April 09, 2007	Monday	Rabi-ul-Awwal 20, 1428

MARKET economies are based on the lassie-e-faire principle, according to which the economy works best when market forces are left to themselves, and, therefore, the government should have a minimum, if any, economic role. However, the market mechanism works to its full potential only when markets are characterised by perfect competition—a situation which exists when no firm or a group of firms is large enough to affect market price. In practice, markets are generally characterised by imperfect competition—monopolies (single supplier) or oligopolies (few suppliers)—where firms can manipulate price by reducing output.

This combination of higher price and lower output, which is a case of market failure, breeds inefficiency and is thus a strong, though by no means the only, reason for the government’s economic or business role. That is why even the most vehement exponents of free market philosophy admit that some government action is necessary for curbing the powers of monopolies and oligopolies and promoting competition.

It is as natural for a firm to seek market power--the degree of control that an enterprise has over pricing and output decisions—as for a politician to aspire for political power. In both cases, the right to seek power is indisputable. However, in both cases the abuse of power is also unacceptable. Abuse of market power to fix prices, divide markets, create shortages or supply sub-standard goods harms consumers and reduces economic efficiency. It is for the government to check abuse of market power by monopolies and cartels and promote competition by putting in place a strong regulatory and institutional framework.

Economic liberalisation does not mean that business activity should be left unregulated. The USA is one of the most liberal economies in the world but it is also one of the most highly regulated market economies. It may seem surprising but the reason is simple: left entirely to themselves, market forces have a strong tendency to bring about market failure. Hence, appropriate government intervention is needed to avert or correct such failure and ensure that competition prevails in the interest of both consumers and economic efficiency.

Does Pakistan have an effective competition regime? Well, the country has a competition law entitled Monopolies and Restrictive Trade Practices (Control and Prevention) Ordinance 1970 (MRTPO) as amended (the last amendment being in 2002) and a body to administer that law called the Monopoly Control Authority (MCA). However, cartels continue to rule the roost in several industries, most notably the sugar industry. These cartels create artificial shortages in the market to raise prices and have thereby contributed to the current weave of inflation. In its Annual Report for the Financial Year 2005-06, the State Bank of Pakistan (SBP) has criticised the role played by these cartels.

For instance, referring to the sugar crisis, the central bank observes that the sugar mills reduced supply to maintain higher than equilibrium (market) price. Emphasising the need for appropriate government action to break the power of these cartels, the SBP judiciously notes that “while a market system is desirable, and direct interventions should be avoided in general, the latter perception does not hold true if market failures lead to non-competitive behaviour. In such case, the government needs to assess the causes of the problem, and institute corrective market based policies.”

A recent World Bank-funded study also observes that Pakistan lacks an effective mechanism to control anti-competitive practices and promote competition. Here, it seems adequate to look at the salient features of Pakistan’s competition regime. This can be done by giving a gist of the competition law—MRTPO:

The law aims at providing for measures against undue concentration of economic power, growth of unreasonable monopoly power and unreasonably restrictive trade practices. Monopoly power is defined as the ability of one or more sellers in a market to set non-competitive prices or restrict output without losing a substantial share of the market or to exclude others from any part of that market. An unreasonably restrictive trade practice is defined as a trade practice which has or may have the effect of unreasonably preventing, restraining or otherwise lessening competition in any manner.

Monopoly power is justified if it substantially contributes to market efficiency, technological progress, or growth of exports.

A quasi-judicial autonomous body named Monopoly Control Authority has been established to administer the law (Section 8). MCA is entrusted with conducting inquiries into the concentration of economic power, monopoly power and restrictive trade practices and to make recommendations to the government for “suitable” measures to prevent or eliminate undue concentration of economic power, unreasonable monopoly power or unreasonably restrictive trade practices .

MCA can prescribe the circumstances in which, and the conditions under which, undue concentration of economic power or unreasonable monopoly power shall be deemed to exist and the practices which shall be deemed to be unreasonably restrictive trade practices.

In case of restrictive business practices, MCA is empowered to take the following remedial action:

• break the association; limit the loans and investments in any undertaking

• undo mergers/acquisitions; take necessary action to restore competition in the market MCA may conduct on its own or on a reference received from the federal government special inquiries into any matter relevant to the purpose of the ordinance.

MCA has the power of a civil court in enforcing the attendance of any person or production of any document.

Non-compliance with the law is punishable with fine up to Rs100,000

Appeals can be filed in a high court against the orders of MCA .

An effective competition law must prohibit hard-core cartels, control vertical mergers (mergers between firms at different level of economic activity), especially by already dominant firms; and control mergers and acquisitions, which may lead to creation of dominant firms or monopolies. Does MRTPO measure up to this criterion? MRTPO prohibits hard-core cartels. It empowers the government to undo mergers and acquisitions if they may restrict competition. However, the law has some shortcomings:

• Monopoly power is justified if, inter alia, it contributes to growth of exports. This provision seems to give leeway to monopolists, because it is not difficult for a monopolist firm to show that its monopoly power is contributing to increase in exports.

• The law does not provide for mandatory pre-merger notification. MCA has only the power to undo mergers and acquisitions—a power which can only be exercised after mergers have taken place. The result is that it is not possible to prevent such mergers as may have the potential of distorting competition. The law must also provide for mandatory pre-merger notification so that potentially anti-competition mergers cannot take place.

• Violation of the law is only a civil offence punishable with fine up to Rs 100,000. This penalty is ridiculous and cannot constitute a strong deterrence, because it is only the big, powerful firms that are likely to contravene the provisions of the law for whom Rs100,000 fine is insignificant. Not only should the fine be increased to at least Rs 10 million, but criminal remedies also be provided so that the violation of the law is punishable with imprisonment, as in case of USA anti-trust law.

The main impediment to competition is cartels and the law empowers MCA to break these cartels. But in addition to legal provisions, political will is also necessary to deal with the powerful cartels. It is the lack of political will to fight these powerful cartels that mainly accounts for the failure of the government to check anti-competitive practices to the detriment of consumers.

According to press reports, ministry of finance, under which MCA works, has prepared a new draft competition law to make the competition regime effective. The draft law provides for increasing the powers of MCA by upgrading it into a commission. The enactment/promulgation of the new law needs to be expedited. But the real challenge for the government will be to enforce the law, as it will face strong resistance from powerful cartels, which wield enormous political influence.