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Competitive Advantage and Competition
Policy in Developing Countries
THE CRC SERIES ON COMPETITION, REGULATION AND
DEVELOPMENT

Series Editors: Paul Cook, Professor of Economics and Development

Policy and Martin Minogue, Senior Research Fellow, Institute for
Development Policy and Management, University of Manchester, UK

Titles in the series include:

Leading Issues in Competition, Regulation and Development

Edited by Paul Cook, Colin Kirkpatrick, Martin Minogue and David Parker

The Politics of Regulation

Institutions and Regulatory Reforms for the Age of Governance
Edited by Jacint Jordana and David Levi-Faur

Regulating Development
Evidence from Africa and Latin America
Edited by Edmund Amann

Regulatory Governance in Developing Countries

Edited by Martin Minogue and Ledivina Cariño

Regulatory Economics and Quantitative Methods

Evidence from Latin America
Edited by Omar Osvaldo Chisari

Regulation, Markets and Poverty

Edited by Paul Cook and Sarah Mosedale

Competitive Advantage and Competition Policy in Developing Countries

Edited by Paul Cook, Raul Fabella and Cassey Lee
Competitive
Advantage and
Competition Policy in
Developing Countries

Edited by
Paul Cook
Director of the Centre on Regulation and Competition
(CRC), University of Manchester, UK
Raul Fabella
Professor of Economics and Dean, School of Economics,
University of the Philippines
Cassey Lee
Associate Professor of Industrial Economics, Nottingham
University Business School, University of Nottingham
(Malaysia Campus), Malaysia
THE CRC SERIES ON COMPETITION, REGULATION AND
DEVELOPMENT

Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Paul Cook, Raul Fabella and Cassey Lee 2007

All rights reserved. No part of this publication may be reproduced, stored in

a retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.

Published by
Edward Elgar Publishing Limited
Glensanda House
Montpellier Parade
Cheltenham
Glos GL50 1UA
UK

Edward Elgar Publishing, Inc.

William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Competitive advantage and competition policy in developing countries /

edited by Paul Cook, Raul Fabella and Cassey Lee.
p. cm. – (CRC series on competition, regulation and development)
Includes bibliographical references and index.
1. Competition–Developing countries. 2. Developing countries–Economic
policy. I. Cook, Paul. II. Fabella, Raul V. III. Lee, Cassey.
HC59.7.C624 2007
338.6
048091724–dc22 2006028691

ISBN 978 1 84542 627 9 (cased)

Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall
Contents
List of contributors vii
Preface ix
Acknowledgements x

1. Introduction 1
Paul Cook, Raul Fabella and Cassey Lee

PART I COMPETITION POLICY AND DEVELOPMENT

2. Competition and the regulation of economic development 9

John Stanley Metcalfe and Ronnie Ramlogan
3. Model competition laws 29
Cassey Lee
4. Legal traditions and competition policy 54
Cassey Lee
5. Establishing consumers as equivalent players in
competition policy 79
Kamala Dawar
6. Guanxi and taipans: market power and the East Asian
model of competition 93
Raul Fabella

PART II EXPERIENCE WITH COMPETITION POLICY

7. Competition policy and the legal system in Brazil 109

Germano Mendes de Paula
8. Competition policy and enterprise development: the role of
public interest objectives in South Africa’s competition policy 136
Trudi Hartzenberg
9. Competitive markets and competition policy in Indonesia 155
Efa Yonnedi
10. Competition policy in Malaysia 183
Cassey Lee
11. Competition policy and competitive markets in Bangladesh 205
Selim Raihan

v
vi Contents

PART III COMPETITION AND COMPETITIVE

ADVANTAGE

12. The role of South African competition law

in supporting SMEs 237
Kim Kampel
13. Globalization and competition in the South African
wine industry 260
Joachim Ewert and Jeffrey Henderson
14. Foreign competition and growth: Bangladesh
manufacturing industries 281
Selim Raihan
15. Domestic competition and technological and
trade competitiveness 331
Yuichiro Uchida and Paul Cook

Index 367
Contributors
Paul Cook is Professor of Economics and Development Policy and Head
of the Institute for Development Policy and Management at the University
of Manchester. He is also Director of CRC and the Competition Research
Programme at the CRC, University of Manchester, UK.
Kamala Dawar is Trade Policy and Representation Officer at Consumers
International, London, UK.
Germano Mendes de Paula is Associate Professor of Economics at the
Federal University of Uberlandia, Brazil.
Joachim Ewert is Associate Professor in the Department of Sociology at the
University of Stellenbosch, South Africa.
Raul Fabella is Professor of Economics and Dean of the School of
Economics, University of the Philippines and a regional research partner
with CRC, University of Manchester, UK.
Trudi Hartzenberg is Executive Director of the Trade Law Centre for
Southern Africa (TRALAC).
Jeffrey Henderson is Professor of International Economic Sociology at the
Manchester Business School and Institute for Development Policy and
Management, University of Manchester, and Research Fellow at the CRC,
University of Manchester, UK.
Kim Kampel is Case Manager at the Competition Tribunal of South Africa,
Pretoria, South Africa.
Cassey Lee is Associate Professor of Industrial Economics at the
Nottingham University Business School, University of Nottingham
Malaysia Campus, Malaysia and a regional research partner with the CRC,
University of Manchester, UK.
John Stanley Metcalfe is Stanley Jevons Professor of Economics and
Director of the Centre for Research in Innovation and Competition
(CRIC), University of Manchester and a Research Fellow at the CRC,
University of Manchester, UK.

vii
viii Contributors

Selim Raihan is University Lecturer at Dhaka University, Bangladesh and

an associate of the CRC, University of Manchester, UK.
Ronnie Ramlogan is a Research Fellow at the Centre for Research in
Innovation and Competition (CRIC), University of Manchester, UK.
Yuichiro Uchida is a Research Associate at the CRC, University of
Manchester, UK.
Efa Yonnedi is a doctoral student and an associate of the CRC, University
of Manchester, UK.
Preface
Issues of competition and regulation have long been matters of both public
policy debate and academic research in developed economies, but until
recently were relatively unexamined in relation to developing economies. The
Centre on Regulation and Competition (CRC) of the University of
Manchester, UK, has been conducting research into regulatory develop-
ments and competition issues since 2001, with a primary focus on changes
and reforms in developing countries, working together with partners both
in the United Kingdom and overseas in China, Ghana, India, Malaysia, the
Philippines, South Africa and Sri Lanka. This work has been funded
primarily by the United Kingdom’s Department for International
Development, with other support from the UK Foreign and Commonwealth
Office’s Global Opportunities Fund, and from the British Council. Other
collaborating agencies include the Foreign Investment Advisory Service of
the World Bank and the Competition Division of the United Nations
Committee on Trade and Development (UNCTAD).
This book series is one of the many ways in which the work of the CRC
and its partners is disseminated, complementing conferences, workshops,
journal publication and policy briefs. This volume incorporates the research
of CRC on competition and competition policy. The contributors focus on
the meaning and understanding of the relation between competition and
development and the implications for competition policy. The volume also
gives attention to the difficulties associated with measuring competition and
uses a range of quantitative techniques to assess the competitiveness of
markets. These new research insights will provide a stimulus to reflexive
policy-making in international development institutions, and a focus for
further contextual research in the academic development community.

Paul Cook
Martin Minogue
Series Editors

ix
Acknowledgements
We are grateful for the financial support provided by the UK Department
for International Development (DFID) to the CRC. This has enabled the
CRC to fund research and host conferences from which the contributions
for this book have been drawn. We would also like to express our thanks to
Pam Johnson who has provided support in the preparation of this book.

x
1. Introduction
Paul Cook, Raul Fabella and Cassey Lee

In recent years there has been an acceleration of interest in competition

policy for developing countries. This interest is most evidently seen in the
number of countries that have revised old competition laws or have devel-
oped new ones. This trend towards the introduction of new competition
laws has been accompanied by the development of dedicated competition
agencies designed to tackle anti-competitive practices and review cases of
mergers and acquisitions. Competition has also been part of the remit of
the spate of newly established dedicated regulatory bodies responsible for
ensuring economic efficiency and protecting the welfare of consumers
arising from the activities of enterprises in the utilities sector, particularly
those that have been privatized.
This rise of interest in competition in developing countries has a number
of explanations (Cook, 2004). Undoubtedly, the interest in the compe-
titiveness of domestic markets and the attention to antitrust-type competi-
tion policy has to some extent resulted from the failures of economic
reforms in the 1980s, that overly relied on trade liberalization to promote
domestic market competition. During that time, World Bank structural
adjustment loans did not stipulate conditions for competition policy (Gray
and Davis, 1993). The conclusion reached was that trade liberalization by
itself did not achieve all it was expected to in terms of increasing produc-
tive efficiency and competitiveness in external markets (Tybout, 1992). The
idea that trade liberalization would improve domestic competition has led
to a reassessment, addressed in this book, that indicates that success in
international trade is itself linked to establishing a competitive domestic
market environment. This, in turn, is associated with a view that compe-
tition policy not only incorporates notions about the potential abuses of
economic power, but needs to act to promote competitive conditions and
adopt a broader perspective that encompasses the competitive infrastruc-
ture such as communications, financial and fiscal systems and regulatory
constraints.
Further, the interest in competition has been heightened as a conse-
quence of the recent spate of mega-mergers and the increased potential for
cross-border anti-competitive practices (Evenett, 2002). In relation to these

1
2 Introduction

events, concern has been expressed over the ability of developing country
governments to deal with these, and to the role that global institutions can
play in setting rules to ensure competitive conditions are maintained
(Holmes, 2004). While there are numerous bilateral and regional agree-
ments on competition policy between countries, most multilateral prin-
ciples for competition continue to rely on voluntary action.
The issue of competition has also gained ascendancy as a result of the
wave of privatization since the early 1980s across the world. In particular,
the shift towards the privatization of utilities in developing countries in the
1990s raised new concerns about the economic regulation of private utili-
ties into markets that were not fully competitive. Would regulators provide
surrogate competition for monopoly utilities and how would competition
be developed in these industries? These questions also extended the debate
over competition into an examination of the respective roles between dedi-
cated economic regulators and competition agencies.
The new interest in issues of competition and the implications for policy
exposed how little was known about the ways in which the competitive
process works in developing countries and of what types of policy would
be most effective in creating a competitive environment. These are the issues
addressed in the various chapters of this volume.
The book is divided into three parts. The first consists of chapters review-
ing the notion of competition and the implications for competition policy
in developing countries. The first chapter in Part I, Chapter 2 by Stan
Metcalfe and Ronnie Ramlogan, examines competition as the regulator
and promoter of economic development, arguing that competition and
development are processes for the transformation of economies from
within. This view of the role of competition is in sharp contrast to that por-
trayed in the static theory of resource allocation, which is grounded in the
notion of equilibrium as the organizing concept. The authors argue that
viewing competition as a process of transformation and therefore placing
it firmly in a development context, challenges many of the ideas that shape
existing antitrust-based approaches to competition policy. Metcalfe and
Ramlogan indicate that adopting the wrong model of competition, particu-
larly when it is drawn from the experiences of advanced industrialized
economies, may not only stifle development but is also likely to clash with
local institutions and embedded business culture.
In Chapter 3, Cassey Lee compares and contrasts two models of com-
petition law put forward by the major international development agencies,
the OECD-World Bank model and the UNCTAD model laws. The chapter
compares the objectives and definitions contained in each model and how
each proposes to tackle issues relating to market dominance and mergers.
Lee discusses the implications for developing countries of drawing on these
 Introduction 3

frameworks and how in practice this may affect implementation and

enforcement.
Following on from this, Cassey Lee in Chapter 4 analyses the relationship
between legal origins and the development of competition policy. The
differences between civil and common law approaches are reviewed and
their relation to economic development and growth is discussed. After
reviewing some of the cross-country and econometric-based studies on the
determinants of competition policy and its likely effects, Lee develops a
framework to examine the links between legal tradition and competition
policy. The review of the literature indicates that the relationship between
legal tradition and competition policy is complex and multidimensional.
The attempt by Lee to model the relationship is beset, as with other quanti-
tative studies, with problems concerning the adequacy of the data, the
smallness of sample sizes and poorly developed proxy variables. Despite the
limitations and preliminary nature of this research, Lee concludes that vari-
ations in legal traditions appear to have a limited effect on competition law.
Chapter 5, by Kamala Dawar, develops a consumer perspective on com-
petition. Rather than simply viewing the competition as a process where
enterprises compete to influence consumers to purchase their goods and
services, Dawar argues that more attention ought to be given to the demand
side in the competitive process. Dawar contends that consumer welfare and
the ability of individuals to use their resources efficiently, is not a priority
in national development strategies. Correspondingly, there is a need to draw
consumers into the competition policy process so that their welfare is con-
sidered and markets are made to function more competitively. Dawar pro-
poses a strategy to draw consumers as participants into policy-making
through various ways of institutionalizing consumer representation.
The final chapter in Part I is by Raul Fabella. In Chapter 6, Fabella devel-
ops a model drawing on the East Asian experience that characterizes the re-
lationship between entrepreneurs and government. Fabella analyses
property rights and contractual conditions within a weak governance envi-
ronment. The model depicts the guanxi system, referred to as relational con-
tracting, to examine the possibilities for solving contract enforcement
problems where there is weak state enforcement. Fabella then shows how
entrepreneurial behaviour modelled in this way can result in anti-competitive
outcomes, which have important implications for the type of competition
policy that will be effective.
In Part II, attention is shifted to consider the experience with competition
policy in a range of developing countries. Three chapters in this part
examine countries where a competition law has been introduced, namely
Brazil, South Africa and Indonesia. In contrast, two further chapters review
the experience with competition policy in general but where no specific law
4 Introduction

has been enacted. In Chapter 7, Germano Mendes de Paula reviews the his-
torical evolution of competition policy in Brazil. The 1990s represented a
turning point in economic policy for Brazil, which was to have significant
implications for the role of competition policy. de Paula analyses compe-
tition policy in Brazil with reference to the changes that were taking place
in the steel industry. A key finding of de Paula’s review relates to the speed
with which competition policy decisions are reached and enacted upon. It is
argued that the procedures for competition policy are drawn out and slow.
This appears to be in part due to the reluctance of the bureaucracy to accept
change; to overlapping responsibilities of various agencies dealing with
competition and to fundamental problems with the judicial system, which
is slow and open to lengthy appeal processes.
Competition policy and specifically the role of public interest objectives
are examined in Chapter 8 by Trudi Hartzenberg. This chapter focuses on
South Africa’s new Competition Act, which was introduced in 1998.
Hartzenberg provides a detailed account of the development of the com-
petition law and of the public interest test, which is explicitly included
within it. Hartzenberg argues that public interest considerations embodied
in competition law are necessary to meet the challenges in terms of trans-
ition and sustainable development facing South Africa. In this chapter
Hartzenberg uses examples to illustrate the use of public interest objectives
over employment, black empowerment and smaller enterprise development
and to draw lessons for other countries. Hartzenberg concludes that public
interest considerations are necessary but must be applied cautiously if the
long-term credibility of competition agencies is to be maintained.
Chapter 9 by Efa Yonnedi considers the competitive environment and
competition policy in Indonesia, which was introduced in 1999. Yonnedi
reviews the available evidence on market concentration and concludes that,
although this is high by international comparisons, it has generally been
declining. Yonnedi also reviews the factors that account for relatively high
levels of concentration in Indonesia. In the second part of the chapter,
Yonnedi traces the historical evolution of economic policy in Indonesia
from the nationalization programme of President Sukarno to the current
spate of market opening policies pursued after the economic crisis of 1997.
An important component of the most recent reforms have concerned
reducing the extent of policy-induced barriers to domestic competition and
the introduction of a formal competition law. Finally, Yonnedi discusses
some of the challenges confronting the government in terms of effectively
implementing the new competition law.
Attention in the next two chapters turns to countries where issues of
competition have become important but where no formal competition law
has yet been developed. In Chapter 10, Cassey Lee reviews the experience
 Introduction 5

of Malaysia. Lee documents the rise of sector regulation in Malaysia, with

a particular emphasis on the competition elements. Lee examines the
impact of a range of economic policies on competition and points to the
difficulties raised by not having a clear and coherent view on competition
policy. This has often resulted in a heavy-handed approach to regulating
market behaviour on an ad hoc basis, rather than one developed within a
consistent framework.
Like Malaysia, Bangladesh does not have a formal competition law. In
Chapter 11 Selim Raihan critically examines the range of economic poli-
cies that constitute competition policy in its broader context. These princi-
pally consist of trade and industrial policies, but competition is also
affected by privatization and foreign direct investment. Raihan assesses the
competitive environment by developing a number of measures that indicate
the extent of competition in Bangladesh. Raihan’s econometric analysis
indicates that the tendency towards capital intensity has reduced the degree
of competition in the domestic market, although external competition has
had the opposite effect.
Part III of the book places greater emphasis on examining the effects of
competition policy and determining the extent of competition in various
markets. This is achieved through reviews and case studies drawing on the
experience in South Africa and econometric analysis across a range of
countries. In Chapter 12, Kim Kampel examines the effect of South
Africa’s competition law on the development of small and medium-sized
enterprises. Initially, Kampel outlines the intentions of the competition
law, and despite showing how small and medium-sized enterprise interests
are accommodated in the law, Kampel explores instances that can occur
where this goal conflicts with the need to consider other wider interests. A
number of examples are used to illustrate the complexity of this issue.
Joachim Ewert and Jeffrey Henderson present a further case study of
competition and its effects in South Africa in Chapter 13. Ewert and
Henderson examine the implications of government competition and regu-
latory policies on growth and equity in the wine industry. It is shown that
while some progress has been made in South Africa towards poverty al-
leviation in urban areas, the same cannot be claimed for rural areas where
farm workers remain one of the poorest and most marginalized groups.
Ewert and Henderson show that while regulatory reforms and the global
integration of the industry has brought about fundamental change that has
benefited some, there are many workers in the industry that have lost per-
manent work and whose welfare is less secure. Ewert and Henderson argue
that the existing policy environment, which seeks to address issues of
poverty and equity, is too narrowly focused on employment and workplace
transformation. Instead, Ewert and Henderson suggest that the viability of
6 Introduction

the industry and its welfare implications will also be determined by the
motives and actions of oligopolistic enterprises operating on the demand
side and by a wider set of other government policies aimed at improving
international competitiveness.
The next two chapters in the final part of the book use quantitative
methods to examine the extent of competition in developing countries. In
Chapter 14 Selim Raihan examines the impact of foreign competition on
the growth of manufacturing in Bangladesh. Raihan selects a range of vari-
ables that provide indicators of the extent of competition being faced in the
domestic industry and finds that the relationship between foreign compe-
tition and growth in the manufacturing sector using the five indicators is
somewhat ambiguous. Raihan provides a number of explanations for this
result.
In Chapter 15 Yuichiro Uchida and Paul Cook examine trade and tech-
nological competitiveness and the role played by domestic competition.
Using country- and industry-based analysis Uchida and Cook investigate
changes in patterns of technological and trade comparative advantage and
link these to changes in the level of domestic competition. Not surprisingly
the levels of domestic competition within industries vary but are increasing
in medium and high-tech industries, particularly in East Asia. Uchida and
Cook show increases in the level of domestic competition are correlated
with improvements in international competitiveness, particularly on the
trade side.

REFERENCES
Cook, P. (2004), ‘Competition Policy, Market Power and Collusion in Developing
Countries’, in P. Cook, C. Kirkpatrick, M. Minogue and D. Parker (eds), Leading
Issues in Competition, Regulation and Development, Cheltenham, UK and
Northampton, MA, USA: Edward Elgar.
Evenett, S. (2002), ‘How Much Have Merger Review Laws Reduced Cross-border
Mergers and Acquisitions’, mimeo, February, Bern: World Trade Institute.
Gray, C. and A. Davis (1993), ‘Competition Policy in Developing Countries
Pursuing Structural Adjustment’, The Antitrust Bulletin, Summer, 425–67.
Holmes, P. (2004), ‘Trade and Competition Policy at the WTO: Issues for
Developing Countries’, in P. Cook, C. Kirkpatrick, M. Minogue and D. Parker
(eds), Leading Issues in Competition, Regulation and Development, Cheltenham,
UK and Northampton, MA, USA: Edward Elgar.
Tybout, J. (1992), ‘Linking Trade and Productivity: New Research Directions’,
World Bank Economic Review, 6 (2), 189–212.
PART I

Competition policy and development

2. Competition and the regulation of
economic development
John Stanley Metcalfe and Ronnie Ramlogan

INTRODUCTION

The theme of this chapter is competition as the regulator and promoter

of economic development and that competition and development are
processes for the transformation of economies from within. This process
view of competition links development to new uses for resources, to the
creation of new activities, to the formation of new patterns of consump-
tion and demand and to innovation and rivalry. We contrast this view with
the more familiar idea of regulating states of competition, arguing that the
static theory of resource allocation, in which the conventional ‘antitrust’
case is grounded, is a distorting mirror in which to reflect the competition
policy needs of developing economies. Indeed the central thrust of our
argument is that the promotion of competition as a process of rivalry is not
the same as the regulation of the market behaviour of errant firms.
Traditional views of the abuse of market power and the definition of
markets are displaced by a concern with open markets, the prevention of
exclusionary practices by incumbent firms and the stimulation of enter-
prise (Krattenmaker, Lande and Salop, 1986; Charles River Associates,
2002). The consequences of this shift to a developmental perspective are
considerable, for it rules out of consideration many of the existing frames
of thought that relate to the idea of economies as equilibrium states of
affairs. First, it should be obvious that any system that is in equilibrium has
exhausted all the internal tendencies to change and that any alteration in
its state can only be imposed from outside of it by some external agency
that cannot, by definition, be part of the conditions determining that equi-
librium state. Yet it is scarcely controversial to suggest that development
takes place from within an economy and therefore, that an economy cannot
be in equilibrium if it is to experience development. If we have learnt that
economic systems exhibit self-organization and that this is what market
institutions achieve, it is a short step to argue that development and com-
petition are similar and interlinked processes of self-transformation.

9
10 Competition policy and development

Second, self-transformation is an evolutionary process and evolutionary

processes are ordered, they exhibit structure, and in creating those orders,
generate the internal reasons to change. As we shall see, markets play a very
important role in this perspective but markets are not enough if we are to
link development to competition. Enterprise and innovation, the stimuli to
self-transformation, depend on more than market institutions and the
organization and regulation of these wider institutional frames is an essen-
tial element in competition policy.
Third, economic development is a process of structural and qualitative
transformation out of which arises measurable economic growth. No
economy has ever grown in the fashion of proportional, semi-stationary
growth in which all activities increase pari passu as if that economy con-
ducted one single, integrated activity. Such a macro approach is entirely at
odds with the developmental view expressed here and although we can
measure macro aggregates we cannot comprehend development from a
macro perspective. For then we have not only averaged away the diversity
that describes the potential for development, we have also hidden from view
the very processes that matter causally. This does not deny that there are
macro constraints on the development process only that economies do not
develop as macro economic wholes (Metcalfe, Foster and Ramlogan, 2004).
Fourth, closely connected to the transformational view is the notion that
development reflects a growth of knowledge and that competition is a
process that depends on and responds to the growth of knowledge. This is
why if, as generally agreed, all economies are knowledge-based, then they
cannot be in equilibrium unless knowledge is in equilibrium. No meaning
can be attached to the idea of knowledge in equilibrium if we take human
agency seriously. To say the converse is to take economics out of time, to
imagine it to be possible for time to pass, and for nothing to happen; not a
useful way of approaching the problem of development. This is the real
challenge posed by the problem of development to understand how knowl-
edge increases and how new knowledge is applied to improve the use of
resources to meet human need. Can there be any decline in poverty, for
example, without the growth and application of useful knowledge?
In incorporating the growth of knowledge as one of the crucial determi-
nants of development we are led directly to the role of innovation, the re-
lationship with inventive creativity and the competitive processes that
ensure the spread of innovations in technique, organization and product
throughout the economy. Innovation is a process of generating economic
variety, a process that cannot be handled by the notion of representative
behaviour unless that notion is statistical and what is representative
becomes a measure taken on some distribution of behaviour. The dynamic
consequences of economic variety are handled naturally in an evolutionary
 Competition and the regulation of economic development 11

framework, a framework that provides causal explanations of structural

change and links these changes to the improvement in the use of resources
that defines development. In this process, innovation and the growth of
knowledge are largely endogenous, new knowledge arises through the
market process and through the deliberate allocation of resources directed
to the conduct of experiments in business, science and technology
(Kuznets, 1977). The development of knowledge and the development of
an economy co-evolve and the competitive process is central to any under-
standing of this claim.
Finally, innovations depend greatly on new technological knowledge but
they also require new knowledge of markets and organization. A policy for
science and technology may be necessary but it is not sufficient for devel-
opment. Knowledge has to be put to practical economic use and markets
are the principal but not the only context in which application occurs.
Markets matter in the evolutionary account but markets mean much more
than getting the prices right. No one will argue that prices should be wrong
but what the right prices are is contingent on the objectives in mind and
subject to continual change in a developing economy. Prices that measure
marginal costs, for example, will not be found in any activity where invest-
ment in knowledge is essential to economic conduct (Stiglitz, 1997; Fisher,
2000).1 Even when the prices are right, that is only part of the story and
possibly the lesser part. Market arrangements are the prerequisite for prices
and markets do not come for free, they presuppose organization and an
organizing agency. How market arrangements are instituted and regulated
is thus a central issue in appraising the prospects for a competitive process.
An efficient price mechanism gives confidence not particularly in relation
to the current allocation of resources but rather that the allocation of
resources will be changing in a pro-development direction. Enterprise can
only conjecture pro-development innovations if the worth of existing prac-
tices is accurately reflected in the existing pattern of prices. From this view-
point market structure is not the issue; rather what matters is a process of
rivalry driven by alternative conjectures about how economic problems can
be solved in better ways. It is the supply of new conjectures, the capability
to apply them in practice and the open nature of markets in adapting to
these new opportunities that matter for competition and development.
Moreover, it is because innovation-led development entails adaptation to
changing circumstances that markets have the central role they have; the
economic problem is never solved because the solutions to problems only
serve to define new problems.
However, in respect of development and competition, markets alone are
not enough. Other instituted arrangements matter as well in relation to
innovation and competition, not least of which are the arrangements
12 Competition policy and development

through which innovation systems are established to connect firms with

other knowledge-holding and -generating organizations. Thus there is a
possibility that a competition policy for development may have relatively
little to do with the agendas of competition authorities in the traditional
sense of concerns over the abuse of monopoly power. Given the concerns
currently expressed in the OECD, WTO and other agencies in relation to
creating competition authorities in developing countries this is an issue we
return to in the final section below.
The rest of the chapter is organized as follows. First, we sketch the ele-
ments of an evolutionary process of innovation-based competition and
then introduce a framework to account for all the elements of evolutionary
change. This provides the basis for the discussion in the final section on
competition policy for developing economies.

COMPETITION AS EVOLUTION

The contrast between competition as a state of market equilibrium char-

acterized by a structure, and competition as a process characterized by a
rate and direction of change, is scarcely new, but a reading of much of the
competition policy literature in relation to development suggests that old
ideas have not been jettisoned. Even leaving aside Schumpeter, other econ-
omists of note have indicated forcefully that all is not well with the idea of
competition as a state of equilibrium. Thus J.M. Clark (1961) claimed that
the shift in perspective from equilibrium to process was the most challeng-
ing question in the theory of competition. Competition as a process
depended for him on competent customers able to accurately appraise the
products on offer, freedom to trade in any market, access to the means of
production and independence of attitude among competitors. In this
context what makes for competition is change in the nature of what is sup-
plied, that is to say, innovation. Brenner (1987) is also a notable contribu-
tor to this literature with his claim that competition is a process of putting
bets on new ideas as if we were analysing a horse race. That competition
has the attributes of a contest was the theme explored by Knight (1935) and
the implication that the outcome of the competitive process is open and
unpredictable. What all of these writers are pointing to is competition as a
process of rivalry and for rivalry to be meaningful the competitors need to
be different. It is this that connects us immediately to the evolutionary foun-
dations of competition and development.
All economies are developing economies and the issue we have to address
is that of the framework that can draw together these ideas into an account
of a competitive process consistent with the processes of self-transformation
 Competition and the regulation of economic development 13

and development. It will need to incorporate entry, exit and innovation and
the structural change that flows from the competitive dynamic. It should
show how these processes are connected to shifting patterns of resource util-
ization and the growth of productivity and it should explain the presence of
significant profits in the presence of intense competition, leading to the view
that profits are not uniquely to be interpreted as the result of abuses of eco-
nomic power. In short, the framework should be broadly evolutionary and
provide the frame for the notion explored below that innovation policy is the
strongest form of competition policy.
As with all modern evolutionary approaches the appropriate framework
is based on the population method, for it is in populations that adaptation
takes place in response to selection working on material provided by variety
in relevant characteristics. To be precise, a population is defined by a set of
economic activities taking place in productive plants where inputs are
transformed into outputs. These plants are operated by profit-seeking firms
and any firm may operate more than one plant producing more than one
commodity. However, it is the plants that are selected for or against; selec-
tion for the associated firms is indirect. Each plant has a set of selective
characteristics, those dimensions of its activity that are causally related to
differential profitability and the growth of the capacity of the operating
firm. These are the characteristics that are evaluated by the market en-
vironment and lead to the levels of input and output and prices associated
with the operation of each plant. Thus what makes the different plants part
of the same population is their experience of the same processes of market
evaluation. A plant for example, producing multiple products for different
markets will be operating in different populations and its overall perfor-
mance will be an average of performance across the different market con-
texts. Population analysis provides a rich approach to the dynamics of
competition in these many cases but here we focus on the base case, the
single plant operated by a single plant firm, producing a commodity that is
identical to that produced by rivals while drawing on the same factor
markets. The market environment that defines the population is clearly
identified, and in this case so are the relevant characteristics that underpin
selection. For each firm there are three broad kinds of process at work, in
relation to which competition is linked to differences in selective character-
istics across the population of firms. The three sets of characteristics, a
developmental triad, are as follows:

● Characteristics that causally influence the productive activity of

the firm and determine its productive efficiency and the quality of the
product it produces. Some of these are grounded in matters of
technology but others are matters of organization, capability and
14 Competition policy and development

workplace culture; the internal rules of the game that determine how
each individual member of the firm interacts with the others,
together with the objectives motivating behaviour at all levels.
● Characteristics that causally influence the ability of the firm to
expand its productive capacity in the population through processes
of investment in physical and human capital. These relate to ques-
tions of motivation and the ability to manage change processes as
well as the ability to access the free capital to finance investment pro-
grammes.
● Characteristics that causally influence the ability of the firm to inno-
vate in terms of technology or organization and thus to alter the first
set of characteristics above. All innovation presupposes a growth of
knowledge and this will depend on the firm’s ability to access exter-
nal knowledge as well as the effort it devotes internally to innovation.

Each firm is defined in these three dimensions, and characteristics in each

dimension may not be independent, creating multiple trade-offs between
efficiency, investment and innovation. As in all evolutionary argument,
what matters is that the firms differ in the three dimensions, that there is
variety in behaviour on which selection can do its work. Competition is
multidimensional even in this much simplified account and cannot be
reduced to behaviour in relation to the first set of characteristics. For
example, it is not unknown for a firm to possess excellent technological or
organizational capabilities that give it large cost advantages in its popu-
lation and yet for the owners of that firm to refuse to grow and invest to
capitalize on these advantages. Similarly, there are firms that have excellent
technology but fall behind their rivals through an unwillingness or inabil-
ity to innovate as effectively as their rivals, eventually consigning them-
selves to history.
As soon as we recognize that competition takes place in three dimen-
sions, much of the record of business rivalry falls into view, as does the
accuracy of Schumpeter’s bon mot that it is a process of creative destruc-
tion. Moreover, the concept of the market environment involves much
more than is covered by product and factor markets that evaluate the
current distribution of activity. It extends to the capital markets and the
supply of finance for investment and innovation as well as the markets for
skills important in relation to innovation. Immediately, non-market insti-
tutions come into view for the ability to innovate for example, or to access
skilled individuals they will be dependent on the surrounding knowledge
environment in universities or the education and training system more gen-
erally. It will depend upon public policies in relation to the innovation and
investment process. These considerations take us beyond our immediate
 Competition and the regulation of economic development 15

brief but we clearly cannot understand the competitive process in markets

solely in terms of markets (Bruton, 1998; Nelson and Pack, 1999).
If markets define the populations of rival firms, how are we to represent
the competitive process in a way that allows for entry of new firms, exit of
incumbent firms and the growth, decline and differential innovative per-
formance of incumbent surviving firms?. How can we translate these
processes into measures of average rates of development say in terms of the
rate of structural change or the average change of resource productivity in
a population? The answers are provided by the population method and we
begin first with a pure accounting schema that accounts for all possible
sources of change in the population.

ACCOUNTING FOR COMPETITION AND

DEVELOPMENT

The population method is a remarkably general tool of analysis in that it

provides an exhaustive way to account for all the changes that occur in a
population of economic activities over a time interval of length,
t. Let the
population consist of a group of firms, being members of this population
by virtue of being subject to the same selective process, each one with its
set of selective characteristics. Four processes exhaust the possibilities of
population change:

● pure replication of the continuing (surviving) entities that remain in

the population over the interval,
t, measured in terms of changes
in the scale of output (activity) of each firm;
● the entry (birth) of new firms in that population within the time inter-
val,
t;
● the exit (death) of firms, alive in the population at the beginning of
the interval
t but departing the population within the interval;
● innovations (mutations) in the characteristics possessed by the con-
tinuing entities so that they vary individually between the initial and
terminal dates defining the interval.

By partitioning the population of firms into survivors, entrants and exits

we can perform a complete analysis of the change in the population
between the two dates. An analysis of selection only in terms of the sur-
viving firms, a standard approach in evolutionary analysis, is not satisfac-
tory, for it loses sight of extremely important processes in relation to the
birth and death of firms and indeed the birth and death of entire economic
activities. Innovation in the surviving firms is an essential element in
16 Competition policy and development

economic evolution, for it corresponds to a change in the characteristics of

the entities and thus a change in the distribution of selective advantage in
the population (Foster and Metcalfe, 2000). As with all evolutionary argu-
ments, the focus of concern is upon the differential growth rates of the
different activities in the population.
Let the first census date be at date t, and the second at date t
t. Let X
(t
t) and X (t) be the aggregate output rates across the whole population
at the two census dates. Define compound growth rates such that g
t is the
growth rate of total activity, gc
t is the growth rate of the activity of the sur-
viving firms and ge
t is the growth rate of the activity of the firms that exit
during the interval. Thus for example, Xc (t 
t)  Xc (t)(1  gc
t)
defines the output profile of the surviving firms. Let N(t
t) be the output
contributed by those firms that enter the population in the interval
t. Define
the entry rate, n ·
t, such that N(t 
t)  n·
t · X(t 
t) . Similarly,
define e ·
t as the fraction of output X(t) accounted for by the firms that sub-
sequently exit in the interval. Let E(t
t) be the output contributed by
the exiting firms while they remain alive, whence, E(t 
t)  e
t · X(t)
(1  ge
t) . It follows that

X(t 
t)  Xc (t)  E(t 
t)  N(t 
t)

or


(1  e
t)(1  gc
t)  e
t(1  ge
t)
X(t 
t)  X(t)
1  n
t

It is convenient to assume that all the exit events occur at the beginning
of the interval, in which case, ge
t–1, and we find that the growth rates,
entry and exit rates are related by

(1  g
t) (1  e
t)
 (2.1)
(1  gc
t) (1  n
t)

Whenever the entry rate is the same as the exit rate then the growth rate of
the surviving firms is the same as the growth rate in the population as a
whole. More generally as e is greater or smaller than n, then g is greater or
smaller than gc, which accords with common sense provided we remember
that the exit and entry rates are defined as proportions of aggregate activ-
ity not as numbers of firms.
We can now identify the dynamic of population change in respect of
the surviving firms and the population as a whole. If we define ci (t) as
 Competition and the regulation of economic development 17

Xi (t)/Xc (t) the share of each surviving firm in the aggregate output of the
survivors, it follows that


1  gi
t
ci (t 
t)  ci (t)
1  gc
t

and



ci ci (t 
t)  ci (t) g  gc
  ci (t) i (2.2)

t
t 1  gc
t

with

gc (t)  ci(t)gi
Equations (2.2) are primitive replicator dynamic relations that hold exactly
for surviving entities and they tie the rate of change of the structure of the
sub-population to the diversity of growth rates contained within it. If the
population is to evolve it must be a population defined by growth rate diver-
sity, which is to say nothing more than the obvious statement that evolution
is a dynamic process. If entity i is to increase its share of the activity of the
surviving group it is necessary and sufficient that it grows more quickly than
the average for its population, gi  gc, and conversely, if i is to decline in
relative importance over the interval. Notice for completeness that since
ci (t)  1 it follows that 
ci (t)  0, always a useful check on the internal
consistency of the replicator process.
Now consider the total population and define si (t) asXi (t)X(t) , the
share of a continuing firm in the total output produced in the time inter-
val, after taking account of entry and exit, and it follows that


1  gi
t
si (t 
t)  si (t)
1  g
t

  
1  gi
t 1  n
t
 si (t) (2.3)
1  gc
t 1  e
t

and therefore, the two measures of population change are related by

 
si (t 
t) ci (t 
t) 1  e
t
 (2.4)
si (t) ci (t) 1  n
t
18 Competition policy and development

If the exit and entry rates coincide then the two measures of structural
change coincide and ggc. In general they will not, and although a sur-
viving firm may be increasing its share in that sub-population (gi gc) it
may still be experiencing a declining share in the total output if n is
sufficiently greater than e. Relations (2.2), (2.3) and (2.4) provide the ele-
ments of a replicator dynamic corrected for processes of entry and exit.
In many cases it is more transparent to work with the replicator dynamic
in continuous time, in which case, letting the time interval
t tend to zero,
we can replace (2.1) to (2.3) by
g  gc  n  e (2.1)

dci
 ci (t)(gi  gc ) (2.2)
dt
dsi
 si (t)(gi  g)  si (t)(gi  gc  n  e) (2.3)
dt

These relations provide a complete description of the different sources of

evolution that restructure any population as a result of the growth rate
diversity contained within it. They are compatible with any theory of the
underlying processes, whether deterministic or stochastic. Like any
accounting scheme they are a filing system in which to locate the various
forces that jointly exhaust the competitive process, a filing system that
serves to provide a complete partitioning of the processes that describe the
development of a population at the most inclusive level. They tie together
four kinds of competitive change, which in practice we expect to give rise
to causally effective explanations in relation to development of the popu-
lation. They also provide a frame in which to place competition policy in
its developmental context. What we see through this population method is
the fundamental evolutionary theme that change is contingent on variety.
The structures of the populations change because the growth rates of the
survivors are distributed around a population average growth rate and
because the entry and exit rates differ. In short, development is an evo-
lutionary process of displacement and replacement, a process of self-
transformation in which the population in question becomes something
different. It is in this sense that competition is a regulator of development,
a method of reallocating resources to different uses, a method for generat-
ing structural change. From this perspective an economy is a set of inter-
dependent interacting populations of activities that utilize resources and
the accounting method will apply at any level of disaggregation we choose.
Developmental change is nested and we can focus the lens of population
change according to the problem in hand.
 Competition and the regulation of economic development 19

To illustrate this point consider a familiar, if limited, index of develop-

ment, the growth in resource productivity in an industry over some time
interval. Using the accounting framework, we can group the factors at
work into ‘selection processes’ defined in terms of the differential growth
or decline of survivors and the elimination of exiting firms and ‘innovation
processes’ defined in terms of the entrants and the changes in the charac-
teristics of the surviving firms. Suppose that the characteristic in question
is average labour productivity in this population of firms, labelled z, and we
want to know how the population average value, labelled z, changes over
our time interval. It follows from the definitions above that in relation to
the ‘selection processes’

z(t)  (1  e)zc (t)  eze (t)

where zc (t)  ci (t)zi (t) and ze (t) is the average value of z(t) for those enti-
ties that will exit over the interval
t. Similarly, in relation to the ‘inno-
vation processes’

z(t 
t)  (1  n)zc (t 
t)  nzn (t 
t)

where zn is the average value of z(t
t) for the entrants over the interval.
The change in z follows as

z  z(t 
t)  z(t)  (1  n)
zc  n[zn (t 
t)  zc (t 
t)]

 e[ze (t)  zc (t)] (2.5)

Expression (2.5) is a complete accounting for the change in average popu-

lation value of labour productivity. On the right-hand side the first term is
the selection effect operating on the surviving firms, adjusted for the impact
of entry. The second and third terms reflect the productivity levels in
entrants and exits, expressed as deviations from the average productivity
value for the continuing entities at the appropriate dates.2
Now the change in average productivity among the survivors can be
expressed more fully by taking account of the so-called Price equation, a
well-known result in evolutionary population analysis (Price, 1970; Frank,
1998; Metcalfe, 1998; Gintis, 2002; Andersen, 2004). This method decom-
poses the change in average value into two additive effects, one due to selec-
tion and the other due to innovation. Thus, following a proper accounting
at the two dates, we find

zc  ci(t 
t)zi(t 
t)  ci(t)zi(t)

20 Competition policy and development

 
cizi(t)  ci(t 
t)
zi

1
1 g c
 ci (t)(gi  gc )zi (t)  ci(t)(1  gi)
gi
or

(1  gc )
zc  Cc (gizi )  Ec [(1  gi ) ·
zi ] (2.6)

Expression (2.6) is the Price equation; in which, Cc (gizi ) , the measure of

the selection effect, is the (ci weighted) covariance between fitness values (the
growth rates gi) and the values of zi at the initial census date. This captures
the idea that the change in the average value of the characteristic depends
on how that characteristic co-varies with growth rates across the population.
The second term, Ec [(1  gi )·
zi ] , the measure of the innovation effect, is
the expected value (again ci weighted) between the growth rates and the
changes in the characteristic values at the level of each firm. Notice the
recursive nature of this formulation; for if the entities are also defined as
sub-populations of further entities we can apply the Price equation succes-
sively to each sub-population. For example, if entity i itself consists of a
population of j sub-entities we can apply the Price method and write

(1  gi )
zi  Ccj (gij, zij )  Ecj [(1  gij )
zij ]

and apply this to each of the i entities in the original population. As

Andersen (2004) suggests, the Price equation ‘eats its own tail’, an attribute
of considerable significance in the analysis of multilevel evolutionary
processes. It means that we can decompose population change into change
between any number of sub-populations and change within sub-populations
in an identical fashion, so that at each level of aggregation we can reflect the
forces of adaptation whether through selection or innovation.
The force of this approach can be simply summarized. Though selection
is only one level of explanation for population change, it cannot be sep-
arated from innovation. Innovation creates the variety on which selection
depends and the ensuing process reshapes the conditions for further inno-
vation. It is an ensemble-level rather than an individual-level explanation,
but one that is based on the specifics of individual variation (Matthen and
Ariew, 2002).
We have applied the accounting across two generations of a population
of firms, and of course we can iterate the procedure indefinitely. As we do
so the composition of the population of the firms will change and a date
may be reached when not one of the original members of the population
 Competition and the regulation of economic development 21

remains alive. In changing the members of the population we naturally

change the distribution of capabilities and propensities to grow and to inno-
vate so that the causal nature of the evolutionary process varies in the back-
ground. However, the activity continues and provided that the forces of
selection remain the same we can continue to speak of a given population.

COMPETITION POLICY FOR DEVELOPING

ECONOMIES
Within the last decade there has been a steadily growing interest in the
matter of applying competition law in developing economies, stimulated by
the general decline in tariff barriers to trade and stoked by the concerns of
UNCTAD, the WTO and the OECD (Tarullo, 1999; Holmes, 2002; Janow,
2003). We do not consider the specific issues of multilateral or bilateral
approaches to require developing countries to adopt competition law, or
the administrative competences that are required to create and operate a
competition authority. Rather we ask, in the light of the above, what kind
of competition law should frame competition policy? Alternatively, what
rules of the competition process are pro-development? Put simply, the real
danger is enforcing the adoption of a ‘wrong model of competition’, one
that is inimical to economic development. In practice the exercise of com-
petition law is a deeply practical matter. In the telecoms market for
example, it involves questions of interconnection access to an infrastruc-
ture and charging in a system of great complexity. Again our concern is
with the general framework, not the specifics of individual cases that vary
greatly. As De Leon (2000) makes clear there is little prospect of translating
competition law and practice from advanced Western economies to the
developing world. Local institutions matter and competition policy may
clash irreconcilably with the established business culture and be under-
mined as a consequence. Moreover, a dynamic view of competition and its
relation to innovation results in a very different take on the competition
problem.
Innovation is a correlate of increasing returns and the latter undermines
any resort to the precepts of perfect competition as a guide for policy. In a
similar vein, Singleton (1997) argues, persuasively in our view, that com-
petition policy should recognize the discovery-based nature of compe-
tition; it should not assume that the economic problem is already solved in
its final form. To argue thus would be to deny the presence of a develop-
ment problem.3
We too shall argue that the best competition policy is a pro-innovation
policy and that this takes the debate over competition policy into a far
22 Competition policy and development

broader domain, one consistent with a process view of competition and the
instituted context of competition. The general objective is to support devel-
opment and so raise average standards of living and reduce the inequality
of its distribution. Innovation and the growth of practical knowledge is the
necessary condition for this transformation to occur.4
A policy to encourage competition and facilitate economic development
in terms of the framework sketched above clearly looks very different from
a conventional ‘antitrust’ policy. It is wider in scope and dynamic in focus,
it is a set of policies to stimulate change in one or more of the four cate-
gories outlined above. It is not a set of policies to pass negative judgement
on the structure of markets or the alleged excess profitability of some firms
but rather to stimulate the market process positively and to connect that to
superior profitability and its converse (Audretsch, Baumol and Burke,
2001). A competition policy for development places at its core, ongoing
structural change, the exit of unprofitable activities and the entry of new
innovation-based activities. Development results from this evolutionary
process if and only if activities with superior characteristics displace less
productive activities, and this only occurs to the extent that the distribution
of the growth rates of activities is positively correlated with the distribution
of the pro-development characteristics of productive activities. If there is
no correlation there is no development, at best only random drift, and so a
top-level requirement of a competition policy is that it should facilitate the
emergence of the appropriate patterns of correlation. The consequence
would be for example, that firms with better products in the perception of
users, or firms with better methods of production, can grow their share of
the relevant markets by growing faster than their rivals. In turn this leads
to a set of questions about the instituted rules of the game that cut to the
core of the efficacy of the competitive process. Do product and factor
markets operate such that the firms with superior process technology are
also the lowest-cost, most profitable firms? Do markets work such that the
activities with superior profitability are also the faster-expanding activities?
Do markets and the institutions supporting innovation work such that the
faster-expanding firms are also the more innovative firms? Do markets
work to eliminate activities that are no longer profitable, do they work to
facilitate the entry of firms with superior new technologies or ways of
organizing a business?
These are questions about the ability of the market process to support
development. In its broadest sense what is required is that better activities
are more profitable, and whether or not this is the case depends on the
price-setting process in a fundamental way. As a general rule, firms set
prices and the issue is what determines their freedom so to do. In part this
depends on the degree of perfection of the market, which in turn depends
 Competition and the regulation of economic development 23

on the organization of the market and the capacity to disseminate infor-

mation among market participants. It also depends on the speed with
which market participants are able to react to different offers, either as con-
sumers or suppliers of resources. As a general rule, price structures for
outputs and inputs of the same quality that are uniform are more
efficacious from a dynamic viewpoint than price structures that are non-
uniform or arbitrary. A perfect market achieves this result in that infor-
mation is disseminated so widely and the recipients of it can respond so
quickly that firms are forced to set the same prices, with the consequence
that the differential rates of growth of their activities are tied to differential
access to resources and markets to the maximal degree. Better product
quality and lower price attract customers more quickly and higher wages
and better employment conditions more quickly attract employees. The
outcomes in terms of profitability influence the ability to invest in pro-
ductive capacity to match the growth of the market, either through profit
retention or access to external capital. But a balance needs to be drawn.
Lower prices and higher wages provide greater opportunity for expansion
but reduce the wherewithal to invest in capacity to meet that expansion of
market. This dilemma is resolved differently in each individual firm in a
way that reflects their underpinning technological and organizational
capabilities. Better methods of production and or higher-quality products
or net employment advantages provide the space to offer lower prices,
higher wages and invest more rapidly than rivals.
Several general consequences follow for the competitive process. Firms
with above-average technical and organizational characteristics will enjoy
above-average growth when markets are more perfect.5 Of course, the
growth rates are not intrinsic characteristics of the firms but are the
consequence of the market process and they are mutually determined;
how one firm’s activities expand or contract cannot be separated from the
performance of the other firms in the population. Thus to speak of the
competitiveness of the individual firm as if that is an attribute of that firm
is meaningless, whatever competitive performance it enjoys depends on
where it stands in the entire population of competitors and the particu-
lar nature of the market environment. This is the nature of a selection
process, growth rates are the degrees of fitness of the different activi-
ties and the degrees of economic fitness of rival activities are mutually
determining.
Efficient markets and adaptive behaviours in the sense discussed above
are only part of the problem. What is at least as important is that markets
are open, that they facilitate and create incentives to challenge established
positions and that they eliminate activities that are no longer viable in the
prevailing environment. Barriers to entry, whether created by incumbents or
24 Competition policy and development

by the regulation of the market process, have adverse effects on development

as does the operation of activities that are below the survival margin and
that are kept ‘alive’ through subsidy or other intervention. However, this
involves much more than a traditional concern with artificial barriers to
entry and exclusionary practices in general. Much more significant is the
‘supply’ of potential entrant activities, the stimulus to enterprise more gen-
erally and to innovation-based enterprise in particular. Without a flow of
entrants challenging existing positions, the continued basis of an evolution-
ary competitive process is undermined. Left to itself competition consumes
its own fuel and leads to market concentration and ultimately to the survival
of firms with broadly similar characteristics. Keeping competition active is
thus contingent on rules of the game that facilitate the formation of new
businesses and ensures that they have access to capital for expansion and
other resources in their early stages of growth. In turn, the rate of activity
creation will depend on the rate at which innovative business opportunities
can be identified and this will depend to a considerable degree on the wider
context of innovation and enterprise in the economy.
We turn now to the claim that the most effective competition policy is
a general innovation policy. The innovation processes identified above
provide the fuel that drives competition and the regulation of develop-
ment as to rate and direction. They depend to a degree on the support for
the formation of scientific and technological capabilities but this is not
sufficient. Innovation involves much more than invention and the recog-
nition of technological possibility; it also requires an ability to identify
possible markets, an ability to lead and organize the business process and
ready access to productive inputs (Witt, 1998; Metcalfe, 2004). Moreover,
as Schumpeter ([1911] 1934) recognized so clearly, the barriers to enter-
prise, whether economic, social or cultural, can be formidable and the
effect of tradition a major limitation on innovation. Thus the ability of
policy to facilitate enterprise, to connect the science and technology base
to opportunities for commercial exploitation, lies at the core of the com-
petitive process. Recently, evolutionary scholars and others have devel-
oped this idea through an analysis of innovation systems (Teubal, 1996;
Edquist et al., 2004), expressed in terms of the activities external to the
firm that condition their innovative capabilities. Like markets, innovation
systems cannot be presumed, they have to be organized and sustained and
it is appropriate to think of them not simply in terms of national level
organizations but as locally organized sets of interactions (Edquist et al.,
2004). Systems of innovation imply different component knowledge-
based organizations and they also presume connections, interactions
between these organizations usually focused upon the pursuit of particu-
lar innovation problems in particular market and sector contexts. This is
 Competition and the regulation of economic development 25

not the place to expand on this rich literature except to make two points.
First, those innovation systems provide instituted support for the com-
petitive process; not all the dimensions of competition can be reflected
through markets. Second, innovation systems are embedded in the market
process and to this degree will be expected to self-organize and self-
transform as the innovation problems change. If the market processes
outlined above do not work well it is not likely that innovation processes
will work well either and innovation systems are more likely then to
degenerate into science and technology support systems with little con-
nection with business and development.
It is traditional in these literatures to focus on the connection between
development and innovation-based market entry. It is too easy to forget the
converse process, that of ensuring the exit of non-viable activities or firms.
The rules regarding insolvency and bankruptcy are to this degree essential
to competition policy in the process sense. Similarly, public policies of sub-
sidizing non-viable activities, for whatever reason, may have the conse-
quence that development is slowed and distorted as resources more
valuable in other activities are locked into inappropriate uses. A broader
issue is relevant here. It is not unusual to find business activities that would
be governed better by a different firm and so one stimulus to the competi-
tive process is the trading of distinctive activities among firms so that they
meet their strategic objectives better. The market for corporate control is so
often seen as a negative control mechanism for wayward management that
the more positive role of the market for corporate control as part of the
business innovation mechanism is too readily overlooked. Especially in
industries subjected to rapid technological change the trading of integrated
business activities is one essential component in the building of competi-
tive capabilities.
Having drawn a broad definition of the scope of competition policy as
regulator of development it is appropriate to reflect on its connections with
the regulation of competition in the narrower sense. Consider first the focus
on excess profits attributable to the exploitation of a monopolistic or
monopsonistic market structure. That this is possible is not denied but in
situations in which competition is active in the sense used here these po-
sitions are unlikely to last long unless supported by artificial restrictions on
market entry. Moreover, profits are, from this view, not the result of market
power but of superior competitive advantage grounded in superior busi-
ness knowledge. To regulate them away is to put at risk the incentives to
innovate in any substantial degree and, to the extent that these profits are
premised on superior innovative ability, to prejudice the further progress of
innovation. As Richardson (1960) pointed out long ago, all manner of
static market imperfections can be justified if they lead to superior paths
26 Competition policy and development

of investment and innovation, objectives that perfect competition by its

nature cannot serve well.6 The consequence of the competitive process is
almost inevitably concentration and market dominance unless this is offset
by innovation-based entry. Monopoly is the prize in the competition draw,
which is why innovation and entry are so important, not because of the
effect on price-cost margins but because of the potential effects of monop-
oly in limiting the sources of innovation. If there is a genuine problem with
monopoly it is in relation to the diminution of innovation that the policy
concerns should be addressed. We are not aware that this practice is the case
among competition authorities in general.
What then is the test for the presence of competition if the market struc-
ture test is ruled out? It is that the market structure is changing as measured
say by the rate of change of a concentration index such as the Herfindahl.
What then is the test for competition being pro-development? It is that the
market structure is evolving in such a way as to increase the efficiency and
effectiveness with which resources are used. If these tests are met, we
suggest that ‘antitrust’, per se, is not a reliable basis for intervention in the
competitive process.

CONCLUSION

We have suggested that the competition process and the development

process are so intertwined as to be indistinguishable to all intents and pur-
poses. An economy that is dormant is unlikely to be competitive, it will not
be characterized by the creation and application of new knowledge, it will be
asleep and it will offer no escape from poverty. By contrast an innovation-
based economy, in which new knowledge is continually generated and
applied, will be competitive. It will be characterized by ongoing structural
and qualitative change, by selection, by entry and exit so that the economy
continually becomes a new economy. In this process, competition policy is
far broader and more significant than is encompassed by the notion of
antitrust. It covers the regulation of the market process, the determination
of the scope of markets and the rules of the game within them, together with
the openness of markets. However, it extends beyond markets too, in par-
ticular, the wider conditions that influence innovation and enterprise. In this
context it seems unlikely that the recent debates in the WTO and elsewhere
on establishing competition law in developing economies will be fruitful
unless a narrow ‘within market’ perspective on competition is abandoned.
By contrast, if energies were devoted to the promulgation of the need for
innovation and enterprise then the task of ensuring competition would be
better done.
 Competition and the regulation of economic development 27

NOTES

1. This theme is the foundation of the Schumpeterian trade-off, in which monopoly power
provides the resources to fund innovation; the losses from restrictions of output must then
be balanced against the gains from better products or more efficient methods of pro-
duction (Littlechild, 1981; Nelson and Winter, 1982).
2. In his survey of industry dynamics processes in LDCs, Tybout (2000) discusses some
limited empirical evidence in favour of relatively high rates of turnover in plants and
employment, finding that efficiency, compared with survivors, is lower in exiting plants
and in entrant plants, and that these categories rarely account for more than 5 percent of
total output in any year. This suggests that some entrants fail to survive, and that those
that do soon overcome the liability of newness and achieve at least average levels of prod-
uctivity in the relevant populations.
3. As Singleton (1997) also points out, in many developing countries the focus of the atten-
tion of competition authorities would be on the activities of the State in allocating
resources, controlling prices and managing production and distribution.
4. Space precludes discussion of the ethical aspects of this stance. The blunt fact is that
innovation-based competition creates losers as well as winners. If average standards of life
improve they do so in the context of much distress and hopes falsified. Restless systems
are uncomfortable systems so there is a policy dimension of welfare protection that we do
not address here.
5. A context in which every firm is a local monopolist would be a system in which market
shares would be frozen and development suspended. The degree of perfection of markets
is a quite different concept from the degree of perfection of competition, a point that
Makowski and Ostroy (2001) seem to fail to recognize.
6. See Stiglitz (1997) for the more general argument that innovation and investment activities
incur knowledge overheads that make imperfect competition (in the Chamberlin sense) the
norm. In this view the so-called Harberger triangles and wastes of rent-seeking fall into
insignificance relative to the consumer surpluses created by innovation (Littlechild, 1981).

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3. Model competition laws
Cassey Lee

INTRODUCTION

The number of countries that have implemented competition law has

risen significantly in the past two decades. More than half of such
countries enacted competition laws within the 1990–99 period – the
decade of extensive economic reforms. The drafting of competition laws
in these countries benefited from the experiences of some of the more
developed countries or communities such as the United States, Japan,
Germany and the European Community. There is in fact a discernable
legal lineage in the competition laws of some countries (Table 3.1). For
example, Thailand, in drafting its own competition law, borrowed from
South Korea, which in turn was influenced by the competition laws of
Japan and Germany. It is well known that both Japan and Germany
implemented their competition laws during the occupation period by the
United States.
International aid and development agencies such as the OECD, the
World Bank and UNCTAD have also been influential in prompting devel-
oping countries to implement competition laws. Both Indonesia and
Thailand implemented their competition laws as part of their commit-
ments in the structural adjustment programmes in the aftermath of the
Asian financial crisis in 1997/98. Similarly, South Korea made significant
reforms in its competition law under similar circumstances.

Table 3.1 Country influence in competition law design

Country Influence From

Japan (1947) USA (1890)
Australia (1974) USA (1890)
South Korea (1980) Japan (1947), Germany (1957)
Taiwan (1992) Japan (1947), Germany (1957)
Thailand (1999) South Korea (1980)
Indonesia (1999) USA (1890), Japan (1947), Germany (1957), EC

29
30 Competition policy and development

Such international agencies have also played another important role,

namely in providing technical assistance in the drafting of competition
laws. An aspect of this is the formulation of a ‘model competition law’,
which serves as a template for developing countries that are drafting their
own laws. The World Bank published its model in 1999, while UNCTAD’s
latest version was published in 2003. The Commonwealth Secretariat has
also issued its own model competition law in 2002.
There are very few discussions on the similarities and differences between
these model competition laws. This gap in the comparative competition law
literature is surprising given their importance as potential templates for
countries drafting their own competition laws. This chapter attempts to
address this gap by comparing the two major model competition laws pub-
lished by the World Bank-OECD and UNCTAD. Apart from discussing
the similarities and differences between these two model laws, the chapter
attempts to draw implications for policy-makers involved in the drafting of
competition laws.
The outline for the rest of the chapter is as follows. A comparison between
the model competition laws of World Bank-OECD and UNCTAD is under-
taken in the next section. In the sub-sections the focus is on the objectives
of competition law, its scope and definitions, restrictive agreements, abuse
of dominance and merger controls. The final section concludes. The relevant
excerpts of the model laws are provided in the appendices.

THE WORLD BANK-OECD AND UNCTAD MODEL

COMPETITION LAWS
There are some standard features of competition laws that are usually
present in almost all competition laws that have been enacted (Table 3.2).
These include the following:

● a statement on the objective of the competition law;

● a delineation of the scope of the law and definitions therein;
● a list of prohibited agreements and arrangements;
● abuse of dominance; and
● merger controls and notification.

The discussions on the above points in each document are quite distinctive.
The World Bank-OECD provides a more broad-based and foundational
discussion on each item, with occasional references to the experiences of a
few developed countries such as the United States, Canada and France. The
UNCTAD document on the other hand, devotes a considerable amount of
 Model competition laws 31

Table 3.2 Basic structure of model competition laws

Main Areas World Bank- UNCTAD

OECD (1999) (2003)
Objective Chapter 1 Chapter 1
Definition Chapter 2 Chapter 2
Restrictive agreements Chapter 3 Chapter 3
Abuse of dominance Chapter 5 Chapter 4
Merger controls Chapter 4 Chapter 5

space to country experience, including many developing countries. One gets

the impression that the World Bank-OECD approach is generally more sub-
stantive (in the basic foundation) while UNCTAD is more inclusive (record-
ing a wide range of experiences). This is consistent with perceptions on the
modus operandi of the two organizations – the former seeks to influence
policy implementation directly (e.g., financial aid with structural reform
requirements), the latter more persuasively (via advisory technical assis-
tance). In the following sub-sections, the recommendations from both the
World Bank-OECD and UNCTAD model competition laws are compared.

Objectives of Competition Law

The objective of competition law is stated in the World Bank-OECD (1999,

p. 142) in the following manner: ‘This Law is intended to maintain and
enhance competition in order ultimately to enhance consumer welfare.’
Similarly, in UNCTAD (2003, p. 13) as: ‘To control or eliminate restrictive
agreements or arrangements among enterprises, or acquisition and/or
abuse of dominant positions of market power, which limit access to
markets or otherwise unduly restrain competition, adversely affecting
domestic and international trade or economic development.’
The World Bank-OECD’s approach is to define the objective of compe-
tition law in broader terms, namely to protect and enhance the competition
process. UNCTAD focuses on the actions that are needed to achieve this.
These two statements are different sides of the same coin. This is recognized
in the World Bank-OECD (1999, p. 2): ‘The most common of the objec-
tives cited is the maintenance of the competitive process or of free compe-
tition, or the protection or promotion of effective competition. These are
seen as synonymous with striking down or preventing unreasonable
restraints on competition.’
Despite such similarities there are differences in the rest of the statements
of definition in the two documents. These refer to the ‘ultimate’ targets or
32 Competition policy and development

beneficiaries of competition law enforcement. For the World Bank-OECD,

the ultimate objective is the enhancement of consumer welfare. Some may
contend that this may be too restrictive, preferring social welfare instead.
UNCTAD’s approach to defining the ultimate beneficiaries of competition
policy is somewhat broader, emphasizing the domestic and international
trade and economic development. A consequence of this broader approach
is that the ultimate beneficiary in UNCTAD’s definition is vague or can
even be interpreted as left undefined.1 This has the advantage of implicitly
incorporating a wide range of objectives such as consumer welfare,
social welfare, economic efficiency and the protection of small business.
The disadvantage is that some of these implicit objectives may conflict with
each other.
There is a general consensus amongst economists that one of the poten-
tial benefits of competition is economic efficiency. However, economic
efficiency may also be consistent with non-competitive situations, for
example, in cases involving natural monopoly, network effects and inno-
vation (dynamic efficiency).
As shall be seen later, the choice between narrow and broad statements
of competition law objectives may have implications for the instruments,
criteria and legal and economic standards in administering and enforcing
competition law (World Bank-OECD, 1999).
How should countries frame their statement on competition law objec-
tives? Should they adopt the more focused but narrow approach of the WB-
OECD or the broader but conceivably vaguer approach of UNCTAD? A
brief survey of 23 countries (Table 3.3) indicates that the enhancement of
competition (19 countries), the elimination/prevention of Restrictive
Business Practices (RBPs) (11), economic efficiency (10), consumer welfare
(8) and economic freedom (6) are the five most cited objectives of compe-
tition laws in the countries surveyed.

Scope of Competition Law

The scope of competition law specifies the entities (enterprises, natural

persons etc.) to which the law applies. It can also specify any exclusion from
the law. Excerpts from the WB-OECD and UNCTAD model competition
laws are presented in Appendix 3.1 at the end of the chapter.
Typically, competition law covers all commercial economic activity in its
myriad forms. These include actions, transactions, agreements and
arrangements involving goods, services and intellectual property. Both the
WB-OECD and the UNCTAD model laws have this basic statement.
There are some interesting differences between the two model laws. The
WB-OECD model law includes acts undertaken outside the country but
 Model competition laws 33

Table 3.3 Statement on competition law objectives in selected countries

Country Promote Eliminate Economic Economic Consumer

Competition RBPs Efficiency Freedom Welfare
Algeria X X X
Armenia X X
Canada X X
Denmark X X
Estonia X X
Gabon X X
India X X X X
Hungary X X
Mongolia X X
Norway X X
Panama X X X
Peru X X
Russia X X
Spain X X
Sweden X
Switzerland X X
USA X X X
Taiwan X X
Tunisia X X X
Ukraine X
Venezuela X X X X
Zambia X X X X
EC X
Total 19 11 10 6 8

which have substantial effect in the country. It also excludes workers’ and
employees’ union-related activities.
In its model competition law, UNCTAD includes ‘natural persons’ (as
distinct from and in addition to enterprises) as a separate entity to which
the law applies. Such natural persons include the owners, managers or
employees of enterprises. UNCTAD also excludes all acts of the State and
State-related agencies from the application of the competition law. The dis-
cussions in UNCTAD (2003) appears to suggest that State-owned enter-
prises may be included but this varies from country to country.
The extraterritorial element in the WB-OECD model law is an interest-
ing one. While relevant, it remains to be seen how such provisions can be
enforced, particularly in small developing countries. Unlike UNCTAD the
WB-OECD defines ‘firms’ as including natural persons. The exclusions
related to the State that are provided for in the UNCTAD model law also
34 Competition policy and development

require careful consideration. Developing countries may pursue develop-

ment strategies that require significant state intervention in the economy
that may compromise competition (at least in the short and medium term).
Even if such strategies are to be pursued and State-related acts are excluded
in the competition law, some mechanisms of consultation (with the com-
petition authority) should be implemented, at the very minimum.

Definitions in Competition Law

The importance of definitions in competition law becomes apparent in the

process of enforcing a competition law. Characterizations and measures
of market structure depend on the definitions employed in the law.
Definitions can be set out generally in the initial part of the statute or more
specifically in the relevant sections of the statute such as mergers and abuse
of dominance.
Appendix 3.2, at the end of the chapter, sets out some of the basic
definitions in the model competition laws of both the WB-OECD and
UNCTAD. Both the WB-OECD and UNCTAD are in agreement on the
choice of two major definitions in competition law, namely firms or enter-
prises and the (relevant) market. The WB-OECD uses the term ‘firms’ in a
broader sense to include ‘any natural or legal person, government body,
partnership or association in any form engaged directly or indirectly in eco-
nomic activity’. UNCTAD defines ‘enterprises’ in a similar way to the WB-
OECD’s meaning of the term ‘firm’. Both the WB-OECD and UNCTAD
also agree on the two elements in the definition of the market/relevant
market. These are substitutability of goods (product market) and geo-
graphic delineation (geographic market).
In addition to the above, the WB-OECD’s model competition law also
defines very basic terms such as ‘competition’ and ‘good’. UNCTAD on the
other hand, provides a specific definition on the ‘dominant position of market
power’. The WB-OECD also defines dominant position but in the sub-
section pertaining to the abuse of dominant position. Overall, both model
competition laws agree on the basic definitions used in competition laws.

Restrictive Agreements

Transactions between firms are often governed by implicit or explicit agree-

ments amongst themselves. These agreements can be classified as either
horizontal or vertical agreements (UNCTAD, 2003, p. 20):

● Horizontal agreements are concluded between firms engaged in the

same activities.
 Model competition laws 35

● Vertical agreements are concluded between firms at different stages

of the manufacturing or distribution process (i.e., between an
upstream and a downstream firm).

Such agreements tend to be ‘restrictive’ in the sense of reducing the indepen-

dence of firms involved to undertake alternative business decisions. When
such agreements significantly lessen competition, they are said to be ‘anti-
competitive’. The five major types of restrictive agreements identified in both
the WB-OECD and UNCTAD model competition laws are as follows:

● price fixing (includes tariffs, discounts, surcharges and any other

charges);
● quantity fixing;
● market allocation (includes geographic and customer allocation);
● refusal to deal (comprising both refusal to purchase and refusal to
supply); and
● collusive bidding/tendering.

With the exception of collusive bidding, all the above agreements can take
place either horizontally or vertically. The term ‘vertical restraints’ is also
used to denote the various types of restrictive vertical agreements such as
retail price maintenance (a form of price fixing), quantity forcing (quantity
fixing), exclusive dealing (where a manufacturing firm prohibits a distribu-
tor firm from dealing with competing products or distributors, subject to
the threat of refusal to supply), and tying (also subject to the threat of
refusal to supply).
While both the WB-OECD and UNCTAD model competition laws are
in agreement on the types of restrictive agreements (see Appendix 3.3),
there are some differences in terms of the provisions for:

● horizontal vs. vertical restrictive agreements; and

● per se vs. rule of reason prohibitions.

The WB-OECD model law makes an explicit distinction in their model

law between prohibitions subjected to per se illegality and rule of reason.
In the model law, horizontal restrictive agreements (i.e., agreements
between competitors) that are subjected to per se illegality include:

● price fixing;
● quantity fixing;
● market allocation;
● refusal to deal;
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