Cyclopedia Of Economics
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- Assumption number two
- Assumption number three
- Commonwealth of Independent States, Economies of
- Competition Laws A. THE PHILOSOPHY OF COMPETITION
- HISTORICAL AND LEGAL CONSIDERATIONS
- Blocking Statutes
- ANTI - COMPETITIVE STRATEGIES
Assumption number one That risk inherent in assets such as stocks can be "diversified away". If one divides one's capital and invests it in a variety of financial instruments, sectors, and markets, the overall risk of one's portfolio of investments is lower than the risk of any single asset in said portfolio. Yet, in the last decade, markets all over the world have moved in tandem. These highly-correlated ups and downs gave the lie to the belief that they were in the process of "decoupling" and could, therefore, be expected to fluctuate independently of each other. What the crisis has revealed is that contagion transmission vectors and mechanisms have actually become more potent as barriers to flows of money and information have been lowered.
That investment "experts" can and do have an advantage in picking "winner" stocks over laymen, let alone over random choices. Market timing coupled with access to information and analysis were supposed to guarantee the superior performance of professionals. Yet, they didn't. Few investment funds beat the relevant stock indices on a regular, consistent basis. The yields on "random walk" and stochastic (random) investment portfolios often surpass managed funds. Index or tracking funds (funds who automatically invest in the stocks that compose a stock market index) are at the top of the table, leaving "stars", "seers", "sages", and "gurus" in the dust. This manifest market efficiency is often attributed to the ubiquity of capital pricing models. But, the fact that everybody uses the same software does not necessarily mean that everyone would make the same stock picks. Moreover, the CAPM and similar models are now being challenged by the discovery and incorporation of information asymmetries into the math. Nowadays, not all fund managers are using the same mathematical models. A better explanation for the inability of investment experts to beat the overall performance of the market would perhaps be information overload. Recent studies have shown that performance tends to deteriorate in the presence of too much information. Additionally, the failure of gatekeepers - from rating agencies to regulators - to force firms to provide reliable data on their activities and assets led to the ascendance of insider information as the only credible substitute. But, insider or privileged information proved to be as misleading as publicly disclosed data. Finally, the market acted more on noise than on signal. As we all know, noise it perfectly randomized. Expertise and professionalism mean nothing in a totally random market. Assumption number three That risk can be either diversified away or parceled out and sold. This proved to be untenable, mainly because the very nature of risk is still ill-understood: the samples used in various mathematical models were biased as they relied on data pertaining only to the recent bull market, the longest in history. Thus, in the process of securitization, "risk" was dissected, bundled and sold to third parties who were equally at a loss as to how best to evaluate it. Bewildered, participants and markets lost their much-vaunted ability to "discover" the correct prices of assets. Investors and banks got spooked by this apparent and unprecedented failure and stopped investing and lending. Illiquidity and panic ensued. If investment funds cannot beat the market and cannot effectively get rid of portfolio risk, what do we need them for? The short answer is: because it is far more convenient to get involved in the market through a fund than directly. Another reason: index and tracking funds are excellent ways to invest in a bull market.
The Lucerne Conference on the then 9 months old CIS-7 Initiative ended two years ago with yet another misguided call upon charity-weary donors to grant the poorest seven countries (Armenia, Azerbaijan, Georgia, Kyrgyz Republic, Moldova, Tajikistan, and Uzbekistan) of the Commonwealth of Independent States financial assistance in the form of grants rather than credits. The World Bank's Managing Director, Shengman Zhang, concluded with the deliriously incoherent statement that "donor assistance in the form of highly concessional finance and debt relief will only succeed if linked to effective reform". None of the other five co-sponsors - the IMF, the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB) and the indefatigable Dutch and Swiss governments - questioned this non sequitur. Since independence a decade ago - aided and abetted by the same founts of Washington wisdom - the seven unfortunates have regressed to a malignant combination of unbridled autocracy and perpetual illiquidity. Poverty soared to African proportions, the region's economies shriveled and public and external debts mounted dizzyingly. Ever the autistic solipsists, the IMF and World Bank maintained in a press release that the talk shop "broadened and deepened the debate to include a range of economic, institutional and social issues that must be tackled if the seven countries are to achieve the targets of the Millennium Development Goals". The release is strewn with typical IMF-newspeak. The destitute, oppressed and diseased people of the region should achieve "ownership of the reform agenda" in accordance with "clear national priorities". Worry not, reassures the anonymous hack: the World Bank has embarked on Poverty Reduction Strategy processes in all seven fiefs. The cynical cover-up of the west's abysmal failure in the region comes replete with unflinchingly triumphant balderdash: the policies of the Bretton-Woods institutions are "putting the countries themselves in the driver's seat of reforms". According to Mr. Zhang, corruption in the CIS-7 is "moderating" and the investment climate is "beginning to improve". The solution? "More regional integration" - in other words, more trading among the indigent and the demonetized. This and better access to markets in "the rest of the world" will assure "recovery and future prosperity". Mr. Zhang conveniently neglected to mention the Stalinesque rulers of most of the CIS-7, the political repression, the personality cults, the blatant looting of the state by pernicious networks of cronies, the rampant nepotism, the elimination of the free media and the proliferation of every conceivable abuse of human and civil rights, up to - and including - the assassination of opponents and dissidents. To raise these delicate issues would have been impolitic when the IMF's largest shareholder - the United States - has embraced these despots as newfound allies. And from fantasyland to harsh reality: According to the World Bank's own numbers, with the exception of Uzbekistan, the current gross domestic product of the reluctant members of the CIS-7 is between 29 percent (Georgia) and 80 percent (Armenia) of its level ten years ago. Armenia's annual GDP per capita is a miserly $670. More than half the population is below the poverty line. These dismal results are despite seven years of strong growth pegged at 6 percent annually and remittances from abroad which equal a staggering one eighth of GDP. Armenia is the second most prosperous of the lot. Its inflation is down to two digits. Its currency is stable. Its trade is completely liberalized (a-propos Zhang's nostrums). Azerbaijan, its foe and neighbor, should be so lucky. Close to nine tenth of its population live as paupers. This despite a tripling of oil prices, its mainstay commodity. The World Bank notes wistfully that its agriculture is picking up. Its oil fund, insist the sponsoring institutions, incredibly, is "governed by transparent and prudent management rules". Georgia flies in the face of the Washington Consensus. Petrified by a meltdown of its economy in the early 1990s, a surging inflation and $1 billion in external debt - it adhered religiously to the IMF's prescriptions and proscriptions. To no avail. Annual GDP growth collapsed from 10 percent in 1996-7 to less than 3 percent thereafter. The Kyrgyz Republic is a special case even by the dismal standards of the region. Again, nine tenths of its population live on less than $130 (one half on less than $70) monthly. Poverty actually increased in the last few years when economic growth picked up. At $310, the country's GDP per capita is sub-Saharan. Is this appalling performance the outcome of brazen disregard for the IMF's sagacious counsel? Not so. according to the CIS-7 Web site "the Kyrgyz Republic is currently the most reformed country of the Central Asia and sustains a very liberal economic regime." The Kyrgyz predicament defies years of robust growth, single digit inflation, a surplus in the trade balance and other oft-rehashed IMF benchmarks. That the patient is as sick as ever casts in doubt the doctors' competence. Moldova - with $420 in GDP per capita and 85 percent of the population under the line of poverty - is only in marginally better shape, mainly due to the swift recovery of its principal export market, Russia. The best economic performance of the lot was Uzbekistan's. It is often wheeled out as a success story and used as a fig leaf. Uzbekistan's GDP is, indeed, unchanged compared to 1989. GDP per capita is $450 - but only one third of the population are under - the famine-level - national poverty line. But a closer scrutiny reveals the - customary - prestidigitation by the proponents of the Washington orthodoxy. With the exception of Belarus, another relative economic success story, Uzbekistan resisted the IMF's bitter medicine longer than any other country in transition. Its accomplishments cannot be attributed by any mental gymnastics to anything the west has done, or said. The CIS-7 Web site describes this contrarian polity thus: "Today significant distortions in foreign exchange allocation remain, reflected in a large difference between the official and curb market exchange rates (about 60% in mid-2002). The current economic system retains the key features of soviet economy, with the state owning and exercising quite active control over the production and distribution decisions of a significant number of Uzbek enterprises." There lurks an important lesson. Central Europe - with its industrial and liberal-democratic past should not be lumped together with east Europe. The moral seems to be that transition in the former Soviet Union, in the east and in the Balkans was a foolhardy and ill-informed exercise, administered by haughty and inexperienced bureaucrats and avaricious advisors. The countries who resisted western pressures and chose to preserve Soviet era institutions even as they gradually liberalized prices and unleashed market forces - seem to have fared far better than the more obsequious lot. This is the Chinese model - as opposed to the "shock therapy" prescribed by western armchair "experts". Tajikistan - with $170 GDP per capita and an unearthly 96 percent of its denizens under the poverty line - may be regretting not having heeded this lesson earlier.
The core countries of Central Europe (the Czech Republic, Hungary and, to a lesser extent, Poland) experienced industrial capitalism in the inter-war period. But the countries comprising the vast expanses of the New Independent States, Russia and the Balkan had no real acquaintance with it. To them its zealous introduction is nothing but another ideological experiment and not a very rewarding one at that. It is often said that there is no precedent to the extant fortean transition from totalitarian communism to liberal capitalism. This might well be true. Yet, nascent capitalism is not without historical example. The study of the birth of capitalism in feudal Europe may yet lead to some surprising and potentially useful insights. The Barbarian conquest of the teetering Roman Empire (410-476 AD) heralded five centuries of existential insecurity and mayhem. Feudalism was the countryside's reaction to this damnation. It was a Hobson's choice and an explicit trade-off. Local lords defended their vassals against nomad intrusions in return for perpetual service bordering on slavery. A small percentage of the population lived on trade behind the massive walls of Medieval cities. In most parts of central, eastern and southeastern Europe, feudalism endured well into the twentieth century. It was entrenched in the legal systems of the Ottoman Empire and of Czarist Russia. Elements of feudalism survived in the mellifluous and prolix prose of the Habsburg codices and patents. Most of the denizens of these moribund swathes of Europe were farmers - only the profligate and parasitic members of a distinct minority inhabited the cities. The present brobdignagian agricultural sectors in countries as diverse as Poland and Macedonia attest to this continuity of feudal practices. Both manual labour and trade were derided in the Ancient World. This derision was partially eroded during the Dark Ages. It survived only in relation to trade and other "non-productive" financial activities and even that not past the thirteenth century. Max Weber, in his opus, "The City" (New York, MacMillan, 1958) described this mental shift of paradigm thus: "The medieval citizen was on the way towards becoming an economic man ... the ancient citizen was a political man." What communism did to the lands it permeated was to freeze this early feudal frame of mind of disdain towards "non-productive", "city-based" vocations. Agricultural and industrial occupations were romantically extolled. The cities were berated as hubs of moral turpitude, decadence and greed. Political awareness was made a precondition for personal survival and advancement. The clock was turned back. Weber's "Homo Economicus" yielded to communism's supercilious version of the ancient Greeks' "Zoon Politikon". John of Salisbury might as well have been writing for a communist agitprop department when he penned this in "Policraticus" (1159 AD): "...if (rich people, people with private property) have been stuffed through excessive greed and if they hold in their contents too obstinately, (they) give rise to countless and incurable illnesses and, through their vices, can bring about the ruin of the body as a whole". The body in the text being the body politic. This inimical attitude should have come as no surprise to students of either urban realities or of communism, their parricidal off-spring. The city liberated its citizens from the bondage of the feudal labour contract. And it acted as the supreme guarantor of the rights of private property. It relied on its trading and economic prowess to obtain and secure political autonomy. John of Paris, arguably one of the first capitalist cities (at least according to Braudel), wrote: "(The individual) had a right to property which was not with impunity to be interfered with by superior authority - because it was acquired by (his) own efforts" (in Georges Duby, "The age of the Cathedrals: Art and Society, 980-1420, Chicago, Chicago University Press, 1981). Despite the fact that communism was an urban phenomenon (albeit with rustic roots) - it abnegated these "bourgeoisie" values. Communal ownership replaced individual property and servitude to the state replaced individualism. In communism, feudalism was restored. Even geographical mobility was severely curtailed, as was the case in feudalism. The doctrine of the Communist party monopolized all modes of thought and perception - very much as the church-condoned religious strain did 700 years before. Communism was characterized by tensions between party, state and the economy - exactly as the medieval polity was plagued by conflicts between church, king and merchants-bankers. Paradoxically, communism was a faithful re-enactment of pre-capitalist history. Communism should be well distinguished from Marxism. Still, it is ironic that even Marx's "scientific materialism" has an equivalent in the twilight times of feudalism. The eleventh and twelfth centuries witnessed a concerted effort by medieval scholars to apply "scientific" principles and human knowledge to the solution of social problems. The historian R. W. Southern called this period "scientific humanism" (in "Flesh and Stone" by Richard Sennett, London, Faber and Faber, 1994). We mentioned John of Salisbury's "Policraticus". It was an effort to map political functions and interactions into their human physiological equivalents. The king, for instance, was the brain of the body politic. Merchants and bankers were the insatiable stomach. But this apparently simplistic analogy masked a schismatic debate. Should a person's position in life be determined by his political affiliation and "natural" place in the order of things - or should it be the result of his capacities and their exercise (merit)? Do the ever changing contents of the economic "stomach", its kaleidoscopic innovativeness, its "permanent revolution" and its propensity to assume "irrational" risks - adversely affect this natural order which, after all, is based on tradition and routine? In short: is there an inherent incompatibility between the order of the world (read: the church doctrine) and meritocratic (democratic) capitalism? Could Thomas Aquinas' "Summa Theologica" (the world as the body of Christ) be reconciled with "Stadt Luft Macht Frei" ("city air liberates" - the sign above the gates of the cities of the Hanseatic League)? This is the eternal tension between the individual and the group. Individualism and communism are not new to history and they have always been in conflict. To compare the communist party to the church is a well-worn cliché. Both religions - the secular and the divine - were threatened by the spirit of freedom and initiative embodied in urban culture, commerce and finance. The order they sought to establish, propagate and perpetuate conflicted with basic human drives and desires. Communism was a throwback to the days before the ascent of the urbane, capitalistic, sophisticated, incredulous, individualistic and risqué West. it sought to substitute one kind of "scientific" determinism (the body politic of Christ) by another (the body politic of "the Proletariat"). It failed and when it unravelled, it revealed a landscape of toxic devastation, frozen in time, an ossified natural order bereft of content and adherents. The post-communist countries have to pick up where it left them, centuries ago. It is not so much a problem of lacking infrastructure as it is an issue of pathologized minds, not so much a matter of the body as a dysfunction of the psyche. The historian Walter Ullman says that John of Salisbury thought (850 years ago) that "the individual's standing within society... (should be) based upon his office or his official function ... (the greater this function was) the more scope it had, the weightier it was, the more rights the individual had." (Walter Ullman, "The Individual and Society in the Middle Ages", Baltimore, Johns Hopkins University Press, 1966). I cannot conceive of a member of the communist nomenklatura who would not have adopted this formula wholeheartedly. If modern capitalism can be described as "back to the future", communism was surely "forward to the past".
The aims of competition (anti-trust) laws are to ensure that consumers pay the lowest possible price (=the most efficient price) coupled with the highest quality of the goods and services which they consume. This, according to current economic theories, can be achieved only through effective competition. Competition not only reduces particular prices of specific goods and services - it also tends to have a deflationary effect by reducing the general price level. It pits consumers against producers, producers against other producers (in the battle to win the heart of consumers) and even consumers against consumers (for example in the healthcare sector in the USA). This everlasting conflict does the miracle of increasing quality with lower prices. Think about the vast improvement on both scores in electrical appliances. The VCR and PC of yesteryear cost thrice as much and provided one third the functions at one tenth the speed. Competition has innumerable advantages:
Thus, paradoxically, the poorer the country, the less resources it has - the more it is in need of competition. Only competition can secure the proper and most efficient use of its scarce resources, a maximization of its output and the maximal welfare of its citizens (consumers). Moreover, we tend to forget that the biggest consumers are businesses (firms). If the local phone company is inefficient (because no one competes with it, being a monopoly) - firms will suffer the most: higher charges, bad connections, lost time, effort, money and business. If the banks are dysfunctional (because there is no foreign competition), they will not properly service their clients and firms will collapse because of lack of liquidity. It is the business sector in poor countries which should head the crusade to open the country to competition. Unfortunately, the first discernible results of the introduction of free marketry are unemployment and business closures. People and firms lack the vision, the knowledge and the wherewithal needed to support competition. They fiercely oppose it and governments throughout the world bow to protectionist measures. To no avail. Closing a country to competition will only exacerbate the very conditions which necessitate its opening up. At the end of such a wrong path awaits economic disaster and the forced entry of competitors. A country which closes itself to the world - will be forced to sell itself cheaply as its economy will become more and more inefficient, less and less non-competitive. The Competition Laws aim to establish fairness of commercial conduct among entrepreneurs and competitors which are the sources of said competition and innovation. Experience - later buttressed by research - helped to establish the following four principles:
Left to their own devices, firms tend to liquidate competitors (predation), buy them out or collude with them to raise prices. The 1890 Sherman Antitrust Act in the USA forbade the latter (section 1) and prohibited monopolization or dumping as a method to eliminate competitors. Later acts (Clayton, 1914 and the Federal Trade Commission Act of the same year) added forbidden activities: tying arrangements, boycotts, territorial divisions, non-competitive mergers, price discrimination, exclusive dealing, unfair acts, practices and methods. Both consumers and producers who felt offended were given access to the Justice Department and to the FTC or the right to sue in a federal court and be eligible to receive treble damages. It is only fair to mention the "intellectual competition", which opposes the above premises. Many important economists thought (and still do) that competition laws represent an unwarranted and harmful intervention of the State in the markets. Some believed that the State should own important industries (J.K. Galbraith), others - that industries should be encouraged to grow because only size guarantees survival, lower prices and innovation (Ellis Hawley). Yet others supported the cause of laissez faire (Marc Eisner). These three antithetical approaches are, by no means, new. One led to socialism and communism, the other to corporatism and monopolies and the third to jungle-ization of the market (what the Europeans derisively call: the Anglo-Saxon model).
Why does the State involve itself in the machinations of the free market? Because often markets fail or are unable or unwilling to provide goods, services, or competition. The purpose of competition laws is to secure a competitive marketplace and thus protect the consumer from unfair, anti-competitive practices. The latter tend to increase prices and reduce the availability and quality of goods and services offered to the consumer. Such state intervention is usually done by establishing a governmental Authority with full powers to regulate the markets and ensure their fairness and accessibility to new entrants. Lately, international collaboration between such authorities yielded a measure of harmonization and coordinated action (especially in cases of trusts which are the results of mergers and acquisitions). Yet, competition law embodies an inherent conflict: while protecting local consumers from monopolies, cartels and oligopolies - it ignores the very same practices when directed at foreign consumers. Cartels related to the country's foreign trade are allowed even under GATT/WTO rules (in cases of dumping or excessive export subsidies). Put simply: governments regard acts which are criminal as legal if they are directed at foreign consumers or are part of the process of foreign trade. A country such as Macedonia - poor and in need of establishing its export sector - should include in its competition law at least two protective measures against these discriminatory practices:
Competition policy is the antithesis of industrial policy. The former wishes to ensure the conditions and the rules of the game - the latter to recruit the players, train them and win the game. The origin of the former is in the 19th century USA and from there it spread to (really was imposed on) Germany and Japan, the defeated countries in the 2nd World War. The European Community (EC) incorporated a competition policy in articles 85 and 86 of the Rome Convention and in Regulation 17 of the Council of Ministers, 1962. Still, the two most important economic blocks of our time have different goals in mind when implementing competition policies. The USA is more interested in economic (and econometric) results while the EU emphasizes social, regional development and political consequences. The EU also protects the rights of small businesses more vigorously and, to some extent, sacrifices intellectual property rights on the altar of fairness and the free movement of goods and services. Put differently: the USA protects the producers and the EU shields the consumer. The USA is interested in the maximization of output at whatever social cost - the EU is interested in the creation of a just society, a liveable community, even if the economic results will be less than optimal. There is little doubt that Macedonia should follow the EU example. Geographically, it is a part of Europe and, one day, will be integrated in the EU. It is socially sensitive, export oriented, its economy is negligible and its consumers are poor, it is besieged by monopolies and oligopolies. In my view, its competition laws should already incorporate the important elements of the EU (Community) legislation and even explicitly state so in the preamble to the law. Other, mightier, countries have done so. Italy, for instance, modelled its Law number 287 dated 10/10/90 "Competition and Fair Trading Act" after the EC legislation. The law explicitly says so. The first serious attempt at international harmonization of national antitrust laws was the Havana Charter of 1947. It called for the creation of an umbrella operating organization (the International Trade Organization or "ITO") and incorporated an extensive body of universal antitrust rules in nine of its articles. Members were required to "prevent business practices affecting international trade which restrained competition, limited access to markets, or fostered monopolistic control whenever such practices had harmful effects on the expansion of production or trade". the latter included:
GATT 1947 was a mere bridging agreement but the Havana Charter languished and died due to the objections of a protectionist US Senate. There are no antitrust/competition rules either in GATT 1947 or in GATT/WTO 1994, but their provisions on antidumping and countervailing duty actions and government subsidies constitute some elements of a more general antitrust/competition law. GATT, though, has an International Antitrust Code Writing Group which produced a "Draft International Antitrust Code" (10/7/93). It is reprinted in §II, 64 Antitrust & Trade Regulation Reporter (BNA), Special Supplement at S-3 (19/8/93). Four principles guided the (mostly German) authors:
The 29 (well-off) members of the Organization for Economic Cooperation and Development (OECD) formed rules governing the harmonization and coordination of international antitrust/competition regulation among its member nations ("The Revised Recommendation of the OECD Council Concerning Cooperation between Member Countries on Restrictive Business Practices Affecting International Trade," OECD Doc. No. C(86)44 (Final) (June 5, 1986), also in 25 International Legal Materials 1629 (1986). A revised version was reissued. According to it, " …Enterprises should refrain from abuses of a dominant market position; permit purchasers, distributors, and suppliers to freely conduct their businesses; refrain from cartels or restrictive agreements; and consult and cooperate with competent authorities of interested countries". An agency in one of the member countries tackling an antitrust case, usually notifies another member country whenever an antitrust enforcement action may affect important interests of that country or its nationals (see: OECD Recommendations on Predatory Pricing, 1989). The United States has bilateral antitrust agreements with Australia, Canada, and Germany, which was followed by a bilateral agreement with the EU in 1991. These provide for coordinated antitrust investigations and prosecutions. The United States thus reduced the legal and political obstacles which faced its extraterritorial prosecutions and enforcement. The agreements require one party to notify the other of imminent antitrust actions, to share relevant information, and to consult on potential policy changes. The EU-U.S. Agreement contains a "comity" principle under which each side promises to take into consideration the other's interests when considering antitrust prosecutions. A similar principle is at the basis of Chapter 15 of the North American Free Trade Agreement (NAFTA) - cooperation on antitrust matters. The United Nations Conference on Restrictive Business Practices adopted a code of conduct in 1979/1980 that was later integrated as a U.N. General Assembly Resolution [U.N. Doc. TD/RBP/10 (1980)]: "The Set of Multilaterally Agreed Equitable Principles and Rules". According to its provisions, "independent enterprises should refrain from certain practices when they would limit access to markets or otherwise unduly restrain competition". The following business practices are prohibited:
C. ANTI - COMPETITIVE STRATEGIES Any Competition Law in Macedonia should, in my view, excplicitly include strict prohibitions of the following practices (further details can be found in Porter's book - "Competitive Strategy"). These practices characterize the Macedonian market. They influence the Macedonian economy by discouraging foreign investors, encouraging inefficiencies and mismanagement, sustaining artificially high prices, misallocating very scarce resources, increasing unemployment, fostering corrupt and criminal practices and, in general, preventing the growth that Macedonia could have attained.
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