Assessing competition within Asian nations

by Johannah Branson

As the recent relief efforts in Myanmar have shown, effective infrastructure and institutions are fundamental to meeting even the most basic human needs, not to mention supporting the complexity of economic activity under business as usual.

One institution we in western societies consider essential for well-functioning markets for the efficient distribution of goods and services, and which is certainly underdeveloped in Myanmar and several other South East Asian countries, is competition policy and laws – the sets of rules maintained by governments to outlaw or restrict anti-competitive practices.

Strong competition policy and laws, effectively enforced, promote fair trade and efficient markets, lower production costs and consumer prices, and consumer welfare and sovereignty. There is mounting evidence that strong competition policy also contributes substantially to higher productivity, greater innovation in the form of new high quality products and process technologies, and stronger economic growth and development. These benefits are of particular interest to developing countries and countries in transition, such as a number of the members of the Association of South East Asian Nations (ASEAN).

NZIER recently completed a study of competition in three sectors of particular interest internationally and in Asia – cement, telecommunications, and transport and logistics.

We compared these sectors in a number of ASEAN countries to see whether there are significant differences in market conditions and outcomes in countries that have different competition policies, including evidence of restrictive business practices in countries that do not have competition laws and improved market outcomes in countries that have recently introduced competition laws.

Our test hypothesis was that countries with fewer barriers to market entry have more competitive markets and more efficient market outcomes, such as more suppliers, lower market concentration, more frequent supplier entry and exit and consumer switching, higher productivity, lower margins and lower prices.

Of the ten ASEAN member countries, Indonesia, Singapore, Thailand and Vietnam have and enforce competition laws. Fair trade and competition acts are in the process of being drafted in the Philippines. Malaysia is currently debating whether to introduce competition legislation. Brunei Darussalam, Cambodia, Laos and Myanmar have no comprehensive competition laws.

Although our analysis was limited by the availability of accurate and comparable data, basic comparisons did reveal some correlations, if not necessarily causal relationships. There were indeed signs of better market conditions and outcomes in countries where competition laws are more advanced.

We found quite high correlation (0.68) between competition law status and ease of economic activity generally, as shown in Figure 1.
The overall conclusion for the case study sectors was as for ease of economic activity more generally – that there is a high but not perfect correlation between competition laws and market conditions and outcomes.

Competition laws generally make a significant positive contribution, but are not the sole determinant of how well markets behave and perform. Also of significant influence are product characteristics (e.g. the low value-to-weight ratio, marked economies of scale in production and high transportation costs for cement, favouring a small number of large plants), resource constraints (e.g. more room to expand port capacity in Malaysia than in alternative ports in Singapore and Indonesia), history (e.g. early liberalisation and competition in Cambodia’s mobile telecommunications sector) and complementary policies (e.g. openness to international trade and investment).

The implication for policy makers is that developing, implementing and enforcing competition laws may not be sufficient to achieve competitive market conditions and outcomes in all sectors, nor necessary for some sectors, but can generally be expected to be significantly conducive.

This was one of several papers contributed by NZIER to the inaugural research programme of the Economic Research Institute for ASEAN and East Asia (ERIA). ERIA is an international research body founded in 2007 to study aspects of economic development and integration in East Asia and to make practical policy recommendations to governments. As part of this research programme, NZIER also contributed studies on small and medium sized enterprises in Cambodia, services liberalisation, lowering border costs, trade facilitation and deepening economic integration.

If you would like to receive copies of these or other ERIA papers, please contact Jessica.Matthewson@nzier.org.nz