When politics trumps economics

Business Line, March 22, 2007

A host of political, economic and governance constraints frustrate the implementation of regulatory laws in developing countries, say Pradeep S. Mehta and Manish Agarwal

Since economic liberalisation started, there have been considerable policy changes in many developing nations, with increased reliance on market forces. Several transitional economies adopted competition laws as a follow up to market-oriented reforms. Additionally, many opened up for private players sectors until then reserved for the public sector. This focus on competition and regulatory laws in developing economies reflects the substantial changes happening in their governance system.

What implication has this new form of economic governance had for the developmental objectives in various countries? The answer is patchy. China, for instance, approved a competition law in June 2006, almost 30 years after it began economic reforms, yet the country has moved rapidly from low- to middle-income status. Neither of the two major growth stories, Botswana or Mauritius, had a formal competition law until the latter passed its Competition Act in April 2003.

`Political will’ turns out to be the key factor that determines the effective implementation of competition laws. In Malawi, though the government claimed to support competition, it took the country eight years to establish the Competition Commission! In Bangladesh, the Monopolies and Restrictive Trade Practices Ordinance remains only in the statute book

In Zambia, the political will to get rid of the financially-drained state-owned enterprises overshadowed other economic priorities. Though the Competition and Fair Trading Act was passed in May 1994 following donor insistence, the competition authority itself was operationalised only in May 1997.

Regulatory strength

The political will to create a strong regulatory agency from the outset is crucial as only a strong regulator can balance the demands of various interest groups, among other challenges. Unfortunately, in most cases, the state may try to further its interests by creating a weak regulator, over which it can exert control.

Since regulatory reforms are largely concentrated in public utilities, where there is a strong public interest factor, it is difficult to envisage how regulatory reforms would be insulated from overriding political considerations.

In South Africa, competition law puts public interest objectives alongside efficiency objectives, raising the profile of these imperatives, which seek to ensure coherence across diverse policy areas. Nonetheless, governance challenges are likely to arise when competition authorities assess non-competition criteria without transparent processes for doing so. In such cases, administrative discretion in interpreting concepts such as `fair’ competition is often the starting point for corruption in developing countries.

A democratic set-up requires politicians to win elections to hold policy-making positions. They must satisfy the aspirations of their electorate, to whom they have to go back, at intervals, to seek a fresh mandate. Politicians often stall the implementation of competition principles for fear of losing certain powers, which they use to satisfy vested interests.

However, little effort has been made to identify the potential gains for politicians from promoting competition measures, including how it can help them retain/enhance their public image/support-base.

Implementation of competition and regulatory laws also faces other roadblocks. Civil servants consider competition/ regulatory law an attempt to reduce their prerogatives. Moreover, the bureaucracy tends to perpetuate itself in regulatory roles for which it may not have the acumen. Businesses generally oppose competition regimes as they feel that it would reduce their market share and profits. Hence, adoption and implementation of a competition regime may easily be hijacked by powerful vested interests.

Other Obstacles

Competition law may covertly protect politically well-connected companies from `fair’ competitive forces, guaranteeing monopoly rents and killing innovation. A government committed to competition law, and the regulator enforcing it must not only direct advocacy efforts towards consumers, but also towards the influential industry participants.

In most developing countries, competition and regulatory laws are entirely new concepts, often being adopted under external pressure (for instance, in Zambia). Consequently, few officials in the public service appear to have understood what the new regime means and what it takes to have a well functioning regulator.

While the cornerstone of the current development paradigm is a private-sector-led growth strategy, implementing economic reforms in developing countries is challenging because of the disregard for the rule of law, weak judicial institutions, and ineffective commercial codes and bankruptcy laws.

A host of political, economic and governance constraints frustrate the implementation of regulatory laws in developing countries. Despite this, most developing countries have gone beyond contemplating whether they want a competition or regulatory law or not, and are debating how to structure their laws and how best to implement an effective enforcement regime within the constraints.

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