Effective Assistance Needed to Help Developing Countries Introduce Competition Laws

Consulting Fellow, RIETI

Rwanda is remembered by many for its sad history of devastating tribal conflict in the 1990s. Very few people, however, know that a competition law existed and was effectively functioning in Rwanda as early as the 1960s.

Introduction of competition law in developing countries

In the book Rwanda chuo ginko sosai nikki ("The Diary of the Governor of the National Bank of Rwanda") written by the late Masaya Hattori and published by Chuo Koronsha in 1972, Hattori recounts how Rwanda enacted a law prohibiting price-fixing and other monopolistic arrangements based on his proposals. The book describes how the law, by effectively preventing cartel activities of foreign merchants, helped Rwandan merchants - whose status in the market was very low - became successful. It is unknown, however, whether any competition law remains in effect in Rwanda today.

Rwanda is an exceptionally pioneering case that was initiated by Mr. Hattori, a Japanese national with outstanding abilities, who was then serving as governor of the Rwandan central bank. In general, it is fair to say that competition legislation hardly existed in developing countries until the 1970s. However, from around the 1980s to the present, in Asia, Central and South America, Eastern Europe and Africa, one country after another has enacted competition laws. These countries include developing countries, former socialist countries, and even countries that remain under socialist rule. Today, more than 90 countries around the world have some sort of competition legislation or its equivalent. There have been media reports that China, too, will soon enact a comprehensive competition law.

Both external and internal factors are behind these moves by developing and former socialist countries to introduce competition legislation. External factors include requests by the International Monetary Fund (IMF), the World Trade Organization (WTO) and others, while the major internal factor is the need to establish a market environment that facilitates free and fair competition as a means to develop the national economy. There may be some cases where a country, perhaps reluctantly, introduces competition law under external pressure. But many other countries must do so because they believe the promotion of competition policy will serve their national interest.

Particularly in countries with a history of crony capitalism, where former state-owned companies retain substantial power in the market, the development of a fair market environment is crucial to economic development. Competition law, along with the creation of an independent competition enforcement authority, constitutes the most critical infrastructure required to achieve such a fair market environment. Recent developments appear to indicate that to some extent, these governments have gained a deeper understanding of the benefits of implementing competition law. One study found a positive correlation between long-run growth and effective enforcement of competition legislation. (Mark A. Dutz and Aydin Hayri [2000] "Does More Intense Competition Lead to Higher Growth?" World Bank Policy Research Working Paper No. 2320.)

Ideals and reality

However, enforcement of competition legislation is not easy. Indeed, the majority of national competition enforcement authorities are having difficulty implementing such laws. Although conditions vary from country to country, the following problems are commonly observed.

(1) Lack of resources among competition enforcement authorities
In case of newly established competition enforcement authorities, problems are not limited to quantitative issues such as lack of personnel and budgetary resources. More often than not, they also face qualitative problems in the form of insufficient technical expertise to enforce and interpret laws.

(2) Insufficient understanding of competition legislation by judicial authorities
Assume that the competition enforcement authorities in a given country have sufficient capabilities both qualitatively and quantitatively, and that a suspected violation of competition law has been sent to court. If judicial authorities are not sufficiently knowledgeable about competition legislation, there will be no adequate legal interpretation. Indeed, there are some countries where most cases of alleged violations have been dropped.

(3) Lack of social understanding of the importance of competition policy
Underlying all these problems is the fact that the general public lacks an adequate understanding of the importance of free and fair competition. This is an issue of paramount importance from the viewpoint of preventing activities that violate competition laws.

Support for competition law enforcement

The introduction of competition legislation in developing countries is not necessarily the result of outside pressure. In reality, however, many of these countries continue to face difficulties in implementing such law and thus seek assistance from developed countries. In fact, substantial support in this area has been extended by Japan, the United States and Europe. Japan's contribution, however, has just begun.

Having engaged in such support activities over the past several months, the thought has occurred to me that there are so many things Japan can do; and developing countries' expectations from Japan are very high. Indeed, many of the problems facing developing countries are identical to those encountered by the Fair Trade Commission of Japan in the past. Setting aside the problem of the judicial authorities, the other two difficulties - the lack of resources for competition enforcement authorities and insufficient social understanding of competition policy - are identical to problems Japan has experienced. Actually, Japan continues to suffer some of these problems. In this regard, Japan is one of the very few developed countries that can offer advice to the relevant authorities in developing countries from a perspective similar to their own.

An economy does not exist in a vacuum. Instead, it grows and changes in tandem with the law, society, and culture. It is necessary to understand an economy in the context of the correlations with these other factors and then, based on this understanding, to design laws and regulations for the market, and to consider how to enforce these laws and regulations. Developing countries are looking to Japan, which imported the concept of competition law initially developed in North America, and then allowed it to take root and develop in the Japanese context. Of course, the Japanese method will not be viable if adopted as is by competition enforcement authorities in developing countries. What is required is a kind of assistance that is not off the shelf, but tailored to the needs of each country.

The book introduced at the beginning of this column describes in great detail how Mr. Hattori deepened his understanding of Rwanda's circumstances by directly asking Rwandans about their economy, society, and how this led to the success of economic policy. The same attitude is required today in assisting developing countries with the implementation of competition law.

(Opinions expressed or implied in this column are solely those of the author, and do not represent the views of the Fair Trade Commission of Japan.)

March 15, 2005

March 15, 2005