Busting cartels for development

OECD Observer, May 28, 2008

Cartels are the most egregious form of anti-competitive practice in the world. They harm consumers in both developing and developed countries because of their upward impact on prices and their corresponding downward impact on consumer welfare. They also afford firms the luxury of being inefficient, says Pradeep S Mehta

Promoting effective competition in developing countries means getting tougher on cartels in the OECD area, and compensating customers internationally. Through a new competition fund, the OECD could play a lead role in making sure poorer countries get a fairer deal.

Cartels are the most egregious form of anti-competitive practice in the world. Rival firms explicitly agree not to compete with each other, to restrict output and raise the price of their products. They harm consumers in both developing and developed countries because of their upward impact on prices and their corresponding downward impact on consumer welfare. They also afford firms the luxury of being inefficient.

Little wonder cartel busting is one of the most important activities of competition authorities around the world. However, while enforcement is quite effective in many of the richer countries, it is lacking in the developing world, because of resource constraints and inexperience.

To be sure, the OECD runs training workshops to assist developing countries in building skills to deal with cartels and other anti-competitive practices. But innovative approaches are needed to compensate consumers from developing countries who fall victim to international cartels, most of which are based in OECD countries.

Cartels operate at both national and international levels. They are no small force. The imports of their products by developing countries sold by sixteen international cartels, which operated during the 1990s, amounted to US$81.1 billion or 6.7% of these countries’ imports and 1.2% of their national incomes in 1997. The resulting increase in prices was about 20 to 40% of the market price, which illustrates the immense adverse impact they have had on economies. This means overcharges in the range of $16 billion to $32 billion, which corresponds to between one third to two thirds of the total development aid received by developing countries in the late 1990s.

Across the globe, cartel activities are being penalised. In recent times, record fines of more than $500 million have been levied by the UK and US competition authorities on British Airways (BA) for colluding with Virgin on transatlantic flights. There are other airlines too, such as Korean Airlines, which have been actioned against. BA is also facing action under the EU laws and other jurisdictions. Furthermore, the affected consumers in the US have also filed for class action damages against BA.

The fines levied on the airlines will be credited to the treasuries in the US and UK, and citizens who have filed private action suits against the said airlines will be compensated. Many consumers from various countries in the developing world also fly to the US, often via Heathrow airport, yet neither these customers nor their governments will be able to fine the airlines or claim compensation!

Should a portion of these fines not be used to strengthen institutions in the developing world that help in enforcing fair competition? The main reason this does not happen is because there is no effective global competition law and no agency to enforce one.

In many cases where the victims of cartels are numerous but cannot be identified, it is common practice for courts to award compensation to some public institution or public interest group. Though short of compensating the victims themselves, this is widely seen to be an acceptable alternative way of using the money–legally it is referred to as a cy près award, a Latin expression meaning “next best use”. In India, when manufacturers won court cases against the government for excess excise payments, the money was not refunded to the manufacturers, but put into a government-administered Consumer Welfare Fund for investment in further consumer education, advocacy and research. Similarly, in Brazil the fines are put into a government-administered fund and used exclusively for consumer protection or competition advocacy. In Peru, there is a system whereby half the fines collected go to a recognised consumer association, again to be used for consumer education and advocacy.

In the US, fines in antitrust cases are quite often put into a trust account to be used only to pursue education and research on competition policy issues. In June 2007, the George Washington University Law School received a cy près award of $5.1 million from a class action antitrust lawsuit to endow a centre on competition law. The law school at Loyola University in Chicago received an award to establish the Institute of Consumer Antitrust in 1994.

These awards relate to mainly domestic cases. However, there are several international cases too, from which no award has been made to parties outside the domestic jurisdiction. One of the most notorious international cartel cases related to bulk vitamins. The cartel was penalised in all rich country jurisdictions, but not in a single developing country. In California, a Vitamin Cases Settlement Fund was created from an out of court settlement. It has already made grants totalling $29 million and more are in the pipeline.

All such awards are given under national laws and remain restricted to their boundaries. Action by developing country authorities has been absent, because most of them, including big countries like India or China, do not have an effective competition law. Smaller developing countries too suffer for similar reasons.

There is thus a strong case for strengthening the enforcement and advocacy roles of competition institutions in the poor world through funding from a part of the fines paid. This could be done by creating an international competition fund to be managed by a credible intergovernmental organisation such as the OECD. Such a fund should be accessible to competition institutions and non-government organisations in the developing world to strengthen their competition regimes. Secondly, to enable the creation of such a fund, national laws in the rich world will need to be amended to allow a transfer of a scientifically determined amount from fines.

One has to remember that the case is to assess the damage of an international cartel on the developing world and allocate funds accordingly. We are not suggesting that fines be allocated on violations of a pure domestic jurisdiction, though some countries would not mind doing so. As we live in a global village, rather than being scientifically fussy about precise impacts of such cartels on developing countries, it might indeed be more cost effective simply to levy a portion of fines in breaking up international cartels by assuming a certain effect on poorer countries. Such minima would help discourage cartels from forming in the first place.

For the OECD, competition is a natural fit. And at a time when the organisation is expanding its contacts with large developing countries such as China and India, setting up a new competition fund could help it build stronger relationships with smaller, poorer victims of cartels too.

The author is also the co-chair of the International Network of Civil Society Organisations on Competition and participates regularly in OECD competition fora. He can be reached at psm@cuts.org.. Udai Mehta and Sonia Gasparikova contributed to this article.

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