), have been increasingly accepted by antitrust agencies in many countries. As a result, the usual sources of conflicts with industrial policy objectives, while not completely discarded, have a much narrower scope and are not very likely to emerge, under more technical than ideological scrutiny. In conclusion, our view is that current antitrust law and policy for most advanced NICs but not for pre-industrialized countries, outside the scope of this chapter - needs very few, if any, adaptations to deal with the need of industrial and technological policies towards convergence to advanced economies in their current process of industrial development. On the other hand, those competition policy issues which exceed antitrust v.g. physical and social infrastructure deserve serious attention for their strategic role not only for cost externalities and systemic competitiveness, but also for social welfare improvement and development as such. References AMSDEN, A., SINGH, A. (1994). The Optimal Degree of Competition and Dynamic Efficiency in Japan and Korea. European Economic Review, 28. BHATTACHARJEA, A. (2003). Indias Competition Policy: An Assessment. Economic and Political Weekly, 38 (34). BHATTACHARJEA, A. (2004). Trade and Competition Policy. Indian Council for Research on International Economic Relations, Working Paper n. 146, November. Available at www.icrier.org. CCE (1994). Lignes directrices communautaires pour les aides dEtat au sauvetage et la restructuration des entreprises en difficult. JOCE, C 368, 23.12.1994. 28

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