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'Crisis is critical period for competition regulators'
May 3, 2009
 By Ann Crotty
Outgoing competition tribunal chairman David Lewis believes the crisis has brought an abrupt end to a honeymoon period for competition authorities globally. During the past 15 years of rampant free market activity, competition regulators have generally enjoyed the support of their governments and citizens as they set about curbing the anti-competitive instincts of business.
Now the dramatic change in economic conditions seems set to change all that. Ahead lies an uncertain period of tension as consumers and producers demand protection from free market forces, says Lewis.
Judging by some responses from the corporate community to recent adverse findings by the competition tribunal, that future may already be with us.
In a talk to Turkey's competition authority last month, Lewis recalled that he was once asked in an interview whether the tribunal should still be fining firms for cartel conduct "when they so desperately need to improve their margins".
Lewis makes no specific prognosis but can it be long before the likes of ArcelorMittal South Africa or Sasol try to pass off some or other anti-competitive deed on the pretext that its status as a national champion must be protected? Or before the likes of Aveng and Murray & Roberts try to persuade the government to allow them to indulge in a bit of bid-rigging if South Africa's construction industry is to survive? Then there are the millers and bakers and the dairies.
It is easy to imagine how 10 years of effective competition policy implementation can be undone in short order.
Lewis has played a critical role in ensuring that South Africa has a vigorous competition policy environment, but he is troubled about the challenges he foresees for enforcers locally and globally.
In addressing the Turkish authority, Lewis described the past 15 years as a golden age for competition law and policy, during which high global growth rates and market friendly economic policies prevailed.
In 1990 there were just 14 functioning competition authorities worldwide; by the end of that decade the number had increased to just under 100. India and China are the latest high-profile additions to the list.
Lewis attributes the "massive up-take of competition law and policy" to the spread of free enterprise and liberalisation in developed and developing countries during the 1980s and 1990s.
This process was characterised by two developments - "a significant reduction in barriers to cross-border trade and capital flows; and domestic market reforms". Through privatisation, these reforms "significantly reduced the direct role of the state in production". Through deregulation, they "purported to lower what were widely construed as domestic regulatory barriers that impeded business entry and growth", said Lewis.
"These days one hears much - and rightly so - about market failure, but it is often forgotten that the underlying reasons for widespread acceptance of liberal economic policies reside mostly in state failure. In developing countries, this was manifest in the shockingly poor service delivered by corrupt and incompetent states and state-owned enterprises."
By the late 1980s, it was clear that the statism characterising post-World War 2 development economics and policy had run into the sand, Lewis said.
Across the globe as the state retreated from national economies, a common theme began to emerge. "While market liberalisation did indeed prove capable of enhancing economic performance, experience starkly demonstrated, yet again, that markets, like all other institutions, require a framework of rules governing the conduct of participants," said Lewis. The core elements of market economy regulations were "rules governing the process of competition".
As Lewis sees it, free markets "are only able to fulfil their considerable promise in the context of a regulatory framework that would blunt immensely powerful incentives to collude in a competitive structure or to abuse a monopolistic structure".
The widespread appreciation of the threat to free markets posed by market participants themselves led to the proliferation of competition regulators during the 1990s.
But, as Lewis points out, that was then. Now we are in a period of economic crisis.
"This is no longer a period where market forces are going to be celebrated but rather one where resonant demands will be made by citizens and producers for protection from market forces."
Policymakers will be pressed to "subordinate pro-market competition policies to state-centred social and industrial policies, demands that will be bolstered by dramatic evidence of deep-seated market failure. State failure will be forgotten; all that will be seen will be market failure and the state will be charged with overcoming that."
Lewis forecasts that the demands on competition regulators will be considerable as well as contradictory.
"There will be a simultaneous demand for more robust enforcement of anti-trust rules and for greater selectivity in the application of those rules."
He predicts that every price shock will generate public and official suspicion of cartel conduct and every market subject to single firm domination will be presumed to reflect exclusionary monopolistic conduct.
On the flip side, "there will be pressure to permit mergers that are manifestly anti-competitive in order to save troubled firms or create 'national champions', just as there will be pressure to permit 'export cartels' or even 'recession cartels' to bail out troubled firms or provide them with an advantage in the export market".
For evidence of this trend Lewis refers to recent mergers facilitated by the US and UK governments and central banks, which are set to create highly concentrated financial markets. He fears that as recession reverberates throughout economies other sectors will look for similar "special" treatment.
Lewis suggests that competition authorities must be determined in their willingness to use their powers to robustly enforce their rules. "These (powers) include, particularly in an economy like South Africa whose markets are strongly susceptible to single- firm dominance, rules against abuse of that dominance."
In light of their generally constrained resources Lewis also recommends that enforcers develop strategic responses. Thus our own competition commission has developed an enforcement strategy including a focus on food markets and on state tender bid-rigging.
He advises authorities to be "equally vigilant in their scrutiny of well-intentioned government initiatives that may give rise to adverse unintended consequences", like our government's proposed greater regulation of private health care in order to control prices so that more people can access private health facilities. Lewis argues that this objective would be more effectively realised by imposing more vigorous competitive disciplines than by greater regulation.
He urges competition agencies round the world to work together to ensure that not only are they not "condemned to irrelevance" but also that recovery from this crisis is not set back "just as it was in the Great Depression when anti-trust laws were actually suspended".
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