WORLD TRADE
ORGANIZATIONWT/WGTCP/W/228
19 May 2003
(03-2672)
Working Group on the Interaction
between Trade and Competition Policy
STUDY ON ISSUES RELATING TO A POSSIBLE MULTILATERAL
FRAMEWORK ON COMPETITION POLICY
Note by the Secretariat
The above-noted study, requested at the Working Group's meeting on 1-2 July 2002
(WT/WGTCP/M/18, paragraphs 96-98), is attached.  The attached version supersedes the
preliminary version (Job (03(31)) which was circulated on 18 February 2003.
The terms of reference for the study (WT/WGTCP/M/18, paragraph 96) are as
follows:
"The study would aim to summarize available information that might facilitate an
assessment of the costs and benefits of proposals that had been put forward for
development of a multilateral framework on competition policy.  It would be based
on existing literature and public sources, including studies and other documentation
prepared by or for UNCTAD, the OECD and the World Bank, and would address the
following three main elements:
(a) Examination of issues concerning the relationship between competition
policy as it relates to trade and industrial policy, including:
- any trade-offs and complementarities that may arise between the
application of competition policy and the attainment of dynamicefficiency gains in developing countries;
- historical experience regarding the relationship between competition
and industrial policy;
- the implications of possible provisions relating to non-discrimination,
transparency, procedural fairness and hardcore cartels for national 
industrial/economic policy options, and national experience in this
regard;
(b) Examination of issues and compilation of available empirical data relevant to
the resource implications of adopting and effectively implementing a
multilateral framework on competition policy, including provisions relatingThis document has been prepared under the Secretariat's own
responsibility and without prejudice to the positions of Members
and to their rights and obligations under the WTO.WT/WGTCP/W/228
Page 2
to hardcore cartels, transparency, procedural fairness and responding to
requests for voluntary cooperation.
(c) The impact of competition law and policy in tackling anti-competitive
practices of firms in a developing country setting."
The study was requested in response to the mandate for technical assistance provided
in paragraph 24 of the Doha Ministerial Declaration.  Paragraph 24 reads, in pertinent part, as
follows:
"24. We recognize the needs of developing and least-developed countries for
enhanced support for technical assistance and capacity building in this area, including
policy analysis and development so that they may better evaluate the implications ofcloser multilateral cooperation for their development policies and objectives, and
human and institutional development."
In particular, the study aims to respond to the demand for policy analysis and development to
assist Members to better evaluate the implications of closer multilateral cooperation for their
development policies and objectives.
As the Working Group has been informed (WT/WGTCP/M/19, paragraph 91), the
study has been prepared by a consultant, Dr. Simon J. Evenett, Director of Economic
Research at the World Trade Institute, University of Berne.  It is based entirely on existing
literature and public sources, including documentation prepared by other intergovernmental
organizations.
The attached version incorporates comments that were made by various delegations at
the Working Group's meeting of 20-21 February in addition to written comments received
subsequently from the delegations of Korea and Thailand.
Members with any comments may direct them to Mr. Rob Anderson
(tel:  022 739 51 98;  fax:  022 739 57 90;  email:  robert.anderson@wto.org).WT/WGTCP/W/228
Page 3
STUDY ON ISSUES RELATING TO A POSSIBLE MULTILATERAL
FRAMEWORK ON COMPETITION POLICY
By
Dr. Simon J. Evenett*
Director of Economic Research
World Trade Institute
University of Berne
TABLE OF CONTENTS
Executive Summary .............................................................................................................. ................ 7
I. THE RELATIONSHIP BETWEEN COMPETITION POLICY AS IT
RELATES TO TRADE AND INDUSTRIAL POLICY ....................................................... 9
A. KEY CONCEPTS IN THE LITERATURE ........................................................................................... 9
Box I.B1: An alternative characterizati on of the types of  efficiencies ................................. 10
B. THE OBJECTIVES AND INSTRUMENTS OF COMPETITION POLICY AND
INDUSTRIAL POLICY .................................................................................................................. 11
1. Competitio n policy ........................................................................................................... ...... 11
Box I.B2: Competition advocacy............................................................................................. 132. Industrial policy............................................................................................................ .......... 15
C.
COMPETITION POLICY AND DYNAMIC EFFICIENCY :  TRADE -OFFS AND
COMPLEMENTARITIES ............................................................................................................... 18
1. Possible trade- offs.......................................................................................................... ......... 19
Box I.B3: An analysis of the efficacy of creating national champions in
small trading economies through the re laxation of competition rules............................... 22
2. Complement aritie s ............................................................................................................ ..... 27
D. COMPETITION POLICY AND INDUSTRIAL POLICY IN THE PROCESS OF
ECONOMIC DEVELOPMENT IN ASIAN ECONOMIES .................................................................... 31
1. Japan ........................................................................................................................ ............... 32
2. Korea ........................................................................................................................ ............... 35
3. Chinese Taipei............................................................................................................... .......... 37
4. China ........................................................................................................................ ............... 38
Box I.B4: The creation of a "national team" in China.......................................................... 41
5. Summary ...................................................................................................................... ........... 42
E. MEANS BY WHICH POTENTIAL TENSIONS BETWEEN COMPETITION POLICY AND
INDUSTRIAL POLICY OBJECTIVES HAVE TRADITIONALLY BEEN MANAGED .............................. 43
                                                     
* The author thanks Maxine Kennett and Benno Ferrarini, also of the World Trade Institute,
for their comments and contributions to this stud y. Julian Clarke also provided careful research
assistance.WT/WGTCP/W/228
Page 4
F. IMPLICATIONS OF POSSIBLE PROVISIONS OF A MULTILATERAL FRAMEWORK
ON COMPETITION POLICY FOR INDUSTRIAL /ECONOMIC POLICY OPTIONS ................................ 48
II. RESOURCE IMPLICATIONS OF ADOPTING A MULTILATERAL
FRAMEWORK ON COMP ETITION PO LICY ................................................................ 52
Table II.T1: Since 1985 the number of jurisdictions with competition laws
has doubled .................................................................................................................... ......... 54
A. PROPOSALS REGARDING CORE PRINCIPLES ............................................................................... 55
1. Proposals regarding transparency........................................................................................ 55
2. Proposals regarding non-discrimination.............................................................................. 57
3. Proposals regarding procedural fairness ............................................................................. 57
4. Proposals regarding Special a nd Differential Treatment................................................... 59
B. PROPOSALS REGARDING HARDCORE CARTELS ......................................................................... 60
Table II.T2: The budgets of the competition enforcement agencies in seven
developing countries in 2000 ................................................................................................. 64
Table II.T3: Year 2000 outlays and employees of government bodies
responsible for the enforcement of national competition laws, as reported
by governments to the OECD................................................................................................ 65
C. PROPOSALS REGARDING MODALITIES FOR VOLUNTARY COOPERATION ................................... 66
Figure II.F1: Bilateral and trilateral cooperation agreements on competition
law enfo rcement................................................................................................................ ...... 72
D. CONCLUDING REMARKS ............................................................................................................ 73
III. THE IMPACT OF TACKLING ANTI-COMPETITIVE PRACTICES
IN A DEVELOPING ECONOMY S ETTING..................................................................... 73
A. INTRODUCTORY REMARKS ........................................................................................................ 74
Table III.T1: Comparison of price-cost margins in Singapore; Hong Kong,
China; the United States; and the OECD economies .......................................................... 76
B. EVIDENCE FROM THE RECORDS OF  COMPETITION ENFORCEMENT IN
DEVELOPING ECONOMIES ......................................................................................................... 78
Box III.B1: Bid rigging on USAID-funded construction projects in Egypt,
1989-1995...................................................................................................................... ........... 79
Table III.T2: Cartel enforcement cases in  selected developing economies .............................. 79
Table III.T3: Findings of anti-competitive conduct in selected developing
economies ...................................................................................................................... .......... 82
Table III.T4: Investigations of anti-competitive conduct by agencies in the
Czech and Slovak Republics.................................................................................................. 82
Table III.T5: European Commission reports on the activities of competition
authorities in selected  accession countries ........................................................................... 84
C. STUDIES OF THE IMPACT OF COMPETITION POLICY ON BROAD MEASURES OF
ECONOMIC PERFORMANCE ........................................................................................................ 86
Figure III.F1: Intensity of compet ition and antitrust policy ..................................................... 87
D. THE GROWTH OF INTERNATIONAL CARTEL ENFORCEMENT SINCE 1993................................... 89WT/WGTCP/W/228
Page 5
Table III.T6: Economies whose firms were found to be engaging in
cartelization by the US and the EC during the 1990s ......................................................... 91
E. THE EFFECTS OF PRIVATE INTERNATIONAL CARTELS ON DEVELOPING
COUNTRIES ............................................................................................................................... .9 2
Figure III.F2: Total imports of twelve cartelized products by developing
economies, 1981-2000 ........................................................................................................... .. 93
Box III.B2: The graphite electrodes cartel, 1992-1997............................................................. 94
Figure III.F3: Graphite Electrode Prices, 1980-2000 (Cartel:  July 1992-
1997) .......................................................................................................................... ...... 95
F. SUMMARY ............................................................................................................................... .. 98
Table III.T7: Estimated overcharges from the vitamins cartel, 1990-1999, in
year 2000 US dollars; by importer........................................................................................ 99
Table III.T8: Estimating the average savings-per-dollar spent on competition
enforcement.................................................................................................................... ....... 100
Box III.B3: The Lysine Cartel, 1992-1995............................................................................... 101
APPENDI CES ..................................................................................................................... .............. 102
Appendix I.A: The role of government policy in competitive Japanese
industries ..................................................................................................................... ........ 103
Appendix I.B: The role of government policy in uncompetitive Japanese
industries ..................................................................................................................... ........ 112
Appendix II.A: Contributions to the Working Group relevant to core
principles, including transparency, non-discrimination, and proceduralfairness ....................................................................................................................... ..... 117
Appendix II.B: Contributions to the Working Group relevant to the
treatment of hard core cartels.............................................................................................. 120
Appendix II.C: Contributions to the Working Group on the matter of
international cooperation..................................................................................................... 1 24
Appendix II.D: Contributions to the Working Group on the matters relating
to the progressive reinforcement of competition institutions in developing
economies through ca pacity building ................................................................................. 126
Appendix II.E: Framework agreements on cooperation on competition law
enforcement and related matters with the European Commission or
European Communities ....................................................................................................... 127
Appendix II.F: Documented number of cases notified by and to the
European Commission during 1991 - 2001 ........................................................................ 129
Appendix II.G: Documented cases of coop eration in selected merger reviews ..................... 130
Appendix III.A: Cross-country indicators of competition in national markets
and of the perception of an titrust policy in 2001 ............................................................... 131
Appendix III.B:  Descriptions of "sig nificant" enforcement actions brought
against cartels and abuse of a dominant position in Brazil, the Czech
Republic, Hungary, Mexico, Poland, Russia, and Slovak Republic, as
reported by these nations to the OECD in 2000. ............................................................... 135
Appendix III.C: Further information on six major international cartels
prosecuted in  the 1990s ........................................................................................................ 152WT/WGTCP/W/228
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IV. BIBLIOGRAPHY ................................................................................................................ 156
V. ALPHABETICAL INDEX OF  ABBREVIATIONS ......................................................... 165WT/WGTCP/W/228
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Executive Summary
1. This study examines three issues relevant to the work of the Working Group on the
Interaction between Trade and Competition Policy.  These are:
- possible trade-offs and complementarities between competition policy and industrial
policy, both in theory and with reference to historical experience, and the implicationsof a possible multilateral framework on competition policy in this regard.  A key
focus here is on whether and in what circumstances the application of competition
policy is likely to facilitate or impede the realization of dynamic efficiency gains;
- possible resource implications of adopting and effectively implementing a
multilateral framework on competition policy.  This includes, but is not limited to,
consideration of the resource implications of:  (i) adopting a national cartel law and
enforcement regime; and (ii) possible modalities of voluntary cooperation; and
- the impact of competition law and policy in tackling anti-competitive practices of
firms in a developing country setting.
2. The study is based entirely on existing economic, legal and developmental literature
and empirical information that is available from public sources.  Where appropriate, the study
has attempted to set out the different perspectives that have been advanced in discussions
among and between policymakers, practitioners, and scholars.  Considerations of space have
required a rigid focus on the issues set out in the terms of reference. Consequently, many not
directly-related matters—that are often the subject of vigorous debates among, in particular,scholars—have been omitted.
3. With regard to the first issue referred to in paragraph 1, Part I of the study identifies
and discusses four arguments that have been put forward in the relevant economic and
developmental literature as to how the attainment of dynamic efficiencies might be
compromised by the adoption or enforcement of competition law. Analysis of thesearguments reveals that one is sector-specific and not of general application, another does not
really constitute a case for restricting  rivalry between firms, and the remaining arguments
have substantial shortcomings.  The study goes on to identify five sources of complementarity
between competition policy and dynamic efficiency gains that have been advanced in the
literature.  At least three of these have been shown to have a solid empirical basis.  With somepotentially important exceptions of a sectoral nature, then, the weight of the evidence suggests
that measures to stimulate competition between firms tend to promote rather than impede
dynamic efficiency gains and economic growth..
4. Part I  of the study also includes an examination of historical experience relating to
the interaction between competition and industrial policy in several Asian economies.  Thisreflects the prominence given to the experience of these economies in relevant economic
literature and policy debates.  An important finding in this regard is that, even when measures
to restrict the degree of inter-firm rivalry were employed by some of these economies,
subsequent research and policy analyses have found that, in many cases, these measures were
unimportant or worse, counterproductive.   Reflecting this, recently, the economies examinedin this part of the paper have reduced their reliance on policy tools that may limit competition
and placed greater weight on the promotion of competition as a means of ensuring satisfactory
long run performance.
5. Even though these conceptual, empirical, and historical observations cast doubt on
the wisdom of constraining competition between firms as means of improving long-term
economic performance, it is recognized that, from time to time, most governments  willWT/WGTCP/W/228
Page 8
choose to limit competition at least in some sectors as a means of pursuing their diverse
economic, social, and developmental goals.  In this regard, the study describes five distinct
means by which any perceived tensions between these goals and the enforcement of
competition law have been managed in jurisdictions with active competition regimes.  The
study then goes on to examine whether these five means can be reconciled with currentproposals for a multilateral framework on competition policy.  It concludes that, by and large,
they can be – implying that a multilateral framework on competition policy of the type that is
currently being contemplated, while facilitating the effective application of competition
policy by WTO Members in various ways, is unlikely to prevent governments from pursuing
other policy goals or even from implementing policies that may sometimes limit competition
in ways that they have traditionally done so.
6. With regard to the resource costs of adopting and effectively implementing a
multilateral framework on competition policy, Part II of the study identifies, for each of the
main elements of a multilateral framework that  are described in the current proposals, the
types of resource implications that might arise.  Empirical data on this subject is sparse;
nevertheless, the study sets out what is available, particularly regarding the costs of operating
a national competition authority, and offers a number of cautions as to how this data shouldbe interpreted.  An important premise of this part of the study is that the costs of the current
proposals need to be assessed in light of the benefits foreseen.  For example, although
measures to promote voluntary cooperation between the competition agencies of WTO
Members, including developing country Members, would undoubtedly entail  some (probably
modest) resource costs, the purpose of such measures is indeed to save resources by enablingcountries to obtain necessary information and to take appropriate enforcement actions at a
lower cost than would otherwise be the case.  More generally, the nature and magnitude of
many of the benefits of a potential multilateral framework are likely to depend critically on
the magnitude of the resource costs that a WTO Member is willing to bear.
7. With regard to the third major set of issues included in the terms of reference, namely
the impact of competition law in tackling an ti-competitive practices in developing countries,
Part III of the study examines recent records and other publicly available information
regarding the enforcement of competition law in such countries.  Perhaps surprisingly,
extensive information of both a qualitative and quantitative nature is available with regard to
the enforcement activities of an increasing number of developing and transition countries with
active enforcement regimes.  One of the striking findings in this regard is the number of cartel
enforcement actions and, in particular, the number of bid rigging cases where the state hasbeen the target of a conspiracy.
8. This part of the study goes on to describe recent empirical economic research on the
impact of competition law enforcement on macroeconomic performance and price-cost
margins.  This literature is very  much in its infancy but it does point to the beneficial effects
of tackling anti-competitive practices in developing economies.
9. The remainder of Part III of the study is devoted first to describing the extent of
international cartel enforcement efforts in the 199 0s and then to assessing the likely effects of
enhanced enforcement against cross-border hardcore cartels operating in developing
economies.  Based on publicly available information, estimates are presented of the value of
developing country imports affected by private international cartels in the 1990s as well as ofthe overcharges paid by customers in these countries.  The evidence is overwhelming that the
latter run into the billions of United States dollars per annum.  In the case of one ten year-long
cartel with global reach (the international vitamins cartel), the evidence also shows that
countries without active cartel enforcement regimes  paid considerably more in overcharges
than countries with such regimes.  This rein forces the view that there are likely to be
substantial net benefits, particularly to developing countries, from strengthening national anti-WT/WGTCP/W/228
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cartel enforcement efforts and international cooperation in this area – which of course are two
of the principal goals of a multilateral framework.
I. THE RELATIONSHIP BETWEEN COMPETITION POLICY AS IT
RELATES TO TRADE AND INDUSTRIAL POLICY
10. As called for by the terms of reference, this part of the study addresses a number of
issues that concern the relationship between competition policy, particularly as it relates to
international trade and trade policy, and industrial policy. This part of the study will make
reference to both theoretical and empirical literature and other public sources.
11. The discussion begins with a review of the key concepts used in the extant literature.
Thereafter, the leading characterizations of competition and industrial policy are presented.
The study then reviews and assesses the various possible trade-offs and complementarities
that are identified in the pertinent theoretical and empirical literature.  Particular attention isgiven to experience of various Asian economies, in the light of the prominence that has been
accorded to these economies in economic literature and policy debates within and outside the
WTO Working Group.  Various ways in which possible tensions between competition law
and the attainment of dynamic efficiency gains, to the extent that such tensions arise, are
managed in jurisdictions having effective national competition regimes are then identified.This part of the study concludes with a discussion of the possible implications of relevant
provisions of a multilateral framework on competition policy for national industrial and
economic policy options.
A. 
KEY CONCEPTS IN THE LITERATURE
12. Before examining the interconnection between competition, trade, and industrial
policies, it will be useful to clarify as far as possible some key terms used in the extant
literature.
13. To begin with, it will be useful to distinguish between the final and intermediate
objectives of a policy.1 The former relate to the ultimate goal that the policy is intended to
achieve and not to some proximate goal. The latter can be some goal, perhaps even an
important goal, that must be accomplished before the final objective can be attained. For
example, as will be discussed at greater length later, some scholars believe the ultimate goal
of competition policy is to further economic development, and that this can be accomplished
through faster economic growth (amongst other means). The same scholars take the view that
raising investment outlays by firms stimulates economic growth and that, using the
terminology introduced above, increasing investment expenditures is an intermediate
objective of competition policy. (It is not the purpose of the current discussion to assess thevalidity of these claims; that matter will be taken up later.)
14. Nothing prevents a competition or industrial policy from having multiple final or
intermediate objectives—a point that will also be discussed at greater length later.
15. The objectives of policy are to be further distinguished from the instruments that a
government has at its disposal to secure those objectives. These instruments include measures
that a state, court, or their delegated representatives are empowered to take.
16. The concept of efficiency is widely used in discussing the objectives of competition
and will be used extensively in this part of the study. Voluntary economic exchange, by
                                                     
1 For alternative accounts of the objectives of competition policy see Graham and Richardson
(1997, pages 8-13) and American Bar Association (2003, in particular sections III and IV).WT/WGTCP/W/228
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definition, involves a purchaser paying an amount for a good that is equal to or less than the
most they would be willing to pay for that item. The difference between the amount actually
paid and the most that a customer would be willing to pay is known as the consumer surplus
of the transaction. Producers, on the other hand, will supply a good if the price they receivefrom selling it equals or exceeds their increm ental costs, and this difference is called the
producer surplus of the transaction. Adding across all transactions, the individual consumer
and producer surpluses yields the sum of the total producer and consumer surpluses of a given
market outcome or outcomes. Economists then define a market outcome to be efficient if
there is no other way to organize the exchanges in the same market so as to increase the sumof total producer surplus and consumer surplus.
17. The concept of efficiency has both static and dynamic aspects.  Static efficiency
refers to maximization of the benefits of voluntary exchange at a given point in time; that is,
maximizing the sum of producer and consumer surpluses in a given market at a point in time .
Dynamic efficiency refers to the maximization of the sum of such surpluses over time . The
latter takes account, in particular, of the impact of technical progress, innovation, and
investments of various types. It should also be noted that a link between dynamic efficiency
and commonly-used and observable measures of long-term economic performance, such aseconomic growth, is often implied—if rarely stated—in the extant literature on the role of
competition policy in economic development.
18. When describing the concept of efficiency, some have found it useful to take a
different tack and distinguish between four different types of efficiency.  Kolasky and Dick
(2002), for example, differentiate between allocative efficiency, productive efficiency,dynamic efficiency, and transactional efficiency, each of which is described in  Box I.B1.
Box I.B1: An alternative characterization of the types of efficiencies
Kolasky and Dick (2002) provide a taxonomy of efficiencies. The first notion of efficiency
they consider is allocative efficiency which they describe as follows:
"At the most general level, a market is said to achieve "allocative efficiency" when market
processes lead society's resources to be allocated to their highest value use among all
competing uses. In the context of market exchanges between consumers and producers, the
allocative efficiency principle can be restated more specifically to say that the value of a
product in the hands of consumers is equalized "at the margin" to the value of the resources
that were used to produce that product."
"This intuitive "equality at the margin" condition ensures that an economy maximizes the
aggregate value of all of its resources by placing them in the highest value uses. Starting from
an efficient market allocation, if a firm were to produce one additional unit of the product, the
resource cost to society would exceed what consumers were willing to pay for that last unit.
Total social welfare thus would fall as a result. By the same token, if the firm cut production
by one unit, the loss that consumers would suffer would exceed the value of the saved
resources in whatever alternative use they were deployed. Again, total welfare would fall as a
result" (page 49).
Kolasky and Dick then go on to discuss the concept of productive efficiency:
"Production is said to be efficient when all goods are produced at minimum possible total
cost. An equivalent way of phrasing the productive efficiency criterion is to say that there is
no possible rearrangement or alternative organization of resources (such as labor, raw
materials, and machinery) that would increase the output of one product without necessarily
forcing a reduction in output for at least one other product. This restatement highlights theWT/WGTCP/W/228
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 principle that firms' choices involve explicit trade-offs between competing demands for
scarce resources" (pages 51-52).
Dynamic efficiency is the third type of efficiency discussed by Kolasky and Dick:
"Whereas allocative and productive efficiency can be viewed as static criteria—holding
society's technological know-how constant—a mo re dynamic view of efficiency examines the
conditions under which technological know-how and the set of feasible products optimally
can be expanded over time through means such as learning-by-doing, research and
development, and entrepreneurial creativity" (page 56).
Transactional efficiency is the fourth type of efficiency discussed by Kolasky and Dick. They
note that:
"…market participants design business practices, contracts, and organizational forms to
minimize transaction costs and, in particular, to mitigate information costs and reduce their
exposure to opportunistic behavior or  [so-called] "hold ups"' (page 58).
Business practices may differ in the magnitude of the costs that parties must incur in order to
transact with one another and, therefore, some practices may be more "efficient" than others
in this regard.
B. THE OBJECTIVES AND INSTRUMENTS OF COMPETITION POLICY AND INDUSTRIAL
POLICY
1. Competition policy
19. Over the last one-hundred or so years there has been an evolution in the importance
given to different objectives of competition policy.  The goal of the following paragraphs is to
describe that evolution and to highlight its relevance for the current discussions over the
potential content of a multilateral framework of competition policy. The goal here is not to
assess the merits of different stated objectives of competition policy2 and the fact that any
objective is listed below should not be taken as an endorsement of that objective.
20. Initially, protecting market processes and rights to engage in commerce were
accorded a high priority, as the following quotation from a joint World Bank and OECD study
points out:
"While many objectives have been ascribed to competition policy during the past
hundred years, certain major themes stand out. The most common of these objectives
cited is the maintenance of the competitive process or of free competition, or the
protection or promotion of effective competition. These are seen as synonymous with
striking down or preventing unreasonabl e restraints on competition. Associated
objectives are freedom to trade, freedom of choice, and access to markets. In somecountries, such as Germany, freedom of individual action is viewed as the economic
equivalent of a more democratic constitutional system. In France emphasis is placed
on competition policy as a means of securing economic freedom, that is, freedom of
competition" (World Bank-OECD 1997, page 2).
21. This quotation suggests that protecting economic freedom and competitive processes
as well as fairness have historically been seen as objectives of competition policy in many
countries. In a similar vein, the new competition law of India refers, in its preamble, to the
objectives of preventing practices having adverse effects on competition, promoting and
                                                     
2 There is a fairly rigorous debate on this subject see, for example, the references in footnote 1.WT/WGTCP/W/228
Page 12
sustaining competition in markets, protecting the interests of consumers, and ensuring
freedom of trade carried on by other participants in markets in India.3
22. Only after competition laws were enacted did a school of thought develop that
justified certain competition laws on the grounds that they resulted in improvements in
economic efficiency. In fact, the logic of static analyses of efficiency in markets and therhetoric of "protecting the competitive process" as well as a focus on consumer welfare often
went hand in hand.  Posner (1976), for example, was to argue in his seminal treatise on US
antitrust law that the "fundamental objective" of such law is "the protection of competition
and efficiency" (Posner 1976, page 226). This perspective gained considerable currency and
accounts for the role that static economic efficiency still plays in the implementation of
competition policy.
23. More recently, a wide range of opinion has stressed the importance of dynamic
efficiency as a legitimate and compelling objective of competition policy. For example, Singh
(2002) argues that competition policy in developing economies should support the overall
development path of an economy. He points to:
"the need to emphasise dynamic rather than static efficiency as the main purpose of
competition policy" (Singh 2002, page 22).
24. In a related vein, Audretsch et al. (2001), Baker (1999), Baumol (2001), and Posner
(2001) make the point that the nature of technologies or consumer preferences in certain
industries and/or the fast pace of innovation in some industries, call for a reassessment of the
weight given to static efficiency as an objective of competition policy.  Consistent with thisview, as will be discussed below in greater detail
4, in many jurisdictions with active
competition regimes the promotion of innovation or dynamic efficiency gains has become an
important goal of competition policy, and the application of competition law explicitly takes
account of this objective. For this reason, it is misleading to suggest that competition policy as
it is currently practiced in major jurisdictions attaches little or no importance to considerationsof dynamic efficiency. For the moment, however, it suffices to note that scholars of market
processes in developing and industrial nations increasingly point to the importance of
dynamic efficiency considerations as an appropriate objective of competition policy.
Moreover, concerns about dynamic efficiency are not the sole preserve of either wealthier or
poorer economies.
25. As well, it should be noted that many states have explicitly introduced other
objectives into their national competition laws. For example, as has been noted in the WTOWorking Group, the Competition Act of 1998 in South Africa states that:
"The purpose of this Act is to promote and maintain competition in the Republic in 
order- 
(a) to promote the efficiency, adaptability and development of the economy; (b) to provide consumers with competitive prices and product choices; (c) to promote employment and advance the social and economic welfare of
South Africans; 
                                                     
3 India, The Competition Act, 2002 (No. 12 of 2003), available on the Internet at
http://dca.nic.in/competition_act2002.pdf
4 See sections C and E of Part I, below.WT/WGTCP/W/228
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(d) to expand opportunities for South African participation in world markets 
and recognise the role of foreign competition in the Republic; 
(e) to ensure that small and medium-sized enterprises have an equitable
opportunity to participate in the economy; and 
(f) to promote a greater spread of ownership, in particular to increase the
ownership stakes of historically disadvantaged persons" (Chapter 1, article 2).
26. This multiplicity of goals reflects the fact that:
"A fundamental principle of competition policy and law in South Africa thus is the
need to balance economic efficiency with socio-economic equity and development"(Introduction, web page of the Sout h African Competition Commission,
http://www.compcom.co.za/aboutus/aboutus_intro.asp?level=1&desc=7).
This example demonstrates that competition law need not be directed towards a single
objective.
27. Turning now to the instruments of competition policy, it is important to recognize that
such policy can be concerned both with private anti-competitive practices and with
government measures or instruments that affect the state of competition in markets.  For
example, trade barriers, barriers to foreign direct investment, and licensing requirements
(amongst others) can influence the extent of competitive pressures in markets and so are seenby many researchers as appropriate concerns of competition policy.
28. In many jurisdictions, the anti-competitive effects of government measures are
addressed through the instrument of competition advocacy activities.  In a report to the
International Competition Network, its Advocacy Working Group defined this instrument as
follows:
"Competition advocacy refers to those activities conducted by the competition
authority related to the promotion of a competitive environment for economic
activities by means of non-enforcement mechanisms, mainly through its relationship
with other governmental agencies and by increasing public awareness of the benefits
of competition" (ICN 2002, page i).
29. The potential contribution of competition advocacy activities to national economic
performance has been discussed extensively in the WTO Working Group on the Interaction
between Trade and Competition Policy.  An overview of the different types of competition
advocacy is provided in Box I.B2.
Box I.B2: Competition advocacy
The growing importance attached to competition advocacy is described by Anderson and
Jenny (2002).5
"Apart from the potential benefits for developing countries of appropriate competition law
enforcement activities, discussions in the WTO Working Group on the Interaction between
Trade and Competition Policy and other fora such as the OECD Global Forum on
                                                     
5 For an account of the importance of competition advocacy in the transition economies, see
Kovacic (2001) pages 291-292.  For a discussion of the role of competition advocacy in Canada, see
Anderson et al (1998).WT/WGTCP/W/228
Page 14
Competition Policy have called attention to the importance of so-called competition advocacy
activities.  These may include public education activities, studies and research undertaken to
document the need for market-opening measures, formal appearances before legislative
committees or other government bodies in public proceedings, or "behind-the-scenes"
lobbying within government.  These, it has been suggested in the Working Group, may be
among the most useful and high payoff activities undertaken by agency staff" (page 7).
Anderson and Jenny (2002) go onto to discuss the particularly strong link between
competition advocacy and regulation:
"The importance of competition advocacy activities arises partly in relation to regulation.  Of
course, in both developed and developing economies, regulation can and often does serve
valid public purposes.  For example, it is well-established that regulation can be an efficient
response to market failures such as imperfect information, the existence of a natural
monopoly (a situation in which a market is most efficiently supplied by a single firm) and
other such problems.  Nonetheless, it is im portant to recognize that, notwithstanding its
avowed aims, regulation often thwarts rather than promotes efficiency and economic welfare.
This is likely to be the case, for example, where it imposes restrictions on entry, exit and/or
pricing in non-natural monopoly industries.  In fact, experience in both developed and
developing countries shows that, in many cases, rather than having regulation imposed on
them for the public benefit, incumbent firms have often sought regulation for their own
benefit, for the purpose of limiting entry into the industry and helping them to enjoy higher
prices for their products.  Recognition of the significance of such conduct as a formidable
barrier to economic development dates back at least to Krueger (1974), and is affirmed in
recent analyses by the World Bank and other development-related agencies.  In the light of
this, efforts to remove inefficient regulatory restrictions and related interventions can be
central to the establishment of healthy market economies in developing and transition
economies" (page 7).
30. Notwithstanding the importance attached to competition advocacy in both national
competition regimes and the work on competition policy in international organizations,
another instrument—namely competition law and its enforcement — is at the center of
competition policy in many countries.  Audretsch et al . (2001) describe the role of
competition law as follows:
"Competition (or antitrust) law lays down the rules for competitive rivalry. It
comprises a set of directives that constrain the strategies available to firms"(page 614).
31. Hoekman and Holmes (1999) add more specificity by defining national competition
law:
"as the set of rules and disciplines maintained by governments relating either to
agreements between firms that restrict competition or to the abuse of a dominant
position (including attempts to create a dominant position through mergers)"
(page 877).
32. UNCTAD (2002a) provides a list of firms' actions that can fall within the purview of
competition law. Although there is no agreed list of the elements of competition law, the
following five figure prominently in most accounts of such laws:WT/WGTCP/W/228
Page 15
1. Measures relating to agreements between firms in the same market to restrain
competition. These measures can include provisions banning cartels as well
as provisions allowing cartels under certain circumstances.
2. Measures relating to attempts by a large incumbent firm to independently
exercise market power (sometimes referred to as an abuse of a dominant
position).
3. Measures relating to firms that, acting collectively but in the absence of an
explicit agreement between them, attempt to exercise market power. These
measures are sometimes referred to as measures against collective
dominance.
4, Measures relating to attempts by a firm or firms to drive one or more of their
rivals out of a market. Laws prohibiting predatory pricing are an example of
such measures.
5. Measures relating to collaboration between firms for the purposes of
research, development, testing, marketing, and distribution of products.
33. This list of five instruments is not supposed to be exhaustive, nor is it meant to
suggest that each element is given the same weig ht or referred to in the same terms in each
country with a functioning competition law.
34. It is worth noting, as well, that competition law and advocacy are not entirely separate
spheres:  in many countries, advocacy activities are explicitly authorised by relevant national
legislation.  For example, the competition laws of both Canada and India contain specific
provisions relating to competition advocacy activities.6
2. Industrial policy
35. The characterization of industrial policy in the extant literature is considerably less
precise than in the case of competition policy; consequently, a number of different
perspectives are described in detail below.
36. A recurring theme is that an objective of industrial policy in developing economies is
to facilitate a "structural transformation" of their economies. Singh (2002) puts it this way:
"…the crucial importance of industrial policy is to achieve structural changes
required for development" (page 22).
37. Likewise, in their survey of developing countries' industrial policies,  Dervis and Page
(1984) argue:
"In the period following the Second World War, structural change in favour of
industry was viewed as a necessary pre-requisite for modernisation and growth in
most, if not all, developing economies. The primary objective of their industrial
policy was to speed up the process of industrialization in order to achieve levels of
industrial development that were comparable with those in Europe and North
America" (page 436).
                                                     
6 See, in the case of Canada, the Competition Act (R.S. 1985, c. C-34), sections 125 and 126,
and in the case of India, the Competition Act 2002 (No. 12 of 2003), Chapter VII.WT/WGTCP/W/228
Page 16
38. Pugel (1984) in his analysis of post-war Japanese industrial policy strikes a similar
note:
"Japan's industrial policy in general aims at achieving real economic growth by
encouraging shifts in resources to more pr oductive uses, both shifts within firms and
industries and shifts in the relative sizes of different industries" (page 421).
39. Using the terminology developed earlier, the final objectives of industrial policy
appear to be faster national economic growth and economic development; the intermediate
objectives are to expand the output of those sectors with high value added or the potential for
considerable growth of value added. It is worth emphasizing that not every industry need—on
the definitions above—be identified as high value added or having prospects for fast growth.
Furthermore, nothing in principle prevents a non-industrial sector—such as a service or anagricultural sector—from being so identified.
40. Some scholars are unsatisfied with the available definitions of industrial policy and
have detected other objectives for industrial policy. For example, Bora et al. (1999)  argue as
follows:
"It should be pointed out at the outset that the term 'industrial policy' is not a well-
defined one. It is ill-defined in relation to its objectives, the industries that are covered
and the instruments that are used. The World Bank (1993)
7 has provided a working
definition of industrial policy as 'government efforts to alter industrial structure to
promote productivity based growth.' This definition is useful since it focuses on the
objective of economy-wide factor productivity growth rather than on merely changingthe structure of outputs."
"With regard to objectives, many developing countries have in mind the potential for
long run productivity growth improvements. However, in most cases industrial policy
is pursued with multiple objectives, increasing short-term employment, increasedoutput, better income distribution and enhancing technological capacity. They are
often also, rightly or wrongly, non-economic objectives of national pride and prestige,
as well as the perceived need to promote 'strategic' domestic industries."
"These objectives are further confused to the extent that many developing economies
have taken the view that ownership of assets matter. There is a concern that foreign
ownership may not always fit in well with broader development objectives, includingenhancing domestic capabilities. In some cases, foreign ownership could crowd out
domestic firms. Thus, even if the World Bank definition is adopted…the fact remains
that developing countries have raised co ncerns about the source of growth" (Bora et
al. 1999, pages 1-2).
41. In sum, then, there appears to be a multiplicity of objectives of industrial policies
employed by developing economies.
42. Like competition policy, there appears to be no accepted set of instruments that are
considered as part of industrial policy. Several characterizations of this set can be found in the
literature.  In his path-breaking and heterodox analysis of East Asian industrialization, Wade(1990) differentiates between functional and sectoral policy instruments. The latter he defines
as follows:
                                                     
7 Here Bora et al. are referring to the World Bank's well known study titled The East Asian
Miracle .WT/WGTCP/W/228
Page 17
"A sectoral industrial policy aims to direct resources into selected industries so as to
give producers in those industries a competitive advantage" (page 13).8
43. In contrast, functional policy instruments affect either economy-wide factors (such as
the supply of engineers or the price of energy) or, in principle, alter in the same manner firms'or investors' incentives irrespective of the industry or sector in which they operate. An
example of a functional instrument of industrial policy would be an economy-wide
investment subsidy or tax credit.
44. Tilton (1996) identified two types of industrial policy instrument in his analysis of
postwar Japanese economic performance. The first instrument is described below:
"The principal way industrial policy functions here is by allocating resources to
favoured sectors. It can do so through policies that directly provide resources to
industries, such as tax breaks, loans, subsidies, and import protection. More
important, however, have been policies to reduce competition between
firms…Industrial policy may also support industry by providing or helping to
circulate information about market or technological opportunities" (pages 2-3).
He goes on to add:
"A second form of industrial policy, strategic trade policy, seeks to appropriate the
benefits of strategic industrial sectors by promoting them at home and helping them
gain a larger share of world markets" (page 3).
9
45. For the purposes of this study, Tilton's characterization of industrial policy is
important because it highlights that some competition policy and trade policy instruments are
also seen by some as industrial policy instruments.
46. Pangestu (2002) presents perhaps the most exhaustive categorization of the
instruments of industrial policy:
"In practice, countries have used a wide range of instruments in the name of industrial
policy. These can be categorized as external, product, and factor market
interventions."
"External market interventions  involve protecting domestic industries from imports,
using instruments such as import tariffs, quotas, licensing, and local contentprograms, as well as export promotion measures to assist industries to catch up and
break into new markets. Common export promotion instruments are export subsidies,
export promotion zones, and subsidized credit (sometimes tied to export targets)."
                                                     
8 Noland and Pack (2003) define selective industrial policies in a similar manner to Wade's
definition of sectoral policies. This observation is of interest as Noland and Pack present an orthodox orneoclassical perspective on East Asian development that reaches very different conclusions than thosefound by Wade.
9 Strategic trade policy involves the setting of national trade policies—such as tariffs—so as to
enable a domestic sector to reap greater economies  of scale from the protected home market or to
enable the sector to expand output and lower costs through so-called learning-by-doing effects. Both of
these result in lower production costs enabling a nation's exports to, in principle, expand export sales.In addition to expanding the output of the domestic  industry, proponents of strategic trade policy note
that it can result in profits being effectively "shifted" from foreign firms to domestic firms.WT/WGTCP/W/228
Page 18
"Product market interventions  to promote competition in domestic markets include
competition policy (to ensure fair competition between domestic players as well as
for foreign players) and domestic market entry regulations."
"Factor market interventions  include policies such as performance requirements and
restrictions on foreign direct investment (FDI) designed to influence the operations of
foreign affiliates so that the host country realizes a net benefit from FDI. Factor
market interventions in the capital market and the financial sector are aimed at
correcting financial market imperfections, promoting infant industries, and protecting
or phasing out declining industries. These measures include setting up development
finance institutions, providing direct capital subsidies to selected industrial
enterprises, furnishing capital subsidies and capital assistance to declining or matureindustries and providing priority access to credit (often at subsidized rates) by
requiring financial institutions to lend to particular sectors or types of companies.
Intervention in the labor market may have efficiency and equity objectives. The
former have to do with human resource development through education and training;
the latter include minimum wage requirements and social safety net schemes"(pages 150-1).
47. Pangestu's characterization of the instruments of industrial policy is of interest for a
number of reasons. First, her characterization highlights how the enforcement of competition
law is one of the large number of policy instruments associated with industrial policy. This is
important because it implies that the preponderance of industrial policy instruments will fall
outside of the domain of a potential multilateral framework on competition policy, as
currently conceived of by its proponents. Second, Pangestu presumes the goal of competition
law here is to promote rivalry and not to restrain it as Tilton suggested. This the first hint of
divergent views as to the contribution of ri valry between firms to economic development.
C. 
COMPETITION POLICY AND DYNAMIC EFFICIENCY :  TRADE -OFFS AND
COMPLEMENTARITIES
48. The purpose of this section of the study is to describe the key conceptual linkages
between the implementation of competition law and the factors which are thought to influence
dynamic economic efficiency.  Following this, section D addresses experience concerning the
relationship between competition and industrial policy in several Asian economies. Taken
together, these discussions will provide an overview of the subtle and variousinterconnections between these two policies and the processes of economic development.
49. To establish a point of departure, recall that in a competitive market in the absence of
government interventions, asymmetries of information, impediments to the entry and exit of
firms, and anti-competitive practices by firms, prices and quantities will settle down to levels
that generate economically efficient outcomes at a given point of time; ie. attaining staticefficiency. In this situation, the prices that consumers pay for a good will equal the
incremental (or marginal) costs of the firm that produced the last unit of the good.
Cartelization and collusion by firms, which raise prices above incremental costs, will result in
a market outcome where the sum of producer and consumer surpluses fall below the level
attained with static efficiency. Consequently, measures to enforce competition laws thatencourage firms to compete (or discourage or prevent firms from resisting rivalry) will
improve the allocation of resources, by making market outcomes move towards the statically
efficient outcome.WT/WGTCP/W/228
Page 19
50. In general, therefore, tensions are unlikely to arise between the appropriate
enforcement of competition laws and the attainment of efficiency in a static sense.10 But does
the enforcement of competition law and inter-firm rivalry impede the attainment of dynamic
efficiencies, and thereby the long-term  performance of economies?  This question is the focus
of the next subsection of the study.
1. Possible trade-offs between competition law enforcement and dynamic efficiency
gains
51. This section of the study reviews and assesses four arguments identified in relevant
literature and policy discourse as to how and why the application of competition might
impede the realization of dynamic efficiencies or other industrial policy goals. The discussion
is based entirely on published economic and developmental literature. It is important to
appreciate that the objective here is to accurately characterize—and then assess—a number ofviewpoints that have received attention in discussions among policymakers andcivil society,
as well as in academia, on national and international competition policy matters. For this
reason, some of the perspectives presented here do not necessarily represent what might be
thought of as mainstream academic opinion.
52. The basis for the first such argument is the realization that, unlike industrial countries,
in many cases developing economies do not have well functioning factor markets—such as
stock exchanges and bond markets—and often have not been able to create institutions that
support the operation of markets such as bankruptcy codes, efficient contract enforcement,
and the like (Laffont 1998).  These "missing markets" and "missing institutions" are said to
alter the optimal degree of competition in an economy and, therefore, have implications forthe vigor and manner with which competition policy should be enforced.  It is also argued that
these considerations are especially important when considerations of dynamic efficiency drive
policymaking .  Singh (2002) explains the logic underlying this argument:
"In order to raise living standards of their people over time, developing economies
need high rates of investment to achieve fast rates of growth of productivity. Highrates of investment in turn normally require reasonable, if not, high rates of profits in
order to maintain the private sector's propensity to invest. This consideration leads to
the view that there may at times be too much competition rather than too little.
Competition would be too much if it leads to price wars, sharp falls in profits, all of
which are likely to diminish the corporate desire to invest" (page 19).
53. Implicit in this perspective is the assumption that firms in developing economies have
to raise funds internally and not through borrowing from banks or other financial
intermediaries.  If such borrowing is not possible, then an attenuation of competitive pressures
is said to enable firms to raise prices and secure funds for investment.
11 Tilton (1996) is
explicit about the effects of policies that reduce competition among firms in the following
remark:
"To the degree that these policies raise prices, they channel resources from consumers
towards targeted industries" (page 3).
                                                     
10 This statement assumes that the approach taken to the enforcement of competition law gives
due regard to technological and other considerations  (e.g., the importance of scale economies) that may
arise in particular sectors.  For related discussion, see subsection 1, below.
11 Of relevance to this argument is the evidence presented in Glen et al.  (2001, 2002) that
implies that the profits earned by firms in developing countries tend to fall faster than in the
industrialized economies. If this finding is correct, and firms in developing countries are indeed unable
to raise funds from banks or from stockmarkets, then market forces would be effectively underminingthe capacity of profitable firms to invest.WT/WGTCP/W/228
Page 20
54. Singh (2002) also argued that reducing rivalry involves more than maintaining prices
set by firms.  Excess capacity must also be attended to because, in his view, it can trigger
price wars.  Governments would, therefore, have to take an active role in managing
investment decisions by firms in high growth or  targeted industries (see Singh 2002, page 19).
In sum, this argument calls into question whether a maximal degree of competition is optimal
and suggests that increasing economic growth requires a mix of cooperation and competition
by firms.
55. A slightly different variant of this argument has been advanced by Amsden and Singh
(1994) in their analysis of "The optimal degree of competition and dynamic efficiency in
Japan and Korea". They observed that:
"In general, whether competition was promoted or restricted [in Japan] depended on
the industry and its life cycle: in young industries, during the developmental phase,
the government discouraged competition; when the industries became technologically
mature, competition was allowed to flourish. Later, when industries are in
competitive decline, the government again discourages competition and attempts to
bring about an orderly rationalisation of the industry (page 945)."12
56. Although these authors do not provide an explicit explanation for these claims, two
arguments that are consistent with the thrust of Singh (2002) might be developed, without
endorsement, along the following lines.  In the case of young industries, firms may need to
finance growth and reducing rivalry will result in higher prices that, in turn, can generate theinternal funds to attain this goal.
57. The argument for constraining competition in declining industries might proceed as
follows.  If firms have soft budget constraints or face little threat from bankruptcy
proceedings, then declining industries may perennially experience price wars and few exits
from the industry.  Such price wars will result in firms building up losses and greater debtsyear after year.  These ever-growing debts may end up compromising the solvency of the
industry's principal financial backers of the firms—that could be the state itself or banks—
which in turn could have serious macroeconomic consequences.  This outcome may be
prevented if firms are discouraged by the state from engaging in price wars while steps are
taken by firms and the government to bring productive capacity into line with falling demand.
58. One way to assess these arguments is to identify the intermediate objectives of
competition policy that are being alluded to.  In Singh's first formulation the intermediateobjective was to increase investment outlays.
13  The question, therefore, arises as to whether
restricting rivalry is the least costly means to obtain this intermediate objective; a claim that is
not demonstrated in Singh's analysis.  As Tilton acknowledges, reducing rivalry has the effect
of increasing prices paid by customers. In contrast, an investment subsidy or tax credit that
stimulated investment by the same amount as reducing rivalry, would not have the sameadverse effect on customers' welfare.  Admittedly, the investment subsidy or tax credit would
have implications for the government's budget .  Another alternative could be to channel
investment funds through the nation's banking system.  Arguably, Singh, Tilton, and others
have failed to demonstrate that these alternative policy measures are inferior to restricting
rivalry through cartelization or other anti-competitive practices.
                                                     
12 Amsden and Singh (1994) cite Okimoto (1990) in support of this claim.
13 Whether the increased investment outlays are actually used productively or as intended is
another important matter, but one that is probably beyond the remit of this study.WT/WGTCP/W/228
Page 21
59. A second  possible trade-off between competition policy and dynamic efficiency is
said to occur when firms need to attain a cert ain size in order to compete effectively on world
markets.  Some argue that in order to reach the appropriate size, state action is called for;
essentially to create or foster so-called "national champions."  These state actions may include
forced mergers and acquisitions (when a state instructs two or more firms to form a singlecommercial entity), and state-encouraged mergers and acquisitions by private firms (which
can result from adopting merger review regulations that places few constraints on mergers by
firms or that overlook the consequences of a proposed merger or acquisition that are unrelated
to competitiveness).  Furthermore, there is an  issue as to what should be the appropriate
competition law enforcement regime for national champions after the latter have been formed.
The following discussion clarifies why size might be important for a firm's competitiveness
and then discusses some of the implications of the potential relationship between enforcementof competition law, firm size, and considerations of dynamic efficiency.
60. In principle, firm size is said to be important for corporate "competitiveness" for the
following reasons:
1. economies of scale (where larger production runs are associated with low
average costs of production),
2. firms need to attain certain minimum scale to successfully innovate or
imitate, or to raise funds on capital markets, and when
3. so-called learning-by-doing is faster in larger firms.
61. When firms do have pronounced economies of scale then it is possible to construct
arguments, on efficiency grounds, that enforcing competition law so as to maximize rivalry
between firms is not necessarily a good idea. The following representative argument by Lau
(1996) is couched in efficiency terms:
"…the government has to take into account the existence of increasing returns to
scale which render the usual market allocation inefficient. For example, if the size of
the market will support it, it is better to have one minimum-efficient-scale plant than
to build two sub-minimum-efficient-scale plants. This is whether the government can
and should intervene to prevent potent ially inefficient and possibly ruinous
competition" (page 59).
62. These arguments still resonate with some policymakers.  For example, Estonia made
a similar argument to Lau's in a submission to a panel on "Competition Policy in Small
Economies" at the Third OECD Global Forum on Competition in February 2003 (Estonia,
2003).
63. As noted earlier, some point to the desirability of subordinating competition policy to
the goal of creating national champions or "national leaders," to use Amsden (2001)'s
influential account of the rise of non-Western economies. Referring to the latter as "the rest
14"
she argues:
"After floundering for a century, "the rest" succeeded in creating professionally
managed, large scale, national firms" (page 190).
This was accomplished in the following manner:
                                                     
14 Amsden's use of this term is not meant to be derogatory. She wishes to juxtapose "the West"
and "the Rest."WT/WGTCP/W/228
Page 22
'National leaders in "the rest," private or public, all shared one characteristic: they
tended to be a product of government promotion " (Amsden 2001, page 193).15
which could include inducements to firms to merge, forced take-overs, and the like.
64. Another important feature of policies employed to create national champions is that
they can involve discrimination  against foreign firms.  The discrimination can be de jure ; for
example, when foreign firms are simply banne d from buying or merging with domestic firms
in certain sectors.  Alternatively, a foreign firm's proposal to buy or to merge with a domestic
firm may be reviewed under a different and potentially more stringent procedure than when
two domestic firms decide to form a single combination.  The discrimination could also be de
facto ; for example, when merger review procedures are implemented in such a way that
proposed combinations involving domestic firms are treated differently than those involving
at least one foreign firm.
65. For the purposes of this study, the issue is not whether governments should or should
not promote national champions.  Nor is the issue whether mergers or acquisitions actually
attain the efficiencies and cost reductions that are envisaged, a matter which has beenextensively  debated in the industrial organization literature. Rather, the question is whether,
in order to do so, governments need or are well-advised to relax the enforcement of
competition law. Critics points to conceptual and evidential weaknesses in the case for doing
so.  A recent submission to the Third OECD Global Forum on Competition by the Republic
of Ireland succinctly summarizes the key arguments in this regard (see Box I.B3).
Box I.B3: An analysis of the efficacy of creating national champions in small
trading economies through the relaxation of competition rules
In a submission to the OECD's Third Global Forum on Competition, the Republic of Ireland
questioned the wisdom of small open economies creating national champions. It argued as
follows:
"National champion advocates argue that applying the principles of competition policy in
small economies can be harmful because firms are precluded from achieving the necessary
scale to compete internationally. Accordingly, industrial policy should encourage national
champions, and normal competition rules should not apply. There are however, several
reasons why the trade-off between competition and other policy goals [including] industrial
policy can be considered small, or even non-existent" (Ireland 2003a, page 2).
The first argument Ireland advances is given below:
"In most cases the relevant market is wider than the national market and hence an accurate
competition assessment, i.e. one based on the wider market, would not identify a competition
problem. Thus, for example, Nokia's strong position in the Finnish market is unlikely to be a
competition problem" (Ireland 2003a, page 2).
In this situation, therefore, competition from the "wider market" would ensure any benefits
from creating a national champion would not be eroded by higher domestic prices; thus there
would be no need to sacrifice stringent merger review procedures in order to promote national
champions.
Developing the argument further, Ireland points out that to the extent that creating national
champions substantially increases concentration in a domestic market, then there may actually
be a stronger case for enforcing competition law than would otherwise be the case. Ireland
argues that:
                                                     
15 Italics in the original quotation.WT/WGTCP/W/228
Page 23
"A sanguine position regarding a large or dominant firm…depends critically on distribution
and importation systems being open to competition, as this will mean dominant domestic
firms are exposed to international competition in the domestic consumer market, not just in
foreign markets. For this reason, small economies have all the more reason to apply
competition rules more vigorously in the importation and distribution sectors, and doing this
would ease any adverse domestic implications from national champions firms…" (Ireland
2003a, page 2).
Ireland then goes onto criticize the argument that domestic firms "need" profits for foreign
expansion; an argument, which if compelling, might imply that the enforcement of certain
competition laws (specifically those related to cartels and to merger review) place greater
weight on export competitiveness than on domestic customers' welfare.
"Monopoly profits could in theory have a beneficial effect by providing a source of funding
for the investment necessary to allow the national champion to compete internationally.
However, a number of criticisms of this argument can be made."
"Capital markets, rather than monopoly profits derived from domestic consumers, are a more
efficient source of funds for investment abroad, and almost certainly result in more sound
investment. Funds raised on capital markets, either via bonds or equities, impose obligations,
controls and incentives on the shareholders and management of firms. By contrast where a
firm has access to monopoly profits there is much less incentive to encourage sensible
investment at home or abroad."
"If monopoly profits are necessary to fund a foreign investment, then in effect the investment
is only viable because of a cross-subsid[y] from domestic consumers. Consequently the
overall effect on the economy would [be] negative as, in effect, the merger would be financed
by a tax on domestic consumers to subsidise competition in export markets."
"An alternative case might arise when a multi-product firm seeks to expand externally from a
platform of a domestic merger but where in one product market the merger raises monopoly
issues…Rather than blocking the whole merg er it would be more appropriate to apply
competition remedies to the specific domestic market power problem" (Ireland 2003a,
page 2).
Finally, Ireland implicitly criticized the assumption that larger domestic firms have greater
export competitiveness, especially when the creation of those larger domestic firms results in
a substantial reduction in the degree of rivalry between incumbent firms. Ireland notes that:
"It has been argued, by Michael Porter and recently also by the OECD, that the discipline
earned by intense competition in the domestic market is the best stimulus to success abroad.
Firms that have to compete domestically know how to cut costs, operate efficiently, please
customers and win business. This experience has given them an enormous advantage when
they expand into foreign markets…"
"In general the evidence is very much against the benefits of domestic monopolies as a
launching pad for mergers with foreign firms. In the Irish context there are few examples of
domestic monopolies that were protected from competition at home and that used this to
compete and expand effectively on foreign markets. Evidence, on the contrary, suggests that
the monopoly profits were neither used to expand abroad nor returned to the shareholder
(often the state) but instead were wasted in inefficiencies within these firms. These additional
costs present problems in terms of transitional costs when an industry or sector undergoes
restructuring" (Ireland 2003a, page 2).
Ireland concludes the discussion of this matter with the following statement:
"In summary the arguments supporting the suspension of competition law to encourage
national champions are weak. There are almost certainly better policy instruments available toWT/WGTCP/W/228
Page 24
encourage national champions than exemptions and protection from domestic competition"
(Ireland 2003a, page 3).
66. The first two perspectives described above purported to show that government
measures to restrain rivalry could, in certain circumstances, enhance dynamic efficiency.  Incontrast, the third  perspective purports to show that governments need not intervene to
promote rivalry—that is, by attacking mark et power—in markets where innovation is the
principal source of competition between firms and there are no barriers to entry by new firms.
This third perspective is of much older vintage than the first two.  Schumpeter in his classic
book Capitalism, Socialism, and Democracy  contrasted his view of the dynamics of a
capitalist economy—which he referred to as "plausible capitalism"—with the:
"essentially static conception emphasized in the contemporary neoclassical economic
analyses, both at the time he wrote and (with only modest amendments) fifty years
later" (Scherer 1992, pages 1416-17).
16
67. Schumpeter argued that the following types of innovations (or "technological
progress", as he put it) drove economic growth: new consumer goods, improved productionmethods and means of transportation, new markets, and new forms of firm structure and
industrial organization. Innovation, however, is an endogenous outcome and is itself driven
by entrepreneurs that seek higher profits.  According to this view, the riskiness of innovation
is such that entrepreneurs are more inclined to invest in innovation when:
"firms could deploy an array of restrictive practices to protect their investments"
(Scherer 1992, page 1417).
Thus,
"Schumpeter went beyond economists' long-accepted view that the expectation of a
monopoly position (e.g. through patent protection on inventions) was necessary tomake the venture worthwhile. Monopoly power already held also supported
investments in technological progress. Here, Schumpeter argued, both economists and
trust-busters had their priorities wrong" (Scherer 1992, page 1418).
In Schumpeter's own words:
"What we have got to accept is that [the large scale establishment or unit of control]
has come to be the most powerful engine…of progress and in particular of the long-run expansion of output not only in spite of, but to a considerable extent through, this
strategy which looks so restrictive….In this respect, perfect competition is not only
impossible but inferior, and has no title to being set up as a model of ideal efficiency"
(Schumpeter 1942, page 106).
68. Schumpeter argued, further, that innovation resulted in a continual process by which
new products simultaneously undermined the position of even entrenched incumbent firms
(the so-called process of "creative destruction").  He crystallized the differences between his
thesis and the neoclassical conception of competition and its emphasis on static efficiency as
follows:
                                                     
16 Scherer (1992) is cited extensively in this discussion because this academic article contains
a balanced account of both Schumpeter's thinking about the operation of market processes and of theresearch programs that were spawned by his seminal contributions.WT/WGTCP/W/228
Page 25
"But in capitalist reality as distinguished from its textbook picture, it is not [price]
competition which counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization…competition
which commands a decisive cost or quality advantages and which strikes not at the
margins of profits and the outputs of existing firms but at their foundations and theirvery lives. This kind of competition is as much more effective than the other as a
bombardment is in comparison with forcing a door, and so much more important that
it becomes a matter of comparative indifference whether competition in the ordinary
sense functions more or less promptly; the powerful lever that in the long run expands
output and brings down prices is in any case made of other stuff" (Schumpeter 1942,
pages 84-5).
69. As these quotations demonstrate, although Schumpeter presented an alternative
conception of the dynamics of market economies—and criticized orthodox analyses for their
characterization of market processes—he did not depart from the orthodox prescription that
fierce competition between firms is the motor for economic advance. Hence, Schumpeter's
theory is not a rejection of competition as the basis of innovation, economic progress, andgrowth but an alternative vision of how competition occurs.
70. The implications of Schumpeter's analysis for competition policy can be summarized
as follows:  state measures that seek to arbitrarily reduce concentration levels or to reduce the
profitability of innovative firms should be avoided, since this will diminish the incentives of
both incumbent and potential firms to invest in potentially profitable innovations and relatedactivities in the first place.
17  Rather, according to this perspective, attention should focus on
addressing barriers that reduce the profitability or likelihood of entry by new firms into an
industry.18  As will be seen below, to an important extent the enforcement of competition law
in jurisdictions with active competition regimes has already adapted itself to these insights, by
de-emphasizing the control of market concentration per se  and placing more emphasis on
entry conditions and other factors that affect the incentives for innovation in markets.
71. It is worth noting, in this connection, that recent empirical research has confirmed
that barriers to entry are substantially higher in developing economies than in industrial
nations (see Djankov et al . 2002 and De Soto 2001). If reforms cannot be introduced to
effectively lower these barriers—perhaps because in some situations poor governance
practices cannot be eliminated in any realistic time frame—then dynamic efficiency may
actually be best served by competition policy measures that prevent incumbent firms fromsetting higher prices to customers over the longer term. Moreover, to the extent that the
enforcement of competition law prevents or di scourages incumbent firms from taking steps to
foreclose entry by potential rivals, then such en forcement will strengthen the incentives of the
latter firms to invest in innovation. This is because these potential competitors will place a
lower probability of their eventual entry into a market being impeded and so will have greaterconfidence that their investments in innovation will bear commercial fruit. Specifically,
preserving the ability of innovative firms to enter a market—one of the sources of long-term
                                                     
17 This raises the empirical question of whether industries with more concentrated sellers tend
to have more innovative firms. Scherer (1992) recounts the twists and turns in the empirical literatureand summarizes the findings of what he believes is  the best research paper on the subject (Geroski
1990). Scherer described the results of the latter study of the propensity to innovate by British firms asfollows:
"innovation was found to be less vigorous in more concentrated industries. Thus, the results
did not support the 1942 Schumpeterian conjectures" (Scherer 1992 page 1424).
More recent surveys of the relationship between th e propensity to innovate and the concentration of
producers in a market are cited in paragraphs 90 and 91 below.
18 For related discussion, see Audretsch et al.  2001, page 619.WT/WGTCP/W/228
Page 26
economic performance in the Schumpeterian world—may well be contingent on the
appropriate enforcement of various competition laws.
72. A fourth  source of potential tension between competition policy, rivalry, and the
realization of dynamic efficiency relates to the existence of atypical production cost or
consumer preference structures in certain economic sectors.  A possible example of thiswould be the existence of a natural monopoly – i.e. a situation where, due to overwhelming
economies of scale, a market is most efficiently served by a single supplier.  Another example
which has received much attention in recent literature and policy debates relates to industries
where so-called network externalities are pervasive (see White 2001, for an accessible
economic analysis of such externalities and th e implications for regulatory and competition
policy.)  In the presence of such externalities, the maximum amount that consumers are
willing to pay for a good or service depends, in part, on the number of other consumers whoalso purchase the item in question.  Admittedly, much of the discussion of network
externalities takes place within the context of markets where firms have advanced
technologies such as the market for computer software. (In the latter market consumers
effectively place a premium on programs that create files which can be opened by and
amended in principle by many other persons.)  However, it should not be forgotten that manycommunication and infrastructure services, that are important for economic development,
exhibit network externalities.  Such services in clude telephones, railways, etc (see Laffont and
Tirole 2000).
73. Although the analysis of market outcomes in the presence of these externalities can
be complex, one theme that does emerge from much of the literature is that there are instanceswhere consumers will prefer that a smaller number of goods (and possibly a single good) be
available in the market place.  If a small number of firms each supply a different product to a
large number of consumers, then the externalities generated for consumers (which result from
the fact that each product they consume is consumed by many others) may well exceed any
adverse impact on prices that may follow from a high degree of market concentration.  Putsimply, there may be instances in which consumers may prefer concentrated market outcomes
with a small number of firms because of the network externalities that large output levels can
create.
74. Moreover, in such industries, firms may adopt pricing strategies that deliberately take
into account the impact of the current number of customers on the desirability of their product
to potential customers in the future. The latter may only be willing to buy the product once the
number of existing customers exceeds a critical level; in which case, firms will have anincentive to keep prices lower at present than in the absence of network externalities.
Therefore, network externalities benefit current consumers directly and through the stronger
than usual disincentives to firms to raise pric es. Both theoretical and empirical analyses of
industries with network externalities have s hown that firms often adopt complex pricing
strategies which typically involve substantial price discrimination across customers.
75. For the purposes of this study, it is worth emphasizing that the above arguments can
provide an efficiency-based rationale for not taking steps to maximize rivalry between firms
in particular (limited) circumstances. Put another way, in certain  sectors  with observable  and
identifiable  technological characteristics, maximizing rivalry among firms may harm the
interests of both consumers and producers.  None theless, this does not imply that there is no
role for competition policy in these markets; rather, it means that competition policy must be
applied in ways that take account of the technological characteristics of such markets—as
indeed competition authorities increasingly do.
19  Indeed, recent contributions highlight the
                                                     
19 A cursory look at the websites of the Antitrust Division of the US Department of Justice
(http://www.usdoj.gov/atr/),  the Bureau of Competition of the US Federal Trade CommissionWT/WGTCP/W/228
Page 27
importance of (appropriately tailored) competition rules in network industries, due precisely
to concerns over the market power that can be created or entrenched through network effects
(see, e.g. Church and Ware 1998).  As well, since network externalities are not found in every
sector of the economy, this fourth perspective provides at most a sector-specific and not a
general counter-argument to the contention that enhanced rivalry promotes dynamicefficiency.
76. To summarize the findings of this subsection of the study, although all four
perspectives outlined above imply that dynamic efficiency may not be best served by
consistently maximizing the number of competitors in markets, they differ in other important
respects.  The fourth perspective is sector-specific in nature, whereas the first three
perspectives may be of more general application.
77. Of the three perspectives with general application, only the first two potentially call
(even potentially) for state measures to constrain competition.  With regard to the third
perspective, in a smoothly running Schumpeterian world where there are no significant state-
orchestrated barriers to entry, it might be  ar gued that there is no need for competition law
enforcement to promote rivalry. Yet, once one allows for the possibility that private firms can
create barriers to entry or foreclose entry to a market by new firms, then improving dynamiceconomic performance may well require the appropriate enforcement of competition laws.
78. The four perspectives also differ sharply in the assumptions they embody as to what,
if any, are the appropriate intermediate  objectives of competition policy. Increasing private
sector investment is the intermediate objective associated with the first perspective (recall the
writings of Singh); whereas export competitiveness could motivate the second perspective.
79. Even if one accepts the intermediate objectives of each perspective as legitimate, one
is entitled to ask whether constraining competition is the policy response the most effectively
meets these objectives. For example, what is the empirical and theoretical support for the
contention in a developing country setting that restraining competition to bolster investment is
more effective and less costly  than offering firms an investment subsidy or tax credit, or
taking measures that encourage banks to lend to firms? Unfortunately, this line of questioning
has not received the attention it deserves in the extant literature.
2. Complementarities
80. Proponents of the view that rivalry can improve economic performance over time
have pointed to a wide range of circumstances under which competition contributes to
innovation, productivity, and growth.  Since the appropriate enforcement of competition laws
can promote inter-firm rivarly, the five perspectives described below highlight the importantcontribution that the appropriate enforcement of competition law can make to efficiency
gains, including in a dynamic sense.  As in the previous section, the goal is to present the
major perspectives in the discussions among policymakers, members civil society, and
academics.
81. First , greater competition between firms is said to encourage managers and capitalists
to focus on improving their enterprise's performa nce so as to maximize profits or at least to
                                                                                                                                                       
(http://www.ftc.gov/ftc/antitrust.htm), the European Commission's Directorate-General for Competition
(http://europa.eu.int/comm/competition/index_en.html) and the Canadian Competition Bureau
(http://strategis.ic.gc.ca/SS G/ct01250e.html), to name just a few of  the enforcement agencies in the
industrialised world, reveals that such efficiency-based arguments figure extensively in the analysesundertaken and decisions made by enforcement officials, particularly though by no means exclusivelyin merger cases.WT/WGTCP/W/228
Page 28
stave off the threat of bankruptcy, take-over, or some other loss of control.  One of the United
States' leading jurists in the early twentieth century, Judge Learned Hand, once observed that:
"Possession of unchallenged economic power deadens initiative, discourages thrift
and depresses energy…Immunity from competition is a narcotic and rivalry a
stimulant to industrial progress."20
82. The propensity of firms to attain the mini mum level of costs subject to a given level
of output and the circumstances in which they are most likely to do so has been extensively
debated by economists (see, for example, the differing views in Leibenstein 1966, Stigler
1976, and Leibenstein 1978.) One interesting feature of this debate, which is of direct
relevance to this study, is  the finding that more intense competition in  product markets tends
to intensify the pressure on firms to lower costs (see, for example, Primeaux 1977 andLeibenstein 1978). Consistent with this view, in  a major survey of the impact of regulatory
reform across a wide spectrum of U.S. industries, Winston (1998) found that introducing
competition into previously-regulated industries significantly strengthened the efficiency of
firms and improved economic performance over time.
83. The view that inter-firm rivalry provides incentives for efficiency-enhancing
restructuring also finds considerable support in the empirical literature on the enterprise
reform in Eastern Europe and the members of the Commonwealth of Independent States
(CIS). Fortunately, a detailed survey of the literature on the determinants of the pace of
restructuring in transition economies has recently been published (Djankov and Murrell
2002). This survey includes a critical discussion  of 54 analyses of the impact of product
market competition on the rate of firm restructurin g and what is especially appealing is that it
uses objective measures to assess the quality of the research papers being reviewed. Djankov
and Murrell find that:
"The analyses indicate that product market competition has been a major force behind
improvements in enterprise productivity in transition economies as a whole…"(page 43).
84. They also note that their:
"…results are upheld in a survey of over 3,300 enterprises in 25 transition economies
(Carlin et al . 2001) that shows strong positive effects of the reduction in market
concentration on firm efficiency" (Djankov and Murrell 2002, page 44).
85. Another striking finding the Djankov and Murrell survey is that, in contrast to their
findings with respect to the importance of competition in domestic markets, competition from
imports is a far less robust determinant of beneficial restructuring. Djankov and Murrell state
that:
"The findings on the effect of import competition deserve special attention. In the
CIS, import competition has a large negative effect in economic terms, although this
effect is statistically not robust. In Eastern Europe, import competition has a positive
effect in economic terms, but the results of individual studies are mixed, consistent
with the literature on developing economies" (Djankov and Murrell 2002, page 44).
86. This suggests that measures to promote rivalry among domestic firms tend to have a
more consistent effect on restructuring—and on dynamic economic performance—than trade
liberalization. Therefore, according to this perspective it would be imprudent to rely solely on
                                                     
20 United States v. Aluminum Co. of America,148 F.2d 416, 427 (2d Cir. 1945).WT/WGTCP/W/228
Page 29
lowering trade barriers to discipline entrenched market power and to provide sharp incentives
to firms to keep costs under control.
87. A second  source of complementarity between the competition law enforcement  and
long-term economic performance is provided by the long-standing contention that the
intended benefits of trade reform may not be realized without active enforcement ofcompetition law.  . The concern here is that reductions in official trade barriers will be
replaced by anti-competitive private practices, the latter counteracting the price-reducing
effects of trade reforms. To the extent that re ductions in the prices of imported machinery and
other capital equipment bolster investment and enhance dynamic economic performance, then
reductions in trade barriers on these durable goods may not translate into higher growth
without measures to discipline private anti-competitive practices. The enforcement of
competition law, therefore, increases the effectiveness of cuts in trade barriers on growth-enhancing imports.
88. The general point that the objectives of trade reform can be frustrated by anti-
competitive practices was made with considerable  force in a contribution by Argentina to the
Working Group in 1998. The contents of this contribution have been summarized as follows:
"In a recent contribution to the Group (document W/63), Argentina has set out the
results of 18 empirical case studies which, in its view, illustrate the importance of an
effective national competition policy, even in the context of external market
liberalization. The presumption underlying these studies is that, in general, when a
country implements far-reaching trade liberalization, domestic prices will tend toward
import parity levels. The competition agency of Argentina had, nonetheless,identified several situations where this response had not been forthcoming, due to the
existence of anti-competitive practices of enterprises.  Factors that tended to facilitate
or underlie such anti-competitive practices included high market concentration levels,
inelastic demand (reflecting a lack of substitutes), the prior existence of a cartel, and
control by a dominant enterprise of scarce facilities that were necessary for imports tooccur.  Based on these findings, the representative of Argentina concluded that
effective national competition policies are vital to ensure that the process of
adjustment to external liberalization and resulting benefits for efficient economic
development are not circumvented by anti-competitive practices" (WTO 1998a,
page 13).
89. A third  source of complementarity between competition law and dynamic economic
performance involves foreign direct investment. In particular, the point has been made that
appropriate enforcement of competition law both enhances the attractiveness of an economy
as a location for foreign investment and is important to maximize the benefits that flow from
such investment (these arguments are develo ped, for example, in UNCTAD 1997 and in other
references cited therein). A synthesis paper on the relationship between competition policy,trade policy, and development reported on the following pertinent discussions in the WTO
Working Group:
"The point has been made in various oral and written contributions to the Group that
the implementation of a transparent and effective competition policy can be an
important factor both in enhancing the attractiveness of an economy to foreigninvestment, and in maximizing the benefits of such investment.  More specifically,
these contributions have suggested that competition policy can enhance the
attractiveness of an economy for foreign investment by providing a transparent and
principles-based mechanism for the resolutio n of disputes involving such investment
that is consistent with international no rms that are widely-accepted internationally.
This increases investor confidence and therefore the propensity to invest.  VigorousWT/WGTCP/W/228
Page 30
competition in markets, reinforced by competition policy, also helps to maximize the
benefits of such investment to host countries, by encouraging participating firms to
construct state-of-the-art production facilities, to transfer up-to-date technology into
host countries and to undertake appropriate training programmes, and by preventing
the exploitation of consumers" (WTO 1998a, page 8).
90. A fourth  set of complementarities arises from the substantial body of research into the
effects of greater competition in the product market on the incentives for firms to innovate.
Comprehensive surveys of the latter can be found in Ahn (2002), American Bar Association
(2002), and Anderson and Gallini (1998).  Lead ing economic researchers have explored the
following three distinct channels through which competition in product markets stimulates
innovation:
"-Darwinian effect: Intensified product competition could force managers to speed up
the adoption of new technologies in order to avoid a loss of control…due to
bankruptcy (Aghion et al . 1999). More generally, firms should innovate to survive
under competitive pressure (cf. Porter, 1990)."
"-Neck-and-neck competition: In a simple model of "creative destruction" the
incumbent firms unlike new entrants have no incentive to innovate. Under a more
gradualist technological progress assumption with incumbents engaged in step-by-
step innovative activities competition could increase innovation. It is because more
intensive product market competition between firms…will increase each firm'sincentive to acquire or increase its technological lead over its rivals."
"-Mobility effect: In the learning-by-doing model of endogenous growth, the steady
state rate of growth may be increased if skilled workers become more adaptable in
switching to newer production lines…In this case, more competition between newand old product lines will induce skilled workers to switch from old to new lines
more rapidly (Aghion and Howitt, 1996)" (as summarized in Ahn 2002, page 7).
91. Ahn (2002) summarizes his review  of the evidence as follows
21:
"Competition has pervasive and long-lasting effects on firm performance by affecting
economic actors' incentive stucture[s], by encouraging their innovative activities, and
by selecting more efficient ones from less efficient ones over time" (page 5).
By contrast,
"The claim that market concentration is conducive to innovation does not appear to be
supported by recent empirical findings…On the whole, however, there is little
empirical support for the view that large firm size or high concentration is strongly
associated with higher levels of innovative activity" (page 5).
92. A fifth particular channel through which competition law enforcement can contribute
to dynamic economic performance is highlighted in the burgeoning literature on so-called
"innovation markets," a term introduced by G ilbert and Sunshine (1995).  This literature
emphasizes that innovation itself is a result of market interactions and that even firms that are
not currently competing with each other in actual (existing) product markets may becompetitors in markets for future innovations.  Furthermore, competition in such markets (and
hence the incentive for innovation) can be undermined by mergers or other (potentially) anti-
competitive practices.
                                                     
21 See Table 1.1 and section IV.1 of Ahn (2002).WT/WGTCP/W/228
Page 31
93. This perspective has become sufficiently influential that, in the U.S., the federal
agencies responsible for conducting merger revi ews  have explicitly incorporated concerns
about "innovation markets" into published enfo rcement guidelines deal ing with matters such
as intellectual property licensing issues22 and have sought to block corporate mergers on the
basis of the threat they would pose to incentives for innovation.23   Although some
commentators (e.g., Gallini and Trebilcock 1998) have argued that the more conventional
theory of "potential competition" already enco mpasses the principal insights stressed by the
conception of innovation markets, at a minimum,  the latter further illustrates the scope for
anti-competitive practices to undermine the incentives for innovation, and hence the positive
contribution that competition policy can make to long run economic performance.
94. To summarize the foregoing discussion of complementarities and trade-offs between
rivalry, competition law, and innovation, ma ny scholars would take the view that, on the
whole, innovation and productivity improvement are likely to be promoted rather than
impeded by inter-firm rivalry.  Nonetheless, it is also apparent from the literature that
identifiable situations can arise in which—given the technologies available to firms in an
industry—the maximization of the number of competitors in a market may lead to inefficient
outcomes.  It should be stressed that according to  the thinking of leading scholars in the field
of industrial organization (see, e.g., Carlton and Perloff 1994) such situations by no means
call for the wholesale rejection of competition policy as a tool of economic governance;
rather, they call for appropriate tailoring of the application of such law to take account of
relevant technological and other considerations.  As has been pointed out and will be argued
further particularly in Part E below, such "tailoring" of the application of competition law toparticular market circumstances is a pervasive feature of modern competition law regimes.
D. 
COMPETITION POLICY AND INDUSTRIAL POLICY IN THE PROCESS OF ECONOMIC
DEVELOPMENT IN ASIAN ECONOMIES
95. The goal of this section of the study is not to describe or summarize current  policies
in East Asia, nor is it to dwell on the broader and voluminous literature on the factorsresponsible for this region's economic fortunes.  Rather, it is to assess the historical
relationships between competition and industrial policies in the national development
strategies of selected East Asian economies which have been the subject of scholarly
contributions relevant to the relationship of competition and industrial policy.  The discussion
focuses particularly on the extent of and contributions to firm, industrial, and national
economic performance of governmental competition policy-related measures to stimulate or
to retard inter-firm rivalry.  Only the literature  that directly speaks to this matter is described
at any length below; consequently, the reader may not see reference to some leading studies
of East Asian development that do not place particular emphasis on the role of competition
policies in that region's economic performance.
24  It should also be emphasized that the
historical descriptions referred to below may not correspond to current policies in the relevant
economies; on the contrary, recently, the economies examined in this part of the paper havereduced their reliance on policy tools that may limit competition and have placed greater
weight on the promotion of competition as a means of ensuring satisfactory long run
performance.
96. This section looks, in particular, at the experience of four economies:  Japan, Korea,
Chinese Taipei, and China.
                                                     
22 See, for example, the Intellectual Property Guidelines published by the United States'
Department of Justice and the Federal Trade Commission in 1995, especially section 3.2.2.
23 See Gilbert and Tom (2001).
24 Much of the recent literature on East Asian development is summarized in World Bank
(2003a).WT/WGTCP/W/228
Page 32
1. Japan
97. Amsden and Singh (1994) analyzed Japan's use of competition policy instruments
during the high economic growth period of 1953 to 1970, an epoch which some have argued
is particularly relevant to developing economies today.25 Amsden and Singh (1994) observe
that the legacy of the antitrust laws imposed by the US occupation authorities in the post-WWII period was short-lived. Increasingly, the Japanese government prioritized the
achievement of national development goals over competition and is said to have
pragmatically managed competition in domestic key industries. Institutionally, it is argued,
this was reflected at the time by the dominance of Japan's Ministry of International Trade and
Industry (MITI) over the Japanese Fair Tr ade Commission. In fact, in order to promote
investment and to stimulate increases in productivity, MITI encouraged the formation of
cartels and mergers in a variety of industries, particularly during the 1950s and 1960s. Mostof MITI policies during the high-growth years of Japan are characterized by a bias against
competition, implemented through the agency's use of "administrative guidance" to firms and
industry associations. Furthermore, as noted earlier, government guidance to a domestic
industry was carefully tailored to the stage of the life-cycle that the industry was in
98. On this view, competition policy in Japan was implemented with dynamic
considerations in mind, with MITI orchestrating collusion and competition so as to best serve
the goals of external competitiveness, factor accumulation, and technological progress.
Amsden and Singh (1994) quote approvingly the following characterization of MITI's method
by Yamamura (1988):
"What MITI did was to 'guide' the firms to invest in such a way that each large firm in
a market expanded its productive capacity roughly in proportion to its current market
share – no firm was to make an investment so large that it would destabilize the
market. The policy was effective in encouraging competition for the market share
(thus preserving the essential competitiveness of the industrial markets), while
reducing the risk of losses due to excessive investment. Thus it promoted theaggressive expansion of capacity necessary to increase productive efficiency in
output" (Yamamura 1988, page 176).
99. More generally the Japanese model, as the country's state-led industrialization effort
is usually referred to, comprised a much larger set of policies as those directly relating to
competition. Porter et al. (2000, page 22) lists the main building blocks of this model:
1. Activist central government with a stable bureaucracy
2. Targeting of priority industries to enhance economic growth3. Aggressive promotion of exports
4. Extensive "guidance," approval requirements, and regulations
5. Selective protection of the home market6. Restrictions of foreign direct investment
                                                     
25 Singh (1999) later remarked that:
"The evolution of Japanese competition policy in the 1970s and 1980s is interesting but
not as relevant to developing countries as the competition policy practised by Japan between1950 and 1973. This is because, at the beginning of the period, Japan was very much like adeveloping country with low levels of industrialization and economic development" (page 10).WT/WGTCP/W/228
Page 33
7. Lax antitrust enforcement
8. Government-led industry restructuring
9. Official sanctioning of cartels
10. Highly regulated financial markets and limited corporate governance11. Government-sponsored cooperative research and development projects12. Sound macroeconomic policies
100. Those who view such government intervention as having played a crucial role in
Japanese post-war development tend to argue that:
"the Japanese were the first to recognise that international competitive advantage
could be deliberately created by government not just to nurture a few infant industries
to supply the domestic market but to push broad sets of industries toward areas of
growth and technological change in the world economy" Wade (1990, page 25).
101. The combination of protection with restrictions on domestic competition assured high
levels of domestic profits which, it is said, translated into high rates of investment andstrengthened incentives to upgrade technology;  so enabling Japanese firms to successfully
compete in foreign markets. Moreover, Amsden and Singh (1994) identify:
"the emphasis on exports and on maintaining oligopolistic rivalry – instead of
concentrating resources and subsidies on a single 'national champion' as the key
factor distinguishing Japanese policies from those of other dirigiste countries"(page 946).
102. Furthermore, concentration ratios in Japan's major industries fell over time, a finding
which Amsden and Singh (1994) contend is:
"…in contrast to the conventional paradigm in economic development…which
proposes that competition leads to economic growth, the Japanese experience
suggests reverse causality; that it was growth which stimulated competition, at leastin the sense of reducing industrial concentration, rather than the other way round"
(page 947).
103. The view that restricting rivalry promoted Japanese economic development is not
universally shared. It is not a matter of challenging the argument that the Japanese authoritiesattempted to limit rivalry; rather a matter of questioning the effectiveness of such state
initiatives. As noted earlier, Porter et al. (2000) saw lax antitrust enforcement, government-
led restructuring (often through state-inspired mergers between private firms), and official
sanctioning of cartels as elements of Japan's industrial policy. Given this record of state
intervention, Porter et al. (2000) asked the following question:
"Does the Japanese government model expl ain the nation's success? To answer this
question, we sought to understand whether the application of the model and some of
its key practices actually discriminated between Japan's competitively successful and
unsuccessful industries" (page 29).WT/WGTCP/W/228
Page 34
104. Porter and his co-authors formed a sample of 20 internationally competitive sectors
and another sample of seven uncompetitive sectors, and then examined in detail the nature,
timing, and extent of different Japanese government interventions in those sectors. Thus, the
focus is not just on successful sectors. Furthermore, this approach enables the contribution of
competition policy to be assessed along side other government initiatives in the sameindustry. Porter et al.'s  summary tables of the nature of government intervention in these 27
sectors can be found in Appendices I.A and I.B at the end of this study.
105. Porter and his co-authors summarized their findings as follows:
"In this broad sample of competitive industries, we found that the government model
was almost entirely absent….There were no major subsidies and little or no
intervention in competition. We found only one partial exception, sewing machines,
an older industry that was targeted in the early years after World War II to meetdomestic demand for clothing and [to] provide employment. Yet even here, Japan
today is competitive not in household but in industrial sewing machines, where
targeting and the other practices were largely absent. The Japanese government
model, then, does not explain Japan's competitive successes" (Porter et al . 2000,
page 29).
106. This is not to say that all forms of Japanese government intervention were ineffective
in promoting the internationally competitive industries. Porter et al. (2000) goes on to argue:
"Looking deeper at the internationally competitive industries, we found that the
government was indeed involved, but in various unexpected roles. Through a slew ofinitiatives, government stimulated early demand for new products, helping to foster
the competitiveness of some industries
26" (page 29).
And,
"In other cases, government regulation triggered innovation through setting
standards" (page 30).
Moreover,
"To these government policies that encouraged competitive success, three other cross-
cutting Japanese government practices can be added: policies to encourage patientcapital, a universal and rigorous basic education system, and a supply of engineering
graduates from universities. Although not figuring prominently in the traditional
model, those practices are important in the success cases" (page 31).
They conclude,
"Overall, then,…government did play a variety of roles in the successful Japanese
industries. However, these roles were very different from what is closely associated
with Japan, and they were not the Japanese policies that have been the most widely
emulated. Not only was there little of the intervention in competition associated withthe received government model; in some su ccessful industries, such as automobiles,
the industry actually spurned government's efforts to suppress competition" (Porter et
al. 2000, page 31).
                                                     
26 Porter et al.  (2000) go on to describe such initiatives in the fax machine and robotics
sectors.WT/WGTCP/W/228
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107. Turning to their analysis of those unsuccessful Japanese industries, these authors
argued:
"…the policies widely believed to explain Japan's success were far more prevalent in
the nation's failures…" (Porter et al. 2000, page 33).
108. One such policy was the state-sponsored formation of cartels whose purported goals
included preventing "destructive competition" and fostering cooperation and collective action.
Porter et al. (2000, pages 36-39) document the formation of such cartels, showing that around
1965 just under 250 of these cartels were active. These scholars went on to examine whether
"…these industries became competitive because of cartels or in spite of them?" (page 39).
109. Several case studies were conducted on industries were cartels operated, and Porter et
al. (2000) found that:
"…cartels are rarely found in competitive industries. In the relatively few competitive
industries in which cartels were formed, they were not strong enough to significantly
limit rivalry because of the industry's structure. Conversely, cartels were common in
uncompetitive industries. Legalized cartels, then, were not a source of
competitiveness, they actually contributed to uncompetitiveness" (page 39).
110. In the light of these findings, it would be misleading to argue that there is an
intellectual consensus behind the proposition that limiting rivalry promoted Japanese
economic development. Moreover, in a contribution to the Working Group in 2001, Japan
itself has argued that intra-firm rivalry has previously played and continues to play anessential role in Japan's development:
"While it has been commented that Japan's post-war economic development was
achieved by subordinating competition policy to industrial policy…much of Japan's
economic dynamism has in fact been rooted in the robust market mechanisms created
through competition among firms.  Industrial policy and competition policycoordinated mutually and developed an environment that allowed companies to
engage in free and fair competition.  The introduction of competition policy early in
Japan's economic reconstruction, as well as the subsequent evolution of this in
response to economic development, was a great factor in Japan's rapid economic
growth in the past.  Even today, it is those sectors where competition has been
intensive - the automobile industry, for example - which tend to have the greatest
international competitiveness" (Japan 2001, page 2).
2. Korea
111. To the extent that accounts of Korean economic development focus on government
measures to alter inter-firm rivalry, the case has been made that steps were taken to promote
the development of large firms that could compete on international markets while at the sametime encouraging fierce competition between these firms. That is, these measures are thought
to have secured the benefits of large firm size without the costs associated with diminished
competition. The paragraphs below describe this argument and discuss how—in the eyes of
some—this argument has fallen out of favour in recent years.
112. Rodrik (1995) succinctly summarizes the thesis of one of the leading authorities on
Korean economic development since World War II, Alice Amsden:
"Amsden (1989) describes in detail the Korean government's use of trade protection,
selective credit subsidies, export targets (for individual firms), public ownership ofWT/WGTCP/W/228
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banking sector, export subsidies, and price controls – all deployed single-mindedly in
the service of acquisition of technological capabilities and of building industries that
will eventually compete in world markets. She argues that government policy was
successful not because it got prices right, but indeed because it got them purposefully
wrong. However, a key element of the strategy, Amsden argues, was that in exchangefor government subsidies and trade protection the government also set stringent
performance standards. Firms were penalized when they performed poorly, as when
they became subject to "rationalization" (government-mandated mergers and capacity
reduction) in the wake of over-extension. They were rewarded when they fulfilled
government objectives, as when they were awarded subsidized credit for fulfilling
export targets. Such discipline kept the system free of rent-seeking that has
contaminated incentive regimes in other settings…" (Rodrik 1995, pages 2946-7).
113. The implications of this apparent mix of policies is described further by Amsden and
Singh (1994). They contend that:
"The Korean government both contributed to the rise of big business, through its
licensing and subsidised credit policies (it owned or controlled virtually all financialinstitutions), and went out of its way to ensure that big business did not collude, by
allocating subsidies only in exchange for st rict performance standards" (Amsden and
Singh 1994, page 948).
114. High and growing concentration ratios were thought to be the result of these policies.
Smith (2000) reports a trend of growing market  power by the so-called chaebols over the
period 1970 to the mid-1980s. From 1977 to 1994, the 30 largest chaebols controlled between
32 and 40 percent of total national output. Total sales by the top five business groups as a
percentage of national income in 1994 was 49 percent (Smith 2000, page 114). Amsden
(1989) shows that in 1982, out of 2,260 commodities only about 18%, or 30% of allshipments, were produced under competitive conditions. With such facts in mind, Smith
argued that:
"The end result has been an industrial structure different from that which the market
would have produced. The actions of the Korean state have also been complemented
by large, diversified business groups which occupied a dominant position in the
economy. Their size and level of diversification meant they were less subject to the
discipline of the market than to the discipline of managerial hierarchies" (Smith 2000,page 12).
115. Over time, however, it appears that the costs of creating such a cadre of large firms
have become increasingly evident. It is said th at these large firms used their market power at
home to frustrate entry by rivals, to raise prices, and to resist the enactment and enforcementof competition laws that could have put a stop to these adverse outcomes. These points have
been made with some force in a submission by Korea to the Working Group in 2001. Korea
notes that:
"The Korean government first tried to introduce competition law in 1963, but its
efforts were not successful.  The government's concern was mainly focused onstabilizing prices of monopolies and oligopolies and preventing cornering and
hoarding practices.  There were some efforts of course to introduce competition law,
but it never passed the National Assembly due to lack of perception of its importance
and heavy lobbying from the corporate sector."
Moreover,WT/WGTCP/W/228
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"Korea's experience demonstrates that it is better to introduce a competition regime at
the initial stage of economic growth, when monopolies have not yet gained political
and economic power.  Despite their merits of achieving economy of scale, large
monopolies, if left unchecked, are very likely to engage in excessive facility
investments, cause price hikes resulting from their inefficient operations, and hinderopportunities for new entrants.  This eventually necessitates the introduction and
enforcement of competition policy to remo ve anti-competitive elements in the market
under the political and social pressure stemming from the rising public discontent
against the unbalanced distribution of wealth" (Korea 2001, page 3).
In addition,
"Korea had to pay dearly for its failure to reconcile industrial policy with competition
in the domestic economy from the initial stage of economic development. In many
ways, the 1997 financial debacle and the ongoing malaise experienced by chaebol  are
linked to the absence of a competitive domestic economic environment during the
past decades.  Building on lessons learned the hard way, the Korean government is
currently making strenuous efforts to establish a pro-competitive market structure,although it is encountering various problems in the process as vested interests in the
status quo are showing more resilience than expected.  The nurturing of monopolies
or oligopolies through industrial policy has created these vested interests and, after
decades of expansion and dominance over the economy, their necessary conversions
exact a heavy toll on the economy.  The Korean experience points to the importanceof having faith in the benefits of competition from the early stage of economic growth
and of incorporating competition policy based on the market function of autonomous
adjustment into the basic framework of economic policy."
"With the progressive liberalization of world trade, developing countries can no
longer resort to the export-oriented economic growth policy through the protection of
domestic industries.  Therefore, competition policy should be put into operation from
the early stage of economic development to respond pro-actively and promptly to the
rapidly changing economic conditions at home and abroad. Greater competition will
ensure that unrestrained interaction of competitive forces will yield the best allocation
of economic resources, thereby helping promising small and medium enterprises to
grow on market-driven foundations and form a healthy industrial platform" (Korea2001, pages 3 and 4).
116. For policymakers convinced of the need for industrial policies to groom
internationally competitive firms or "national champions", one implication of the Korean
experience is that mitigating the adverse domestic side effects of such a policy will requiremeasures, such as the enforcement of competition law, that stimulate or ensure rivalry
between these firms.
3. Chinese Taipei
117. The role of government intervention in the economy of Chinese Taipei is generally
regarded as having been on a smaller scale than  in Korea, with a greater role ascribed to
market forces. Rodrik (1995) summarizes the find ings of one leading analyst of development
in Chinese Taipei:
"Wade (1990) does not deny that there were elements of the free-market (i.e.
[Hong Kong, China]) recipe in the [Chinese Taipei] strategy, but he qualifies the
picture significantly. He calls [Chinese Taipei] a [regulated] market economy,characterized by: (i) high levels of investment, (ii) more investment in certain keyWT/WGTCP/W/228
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industries that would have resulted in the absence of … intervention; and (iii)
exposure of many industries to international competition. He documents the
pervasiveness of incentives and controls on private firms through import restrictions,
entry requirements, domestic content requirements, fiscal investment incentives, and
concessional credit. He argues that [Chinese Taipei] has consistently acted inanticipation of comparative advantage in such sectors as cotton textiles, plastics, basic
metals, shipbuilding, automobiles, and industrial electronics…"  Rodrik (1995,  pages
2946-7).
118. With reference to official measures that are related to competition law, there is some
evidence of selective measures aimed at i ndustrial reorganization. Wade (1990) argues:
"Industrial reorganization programs—to promote mergers, encourage greater
specialization between firms in the same industry, and promote modernization of
equipment—have been attempted only selectively. Most of the time the government
has encouraged and supported an industry's own efforts at greater specialization and
modernization, but has not tried to compel them; and it has been distinctly ambivalent
about promoting mergers" (Wade 1990, page 186).
Having said that, Wade goes onto argue:
"Occasionally, however, the government has taken the initiative in promoting
mergers when vital sectors are in trouble. In one such case the government virtuallyordered the four polyvinyl chloride (PVC) producers to merge…Another example is
the merger of five of [Chinese Taipei's] major synthetic fiber producers in 1977"
(Wade 1990, pages 186-7).
119. It would seem that only rarely were policies towards mergers implemented with
certain industrial policy goals in mind, and then only in declining industries. Wade (1990,
pages 187) also notes that mergers were very infrequently forced on unwilling partners.
Government intervention was more prevalent in  encouraging long-term relationships between
buyers and sellers which, in principle, could have had implications for the enforcement of
laws on vertical restraints. However, after describing some initiatives to this effect, Wade
argues that:
"…with long-term subcontracting relations being unfamiliar in [Chinese Taipei], the
results have so far been meagre" (Wade 1990, page 187).
120. Interestingly, Wade's account does not point to official toleration or encouragement of
cartels in the manufacturing sector of Chinese Taipei. (The authorities did, however, fix the
price of certain agricultural products; see Wade 1990, page 302). None of this is to suggestthat the Chinese Taipei authorities did not try to influence the degree of competition between
firms. (Indeed, Wade does document how entry into markets and access to investment funds
were actively regulated by official bodies.) Rather, Wade's account demonstrates that the
measures typically associated with relaxed enforcement of competition laws (tolerating
cartels, enforced mergers, sympathetic assessments of proposed mergers and verticalrestraints) were used rarely, if at all, and when used there is little evidence of their
effectiveness.
4. China
121. Over the last two decades, the role that inter-firm rivalry has played in advancing
development in China differed from that in Japan, Korea, and Chinese Taipei. Unlike thelatter economies, China started from a centrally planned socialist economic system and hasWT/WGTCP/W/228
Page 39
subsequently managed its transition towards a socialist market economy (Wang 2002).
Throughout this transition, the rate of economic growth in China has regularly exceeded
seven or eight percent per annum and tens of millions of people have been lifted out of
poverty, especially in the coastal regions. Although much has been written on the
development of the Chinese economy (see, for example, Lardy 1998, Naughton 1995, Nolan2001, Perkins 2001, Steinfeld 1998, and World Bank 2003a), very few researchers have
focused specifically on the role that inter-firm rivalry has played in promoting or detracting
from China's development.
122. Although this transition has been accomplished without the full range of competition
laws, it would be a mistake to suppose that national measures did not deliberately attempt to
influence the degree of inter-firm rivalry. In fact, according to Jiang (2002), it is possible to
identify three phases when industrial policies had different effects on the degree ofcompetition between firms. Jiang (2002) argues that:
"From the perspective of market competition, China's industrial policies have
undergone three stages of development: (1) from the late 1970s to the mid-1980s, the
industrial policies promoted competition; (2) from the mid-1980s, the industrial
policies limited competition; and (3) since the mid-1990s, industrial policies havepromoted and limited competition in concert" (page 49).
123. During the first phase it is said that the government saw value in injecting some
competition into the prevailing economic system; a point that Jiang (2002) makes in the
following paragraph:
"During the economic restructuring in China in the late 1970s, the Chinese
government became keenly aware of the drawbacks of central planning and thus
began to encourage enterprises to compete with each other to increase output,
improve efficiency, develop new products, and increase employee salaries. To
effectuate this new emphasis of Chinese industrial policies on competition, thegovernment employed three new policy measures: (1) the encouragement of new
enterprises; (2) the encouragement of competition among existing enterprises; and (3)
the relaxation of price controls" (page 49).
124. In the refrigerator manufacturing industry, the effect of these policies was to reduce
the four firm concentration ratio from 74.5 percent in 1982 to 29.0 percent in 1988. During
the same period, total output rose 75 times to 7.576 million units per annum (Jiang 2002,page 57).
125. The growing competition faced by state- owned enterprises caused them increasing
difficulties. In China this takes on an additional dimension as these state-owned enterprises
are not only large employers but also providers of social and other welfare services. Concerns
that increased rivalry was undermining the viability of these enterprises lead, it is argued, theChinese government from the mid-1980s to the mid-1990s to adopt measures that restricted
competition between firms (Jiang 2002, page 58). These measures included those to restrain
the establishment of new small and medium-sized enterprises (principally through regulations
on construction), measures to restrain competition between rural and state-owned enterprises,
and requirements that only designated enterprises would produce certain products.
126. For example, Jiang (2002, page 60) reports that during this epoch the Ministry of
Light Industry decided that only five firms were allowed to produce refrigerators. The
medium- to long-term effectiveness of these measures has, however, been called into
question. Jiang (2002) remarks that:WT/WGTCP/W/228
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"This restrictive policy ultimately worked for only one or two years. With domestic
demand snowballing and the refrigerator industry remained lucrative, local
governments and enterprises scrambled to build new refrigerator manufacturing firms
by bypassing the restrictions of the central government's industrial policy various
pretexts. Throughout 1987 and 1988 [two and three years after the initial measureswere announced], refrigerator production in China reached an all-time high with the
addition of an additional 180 refrigerator factories" (page 62).
127. Industrial policies since the mid-1990s are said to have a mixed effect on the degree
of inter-firm rivalry. On the one hand, domestic consumers and investors were dissatisfied
with the prevailing mix of quality and prices in concentrated industries. Jiang (2002) offers
the following account of the decision to promote competition:
"During the mid-1990s, pressure from three groups prompted the central government
to deal with the issue of competition in these monopolistic industries. First, domestic
consumers resented the poor quality and unreasonable fees of these industries and
demanded improvements in the industries' efficiency and services. Second, new
investors wanting to enter these industries began to pressure the central governmentto address these industries' long-standing monopolies and high profit levels. Third,
with China's recent accession to the WTO, China will have to give in to long-standing
external pressure to open its service market s. This pressure originally convinced both
the central government and the monopolistic industries that they would be unable to
compete with transnational companies from foreign countries once China entered intothe WTO if they did not break up the monopolies and improve efficiency through
competition. As a result, in the past five years, Chinese industries that several large
state-owned enterprises formally dominated have reoriented themselves to prepare for
foreign competition" (page 64).
128. On the other hand, the continuing erosion in the viability of state-owned enterprises in
the mid- to late-1990s—with its attendant consequences for unemployment, labour unrest,
and social welfare—is said to have persuaded some Chinese policymakers of the need to
moderate competition in certain sectors (Jiang 2002). Typically, it did so by reducing
production capacity in an affected sector. In particular,
"The government focused on closing down five types of small non-state enterprises:
coal mines, steel rolling plants, cement factories, refineries, and glass-producingfirms. The shutdowns in 1999 accounted for 10%-15% of the production capacity in
each of these respective industries. The government believed that the closure of these
small enterprises would solve the problem of overproduction and alleviate the
pressure of competition on the state-owned enterprises" (Jiang 2002, page 65).
It should be recognized, however, that these policy measures may have been motivated by
other concerns; not least the inability of smalle r non-state enterprises to meet the social and
financial obligations borne by other firms.
129. Yet the extent of rivalry that the Chinese government appears to have decided is best
for its own development is increasing, accordin g to Jiang (2002). He contends that since the
mid-1990s, the:
"…Chinese industrial policies widely carried out to support industries in short supply
and restrict industries in overproduction have seen their domains dwindling steadily
over the last few years. In contrast, antimonopolistic industrial policies are becominginextricably intertwined with government policies" (page 65).